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Balanced Funds Performance – HDFC Prudence vs HDFC Top 200

Posted on by Jagoinvestor

Have there been times when you thought of investing in Balanced funds like HDFC Prudence, but did not invest because you wanted to invest in pure equity funds with maximum exposure to equity? If yes, than you need to rethink this thought because balanced funds have performed superior than equity funds in some cases and given their diluted exposure to equity as compared to that of a pure equity fund, the returns are really worth considering. So here you go-

What are Balanced Funds ?

Balanced funds are Equity Mutual funds, which are not as aggressive and as pure equity diversified mutual funds and keep equity component in the range of 60%-75% and rest in Debt products or Cash. By definition you can see that Balanced funds are not exposed to equity in the same way as regular equity diversified funds whose equity exposure is generally 95% or more in an average scenario. Balanced funds keep a balance between equity and debt, with equity still being the higher component.

For example, HDFC Prudence keeps its equity allocation around 75% in most of the cases and rest 25% in debt or cash. However, Reliance Regular Savings Balanced is generally low on equity and keeps it around 60-65%, but from last some months, it has raised its equity exposure to 70%, but hasn’t touched its limit of 75% ever! . From tax point of view, any mutual fund which has equity component more than 65% is considered as “Equity Fund” and long term capital gains are exempted from tax after one year just like an pure equity equity fund .

Balanced funds Returns less risky than Pure equity mutual funds

As balanced funds are lower on equity exposure, the fall in case of market crash is lower than pure diversified funds. For example, during the financial crisis of 2008, balanced funds lost only 42% as compared with 53% drop in returns by diversified equity funds.

Lets also see another example of Reliance Regular Saving Balanced fund, its NAV was around 17.27 on 1st Jan 2008, exactly after 1 yr on 1st Jan 2009, its NAV fell to 11.26 which is 34.78% drop, where one of the best diversified equity fund from Reliance AMC called Reliance Regular Saving NAV was 30.28 on 1st Jan 2008 and it dropped to 14.05, which is 53.6% drop. After that in next 2 yrs, Reliance Regular Balanced fund has given a return of 110% , where as Reliance Regular Saving Equity gave a 137% return, which shows that Pure equity fund gave much better return than balanced funds in 2 yrs time frame (Jan 2009- Jan 2011). But the most interesting thing is to look at the 3 yrs return starting from Jan 2008 to Jan 2011, which shows that the return of Reliance Regular Balanced fund was 137% where as the return of Reliance Regular Saving Equity was 110%, which shows that if you also consider the crash of 2008 into the overall scenario, Balanced fund out performed Pure equity fund by a considerable margin.

Comparision of Returns from Reliance Regular Saving Balanced and Reliance regular Saving Equity Funds

Balanced vs Equity funds Comparision

Main Advantage of  Balanced Funds

Balanced funds have to maintain their ratios of splitting between equity and debt by fixed percentage. In order to do so, the fund has to keep on buying and selling from time to time which leads to the concept of Asset Allocation. So, if a balanced fund has a ratio of 70:30 (Equity: Debt) and suppose it reached to 77:23, the fund manage will make sure that he sells the excess part of equity to rebalance the fund back to 70:30. However in equity funds, if the ratio itself was 98:2 earlier, despite the big run in markets, the equity part will still remain around the same ratio and there is no question of asset allocation.

So the conclusion is that the asset allocation is the internal advantage available to Balanced funds which leads to superior returns over longer term, but in short term, balanced funds will not out perform pure equity based funds incase there was a bull run. You always have to give balanced funds a long time to see the performance.

Performance of Balanced Funds vs Equity Funds

Can you imagine HDFC Prudence out-performing HDFC Top 200 despite having a low equity exposure compared to HDFC Top 200? Yes, it has happened! Now let me show you some statistics which I found out.

SIP investment in HDFC Top 200 vs HDFC Prudence

Over the last 14 yrs from Jan 1997 to Mar 2011, if you had done a SIP investment of Rs. 1,000 per month in HDFC Prudence, it would have become Rs 13.6 lacs and return turns out to be 25.93% CAGR. However if you had invested the same 1,000 per month in HDFC top 200, it would have become 13.9 lacs and return turns out to be 26.20% CAGR, marginally more … Which shows that despite having much lower equity exposure, HDFC Prudence has given almost equal returns like HDFC Top 200, which in my opinion can be called out-performance. Here is the chart of how the corpus was moving in both HDFC Prudence and HDFC top 200 for 14 yrs (SIP of Rs 1,000/month).

HDFC top 200 vs HDFC Prudence comparision

Lumpsum Investments in HDFC Top 200 vs HDFC Prudence

Now let’s come to lumpsum investment. Imagine you invested Rs 1 lac in HDFC Prudence on 1st Jan 1997 and I invest the same money in HDFC Top 200 on same date. We both redeem our investments on 11th Mar 2011. Who will have more money? Answer is it would be You, You will have around Rs 24 lacs (CAGR return = 24.94%), whereas I will have approx 21 lacs (CAGR return = 23.78%). See the chart below to look at how the corpus moved per month in case of one time lumpsum investment.

HDFC top 200 vs HDFC Prudence comparision

Some more statistics on Balanced Funds

  1. In the last 10 yrs , the return from HDFC Prudence is 29.38% . Only 2 Equity Diversified funds has outperformed HDFC Prudance in true sense, which are Reliance vision and HDFC Top 200
  2. HDFC Prudence 5 yrs returns is 17.93% cagr and its more than pure equity funds (The best return is from HDFC top 200 at 17.90%)
  3. HDFC Prudence returns have outperformed all the equity diversified equity funds in 3 yrs time frame, HDFC Prudence returns for 3 years is 18.65% and the best equity diversified funds in 3 yrs time frame was Mirae Asset India Opportunities Regular with returns of 17.88%
  4. The average of top 5 balanced funds return in last 5 yrs was 15.88% (17.93 , 16.97 , 15.54 , 14.55 , 14.40) and average of top 5 equity diversified funds was 16.63% (17.9 , 17.63 , 16.88 , 15.72 , 15)
  5. The average of top 10 equity diversified funds in last 10 yrs was 27.67% , balanced funds was 22.57%

List of good Balanced Mutual Funds

List of Balanced mutual Funds

Source of Data : All the data is taken from Valueresearch , and for growth category of mutual funds , not dividend , All data as on 19/04/2011 .

Do you invest in balanced funds ? What you think it would be wise to invest in balanced funds compared to pure equity funds ? Share your thoughts on this HDFC Prudence vs HDFC Top 200 comparision which must have shown you difference between equity funds and balanced funds

Are you suffering from Mental Accounting ?

Posted on by Jagoinvestor

Do you know that majority of the problems in your financial life are purely because of psychological reasons? We are all humans and are prone to think irrationally at times, due to which, a lot many wrong decisions are taken in our personal finance. Behavioural Finance is the area of finance that combines psychology and finance together and gives you an insight as to how a common man makes mistakes in his decisions. Today, I am going to talk about on its concept called ‘Mental Accounting’.

Mental Accounting

Lets imagine a scenario, which will give you a brief idea on mental accounting .

Scenario 1 : You and your wife visit an electronics showroom with the intention to buy a Laptop. After browsing various products you finalize a nice laptop with the price tag of Rs. 40,000. Just when you were to swipe your credit card, the couple behind you mentioned that another showroom about 3 blocks away (15 min drive max) is selling the same laptop for Rs. 39,800. Will you consider driving 15 mins to save Rs.200? Majority of us will not do so!

Scenario 2 : You and your wife visit the same electronics showroom to buy 4 GB Pendrive costing Rs.400. However, you come to know that this product is available for Rs.200 at another showroom which is 15 mins drive. So will you now choose to drive another 15 mins to buy this Pendrive? Most of us will happily choose to drive 15 mins to the second showroom.

If you look at both the scenarios, you will notice that both scenario 1 and scenario 2 are exactly the same, they both will save you Rs. 200 and both requires you to drive 15 min. Exactly same, no difference. But most of the people will choose the first showroom only in scenario 1 and will choose second showroom in scenario 2.

Why does this happen ?

Truly speaking, this happens because of Mental Accounting which makes Rs. 200 saved on laptop not a significant amount because its just 0.5% of the original price. Whereas, Rs. 200 saved on Pendrive looks attractive and substantial bargain because its 50% of the original cost.

What is Mental Accounting ?

Mental Accounting is very simple to understand. What makes is a crucial aspect to understand is the different ways we treat money depending on situation and its source. We often concentrate on the situation and the source of money in terms of the amount of hard work we put to get that money and all these points makes us human to fall prey to treat same amount of money in different ways. But coming back to the facts, Money is Money and it doesn’t matter where it comes from!

So, if you earn Rs. 100 from 3 different sources- Lottery, Salary or Tax Refund, all of them should mean the same as they all have the same purchasing power. Forget how you got it; all of that Rs.100 is valuable equally!

Personal Experience of Mental Accouting

Let me share on how I myself was a victim of Mental Accounting. Some 2 years back, when I did my first stock market trade in F&O. I made Rs. 2000 as profit on an investment of Rs. 6000 in the matter of 2 hours (options trading). This increase of Rs. 2000 actually increased my overall wealth, but to me it was ‘Cheap Money’. Naturally, I had made plans to spend this money and I had no 2nd thoughts on NOT spending. The decision to spend money was not at all rational, but it was fast money which came from stock market and it came without any hard work. Mental Accounting was doing its job in my mind!! Carefully evaluating the situation, all what happened here was that my networth went up by Rs. 2000 and I took out Rs. 2000 and SPENT it!

 

6 Examples of how our personal finance decisions are based on Mental Accouting

1. Treating some money as “Free-Money” or “Loose-money”

Most of us label money based on where it comes from, by doing so the value of that money appears to be less. E.g. if you get food coupons from your company, you will not consider it as cash! At the last company I worked at, it was amazing to see that people didn’t mind paying up to Rs.50 for Food Coupons for friends, but if the same person had to spend Rs. 10 hard cash, he will not be willing to do so. Food coupons have same purchasing power (at least in limited environment) as cash, so one should be treating it in the same way and not being bias just because it’s not in the form of currency. What I really want to know is that what will happen if companies start providing cash equivalent of these food coupons???

Another example can be with the money that we get from tax refunds, cash gifts on events etc…etc… We all in our heads label these as ‘Cash, but not as valuable’. Imagine that you got Rs. 2000 as your tax refund and you are more likely to be spending this money rather than the willingness you would have to spend from your salary. Also imagine that some friend gave you Rs. 1000 as gift voucher, will you even bother researching on what products can this voucher buy??? In the same way, if you earn yourself a bonus of Rs. 50,000; you will be more inclined to spend it on a holiday or for buying some item for the house. Would you do the same thing with the money from your salary??

So the message is clear, don’t label money as ‘salary money’, ‘tax refund money’, ‘bonus money’ or ‘Gift money’. It’s just MONEY!

2. Holding Stocks and Mutual funds with Loss

Mental Accounting is visible in buying and selling of equity products like stocks and mutual funds. Consider a person who bought shares at Rs. 100 each and the current price drops to Rs. 80. He does not consider this as loss until he books it, loss is not existent for him, and it’s just a possibility. But in real terms, that person is actually suffering loss already. The person in this case labels the loss as ‘potential’ and not ‘real’. On the other hand, if the same stock went up from Rs. 100 to Rs. 120, he will be happy and will be telling everybody that how he is in ‘profit’ even though he has not booked as yet. Profits have already happened according to this person’s thinking and this is exactly why many people fail in stock investments.

3. Size of the decision/money involved

A lot of times the size of the transaction also influences our thinking. Imagine that you went to buy a Plasma TV which costs Rs 20,000. You bargain with the vendor and successfully get a discount of Rs 500; it makes you happy and you feel as if you saved something. But do you put any big effort to find out how you can save much on groceries or vegetables? As the transaction size is bigger and bigger money is involved in case of Plasma TV, it clicks your mind that you should try to bargain the price and save as much as you can, but this thinking is not the same in case of small purchases. Even if we are able to save Rs 5 on small transactions, it would amount to Rs 1700 (approx) in saving in whole year and that would be bigger than Rs 500 saved in case of Plasma TV.

While there can be repetitive headache involved in saving that small amount, the whole idea is to communicate that we tend to think differently when there is a big decision and very different when in smaller ones.

4. Earn less interest and pay more interest

Many investors do the common mistake of earning less interest on their FD’s, PPF or Cash in their Savings account, but pay huge interest on their personal loan or credit card interests. For investors, money in FD’s and PPF is ‘safe’ and not to be touched, but in true sense you are earning less on a part of your portfolio and from that same portfolio you are paying huge interest for loans. If you see your whole portfolio as one and single element without labelling parts of it, your perspective will change. Ideally  one should clear a liability whose interest rates are higher than the part of portfolio earning lesser interest . But due to mental accounting , this idea does not look fine to many people .

5. Labeling money into safe money and risky money , loosing any money is just loosing

Ajay has Rs 1,00,000 in Bank FD, Rs 2,00,000 in his PPF account and 5 lacs in Balanced Mutual funds. All these investments are for his daughter’s education down the line and he has mentally labelled it as ‘safe’. However Ajay has also separated out Rs 50,000 to try out stock trading which is his passion and what he loves to do. He has mentally labelled this Rs 50,000 as ‘Risky’. You can see his total worth is 8.5 lacs.

Case A: Now imagine he is in loss of Rs 25,000 in his stock trading. This will not hurt him so much as he had accepted from start that it’s for stock trading and loss was a possibility. He is fine with this loss, as nothing has happened to his ‘safe’ investments.

Case B: Suppose market is down and he faces a loss of Rs 25,000 on his mutual funds. As the loss has happened in his mutual funds which was initially labelled as ‘safe’ and “for-his-daughter’s-education”, the level of disappointment and worry would be much bigger than Case A.

Even though the reaction of Ajay was different in both case A and case B, it’s purely because of mental accounting and the way he had unconsciously labelled both investments of his portfolio, but in both the cases the reality is that his total net worth went down from 8.5 lacs to 8.3 lacs, It’s as simple as that.

6. Paying for Financial advice

We recently encountered a very funny situation, one of the readers contacted us for our Financial Coaching service, he was very clear that he needs it (For readers who are not aware about financial coaching, it’s a paid program where we coach people in their financial life just like Garry Kirsten coaches Indian cricket team and transformed their performance). He was very much interested in being coached on his finances and what MONEY means to him, but was very uncomfortable paying the fee out of his wealth, as for him there were other important things in life; he said he would get back to us once he makes the decision. But he didn’t communicate for weeks, then just last week he told us that now he is ready for Financial Coaching. After we started his work, we asked him, what had happened in his life which motivated him to take our service. To our surprise, he had sold his old car and got price way beyond he expected, and he was fine to use that extra money to improve his financial life.

If you look at this incident closely, even the money which he got by selling his old car become the part of his overall wealth, the moment he sold it, in fact it was always part of his wealth even when he didn’t sold it. You must be thinking what was our first   coaching lesson for him? Yes, it was the way he looks at different aspects of his financial life and not fall prey to these kinds of behavioural patterns.

7. Treating unexpected money in a different way

There are lot of unexpected money at times coming in our life , It can be money in form of Bonus from your company , It can be money recieved from an old friend who took it from you ,didnt give back to you and you also forgot about it. It can be some money you find in old book which you had secretley kept long back . All these are examples of “unexpected” money and hence there is no mental accout for it , that money looks more of pocket money to you and you tend to spend it without thinking much .. However money is money , no matter from where it came . Its just different in your mind .

Please share your real life incidents where you fell prey to mental accounting . Do you think mental accounting is not applicable in real life and is more of a “time pass” concept or do you think its really something one has to understand and apply in their financial life ? Share your views

 

How EMI’s Principle and Interest breakup is done

Posted on by Jagoinvestor

Do you know who to calculate principle and interest part in your home loan’s EMI break up? Do you know how each EMI is distributed to principal and interest repayments? It is extremely important to have this knowledge because a lot of real life decisions like prepaying the loan, opting for the loan tenure and many more such aspects depend on how your EMI is structured.

home loan EMI breakup

Basics of Home Loan EMI’s

What happens in a general scenario? Loan is opted for from a Bank and you start paying your EMIs each month as contracted (see this excellent article on how EMI formula is derived). When you pay your EMIs, some part of it goes towards interest and remaining towards principal repayment. So each month you are reducing your loan by some extent and now as your loan have reduced, you will be paying less interest on your next instalment. In the same way, with each passing month, your loan gets paid by some amount and balancing amount keeps on reducing resulting in paying lesser interest month on month and year on year and the day comes when you fully close your loan. Note that your EMI is generally fixed and internally it’s worked out into ‘interest’ and ‘principal’ repayments.

However, even today, a lot of people have no understanding of the idea that in the early years of repaying the loan, interest component is very high as compared to principal repayment. The longer the tenure of the loan, the interest component will be higher than principal payments and also the rate at which the interest part will come down will also be lower, making sure that in the initial years most of the EMIs goes towards ‘Interest’ and not ‘principal’.

Example of EMI payment

Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. Sounds disappointing? What is EMI disease ?

In the same way After 100 payments (8 yrs and 4 months), when you would be paying your 101st EMI of Rs 28,950, the interest part would still be as high as Rs 19,891 and the principal part would be Rs 9,060. Still disappointed? Now let’s fast forward towards the end, let’s take 200th payment. When you make your 200th EMI payment of Rs 28,950; this time your interest part would be very less at Rs 8,349 and principal would be Rs 20,601. So now, with all these examples I gave, you can see how interest part is very high in initial years. Let’s look at it from a different point now!

Just consider this- For the scenario above; If you keep paying your EMI’s for 2 yrs (24 payments), you will pay total of 6.94 lacs (24 x EMI) from your pocket, but your loan would just go down by 1.05 lacs! And your outstanding loan would be still 28.95 lacs. In the same way in 5 yrs even though you pay around 17.37 lacs (60 x EMI), your loan outstanding would be down by just 3.06 lacs and loan outstanding would be just Rs 26.94 lacs.

The chart below shows the breakup of interest and principal payment for each year for a 30 lacs loan for 20 yrs tenure assuming interest @10%. So each bar is broken into two parts, where green bar represents Interest part and orange bar represents principal part. It is clearly visible that how interest forms a major part of overall EMI in initial years and only in the later years principal part becomes high.

Loan Amortization calculation

Here is the actual breakup of the EMI in numbers

Loan Amortization

Pre-payment of long tenure loan

A lot of investors opt for 15-20 yrs loan thinking that they will pre-pay the loan in next 4-6 yrs itself because of their salaries will rise or for some other reasons. In these cases, for the initial years they keep paying loan interest only and not a lot towards principal. When they prepay the loan, they end up paying a little lesser amount then original loan amount. Example, if you take a loan of 30 lacs for 20 yrs tenure at 10% p.a. and prepay the loan in 5 yrs itself, you will still end up paying 27 lacs as loan outstanding, even though you have already paid 17 lacs in EMI in last 5 yrs, Pre-payment penalty would be extra! But the positive side is that there might be a good appreciation in the house value itself.

So if you are taking loan for longer duration thinking that you would pre-pay the loan very soon, you need to rethink! This makes sense, once the worth of your house has gone up and there is a decent profit. A better option which I can think of is to pre-pay in small chunks each year along with your EMI’s from the start of the loan payment. It would make sure that you principal goes down in big chunks each month.

If you take short term loans, because of the shorter duration, the bigger chunk of the EMI is actually principal part, hence you can look forward to pre-pay the loan incase you wish to.

Free Calculators for Loan Amortization

I have created and found out some loan amortization calculators which you can use for calculating your EMI’s and its breakup into principal and interest for each month.


By now you must have got a clear understanding on loan amotization and how home loan EMI is broken into principle and interest component. Note that the asssumption for this article was that the loan is on “Monthly Reducing Balance”

4 amazing things you can learn from Cricket

Posted on by Jagoinvestor

Does cricket have anything to do with your financial life? I say, Yes!. Cricket and Financial life have some amazingly common things! There is much,  we can learn from cricket and implement in our financial life. Both cricket and Financial life involves achieving goals. Let’s see what we can learn from cricket, to use in our financial life.

Personal Finance and Cricket
1. Chasing a big score is easy, if you have a good start!

In cricket, making a good score within the first 10-15 overs helps a lot. It’s much easier to score 300, if you’ve already made 80-100 runs in the first 10 overs. However if you make a very bad start; losing wickets and not making enough runs, you will have to work much hard later to reach a good score. We see this in every match. Once the first 15 overs are, well over, we have fielders placed well, all over the field and everyone is warmed up. So, a good start in the start of the match compensates for the slow run rate later, and at the end you get a good score.

In the same way, your time, at the starting years of your financial life is like a precious “wicket”. Dont lose it. The longer you have in your hand, more is the risk you can afford to take. Saving more in the start helps a lot in building corpus. For example if you invest Rs 10,000 per month for 30 yrs , you will build a huge corpus at the end. However if you decide to save additional 4,000 per month and invest 14,000 per month for first 10 yrs , you can then stop your investments and leave that accumulated corpus to grow for 20 more years to reach the same corpus. So an extra saving of Rs 4,000 per month makes sure you don’t have to take on a much larger load later. The assumption is that you get 12% return on your investments.

2. Each team member has his place in the team

What will happen if you decide to have 11 Sehwag or 11 Zaheer Khans in the team? Will India win? I doubt it! A good team has a good batting line up, great bowlers, a wicket keeper with really safe hands, and quick, sharp, athletic fielders. Having a team that is extremely dependant on one single ability, would mean that we ignore other areas and leave big wide gaping holes which in turn lead to failure… big time.

Having 11 Sehwag’s would mean we can theoretically score 400-450 in 50 overs, but then we won’t be able to stop the other team by chasing, because we will not have a great bowling attack. In the same way, if we had 11 Zaheer Khans, we might bowl out the team under 150 runs, but won’t be able to chase that tiny total either. So a balance within a team is required.

In the same way, our portfolio is a team and it has different team members like mutual funds, direct equity, ULIPs, Insurance, PPF, other debt products and of-course – cash. Each of these have different functions and are useful in different ways. You can’t afford to have your team always stuffed with a single kind of financial product unless you are super-expert in that. You can definitely favor one product or strategy, more than others, but only if you know what you are doing. This can’t be the case in general for a common investor. One cant have only equity all his life or only debt products all his life ,you need to have balance and their comes asset allocation.

3. You can’t hit sixes & boundaries every time. Just make sure your run rate is awesome!

This is my favorite! If you look at any match, 6s and 4s are always there and that what most of the viewers like to watch, but you can’t deny that the actual score comes from 1s and 2s; runs which players make consistently. It’s the core of the score. There are bowling deliveries which has to be identified well to hit boundaries, but if one tries to smash every ball out of the park, failure is almost certain! All the wickets will fall sooner rather than later. A team has to make sure that they keep taking singles and doubles consistently, and hit boundaries on weak deliveries.

In the same way, in our financial life, some years can be awesome with 50% or 100% returns like 2010-2011 or worst like -50% return in year 2008 , However dont get disheartened by these extreme years, you have to make sure you make average good returns consistently each year and keep moving towards your target. Its much easier to get 12-13% return on yearly basis compared to getting 40-50% year over year. There will definitely be times when you will make amazing returns from your money. It could be stocks, mutual funds or real estate. But don’t get used to it!. Look for a good average return overall, with great returns once in a while. Having said that, don’t feel bad if there are some years which are bad and your money does not grow a lot, because even in cricket, there are some maiden overs! . If you didn’t score any runs in an over, it does not mean that you have lost the game; it just means that you are facing a strong bowling attack.

Don’t lose your sleep over it. If you look at the world cup final between India and Sri Lanka, you will appreciate the fact that India maintained its run rate till the end and made sure they preserve the wickets till end and that’s the reason it become very easy to chase the score and finally play some winning shots with the backup of our wickets in hand. In the same way, you need to ensure while chasing your goals, that you maintain a good run-rate year after year. There will be good years and bad years, but don’t let them weaken or slow your run-rate.

4. Things can go wrong! You need to be nimble & re-evaluate your strategy

A lot of unexpected things happen in a cricket match. For example there can be a bad start with very low run rate, fall of important wickets, excellent fielding by the opposing team etc., which might make you feel as if the game is all over, but there are many occasions where the losing side has won. It all happened, due to focus, being calm, reevaluating the situation and finding the strategy of what’s to be done “now.” With slow and steady progress, and some calculated risks there are many matches where losing side have won.

In your financial life, there can be many issues like losing the initial years of your life without investing any money, loss of income, change in taxation rules which affect you badly, many bad years without any good returns etc., and all this can make you feel that you will not achieve your targets on time. It’s true, that situations get tougher and reduce your chances of getting closer to your goals easily. It does not mean however, that things are over! You can always take charge of your financial life and really fix it. You can spend good time over your financial life and be extremely committed to make it awesome. Learn personal finance, find out how to get better returns from your investment, be more aware of what precautions can be taken etc. You need to be more alert and keep evaluating your strategy for improving your financial life.

Can you share more learnings from cricket which we can relate to personal finance ? Also, share if you like the analogies in this article ?

What is Banking Ombudsman ?

Posted on by Jagoinvestor

Do you know you can complain to Banking Ombudsman incase you have any complaints against your bank in India ? Banking Ombudsman is a body created by RBI to look after banking related complaints. Imagine the scenario’s – You insert your card in ATM to withdraw Rs 500. The transaction fails, but your account is debited by Rs 500. You’re frustrated, you’re irritated, you complain to your bank about the money being debited after the failed transaction. The bank tells you that your money will soon be credited to your account, but nothing happens for weeks…  Six months pass by, with all of this up-down in-out stuff, You’ve done all you can, but no body is listening! . Can you imagine getting a compensation of Rs 16,200 because of your bank’s inability to honour the rules set by RBI? Can you imagine, that for not getting Rs 500 within a few days, you can get Rs a 100 penalty for each 162 days you have waited?  Yes it can happen! And it has happened! . In this article, I’ll show you the power of the Banking Ombudsman and some case studies which show you that getting your complaints addressed is more easy that you think!

Banking Ombudsman RBI

What is Banking Ombudsman ?

The Banking Ombudsman is a senior official, appointed by the Reserve Bank of India to address grievances and complaints from customers, regarding deficiencies in banking services. It covers all kinds of banks – PSU Banks, Private banks, Rural banks and co-operative banks. Even though, it was originally setup in 1995, there were major revisions in 2006 covering transactions related to complaints of ATM cards, debit cards and credit cards, deduction of service charges by banks without prior intimation, unfair practices of banks and non-compliance by direct sales agents (DSA) of banks for services promised while opening an account etc. It was last amended in Feb, 2009 to cover deficiencies arising out of internet banking too.

Today, the Banking Ombudsman covers almost all kind of complaints for banking services. To give you a brief idea about their effectiveness, Banking Ombudsmen received 79,266 complaints in the year 2009-2010 out of which around 94% were handled and just 5-6% of the complaints remained pending for more than three months as on June 30, 2010. There are a total of 15 Banking Ombudsman in our country. You complain to the one which comes under the jurisdiction of the Bank location, i.e., if your bank is in Bangalore, you can complain to the BO from Bangalore region. Incase you or the bank is not satisfied by the decision given by the Banking ombudsman, in that case within 30 days of BO decision,  the complaint can be taken forward to Appellate Authority, which is a Deputy Governor of the RBI . Its just like going to supreme court if you are not satisfied by High court decision 🙂 .

What kind of complaints are taken care by banking ombudsman ?

So, the first question that comes to mind naturally is – “Will it be helpful for me?” You wont believe it, but the most basic problems, a common man faces (See an example of what I faced) , like rude behaviour of bank officials, delays in disbursing loans, forcing customers to buy insurance policies for processing loans etc., are all addressed by Banking Ombudsman (BO), and the process of complaining is as simple as filling up a form online or sending in a filled form to a postal address.

The best part is that if you are harassed because of any issue or have undergone through mental agony, you can ask for a compensation upto Rs 1 lac. Also some readers of the blog has acknowledged that banking ombudsman were useful for them (see this , this and this comment) . So let me list down some of the possible scenarios where you can file a complaint with Banking ombudsman.

  • Levying of charges without any notice or Information.
  • Charging higher rate of interest linked to BPLR on Housing Loan
  • Any Loss suffered because of lack of co-ordination from Bank side
  • Unreasonable credit card charges
  • Fraudulent transfer of funds by using net banking
  • Fraudulent transactions against lost credit card
  • Cheque lost in transit by the bank
  • Non-updation of CIBIL records
  • Loss of cheque from Cheque drop box
  • Closure of any account with providing any information or reason
  • When bank demands unreasonable proofs for openening of account
  • Change in terms and conditions without notice or valid reason
  • Delay in providing any service
  • Mis-selling of Insurance products
  • Forcing customers to take insurnace policies for processing Loans
  • Rejection of Loans
  • Harrasment to customer or misbehaviour for any reason
  • Casual approch from Bank on perfoming its duties

I ran a poll with title “Have you even been frustrated with your Bank and wanted to complain? ” on this blog, on which 100 people participated. Surprisingly , around 65% people said that they were frustrated on some issue with their bank and wanted to complain. Only 35% said that they never had any issue with their bank which went to a level that they have to complain about it .

Banking Ombudsman survey

Real Life Cases Solved by Banking Ombudsman

As per the Banking Ombudsman Annual Report 2009-2010 , ombudsmen have resolved thousands of cases and helped common man get justice. I would say, this is a great way to raise your voice and show banks that they can’t take you for granted, just because they are bigger than you in size. A customer has to be treated as per the guidelines, and customer service is the critical part of any service provider. Just to give you some idea, the Banking Ombudsman annual report showcases around 57 different real life cases of how it has helped customers get justice (Page 57-73) . I am highlighting four of those live cases below

1. How a person got compensation of Rs 16,200 because he got less money from ATM

The complainant maintained an account with AB Bank. He withdrew an amount of Rs 500 from the ATM of DH bank on July 28, 2009. The cash dispensed by the machine was only Rs 400. However, his account was debited by Rs 500. The amount of Rs 100 was credited back to his account only on January 27, 2010 (Around 162 days late) & despite lodging the complaint immediately, no penalty was paid to him as per the instructions issued by DPSS, vide its circular dated July 17, 2009.  Since the bank had delayed in affording the credit to the complainant’s account by more than five months, the BO directed the bank to pay the penalty amount of Rs 16,200 for the delayed period (Rs 100 for each 162 days) .

2. How a credit card holder got Rs 10,000 in compensation for non-updation of CIBIL records

One credit card holder complained about the bank’s claim against his settled credit card account dues, and non-updation of his status with CIBIL. The bank accepted that although the credit card account was settled three years ago, the status of the account could not be updated in the records of the bank with CIBIL (See a related example) , which was rectified subsequently. Clear negligence was observed on the part of the bank for not updating their records for more than three years, resulting in undue harassment to the complainant. The bank was directed to pay an amount of Rs 10,000 to the complainant as a token compensation  for the violation of BCSBI Codes.

The Branch Manager assured him to provide the loan without delay. However after three months the branch returned all the papers stating that the Loan Disbursement Officer was ill because of which they were unable to provide the loan. With the intervention of BO, it was agreed by both the parties, that the complainant would resubmit the loan application and the bank would consider the same again. Moreover, since the complainant had lost Rs 5000 which had been paid as registration fee to the Institute, the bank agreed to pay Rs 5000 as a token compensation and another Rs 5000 as a service gesture. The education loan was sanctioned subsequently by the bank and the student got admitted to the MBA course in the same business school.

3. How a senior citizen claimed Rs 1 lakh in compensation for Harassment regarding the loan he never took

Even though the complainant had no business relationship with ABC bank, he was getting calls/SMS from the recovery agents using abusive language & demanding repayment of some loans which he had never taken. Several complaints to the bank against this harassment calls fetched no effect. The bank pleaded to the BO that the telephone numbers from which he was getting the abusive calls did not belong to any of their recovery agents. Based on this, the BO closed the case under clause 13(d) of BO Scheme (i.e. complaint without any sufficient cause).

As the complainant continued to get the harassment calls, he went in appeal. During the appeal, the bank admitted that the phone numbers from which he was getting abusive harassment calls belonged to their recovery agents and that they had since taken necessary corrective action to discontinue such calls. The AA observed that the bank had not conducted proper due diligence while sanctioning the loan to some third person indicating a major KYC lapse. To cap it all, the bank had misguided the BO resulting in the BO pronouncing a wrong order, damaging the credibility of the BOS. The AA set aside the decision of the BO and directed the bank to pay the appellant Rs 1 lakh towards compensation.

4. How A person got Rs 6,500 as interest for Failed ATM transaction

In a case of failed ATM transaction where the account was debited though no cash was dispensed it was observed that as per BO’s orders the amount was credited to complainant’s account, but the bank did not pay the penal interest in terms of extant RBI instructions for the delayed period credit of approximately 2 months. The bank was directed to pay penalty at Rs 100 per day amounting to Rs 6500 .

Proof that it works !

How Trivikram got his wrongly wrongly credited money to different amount .

I got my money back after complaining the issue in Banking ombudsman.

Last year May I transferred money through internet banking to wrong account. After realizing I called my bank officials and requested not to transfer. But it’s already transferred they need to contact with payee bank. The other bank people not given any information as I am not a account holder. I tried through my friend they told that it’s transferred back to my account. Almost three months I tried hard back and forth in both the banks but no use.
This month (5/04/2011) I got to know about Banking ombudsman through one of my colleague and I raised the issue with all my details. Today I got my money back:-).

Ankur on comments section mentions how he got his interest back by

Hey Manish,
some good news… i finally got my intrest back for arnd 20 days. though the amount was meagre but yet it was fruitful. i had known 3 persons who applied for this scheme and we 4 guys got 6000/- back in total.
now i believe that BO(directly got a call from the branch manager to come and collect the cheque 🙂 ) do works and finally thx to you guys for guidance.

cheers

How Atul got his IT refund with help of Banking Ombudsman

Hi Manish,

I had approached IT ombudsman for IT refund. After chasing IT officials for 2.5 years the experience with Ombudsman was inspiring. Not only I got the money back but with interest.

The only catch is that one needs to be patience and keep all proofs ready. Best way is to keep copy of letters send by post, copy of emails etc.

Regards

Atul

Procedure of Complain ?

There are two ways of  filing your complain .

Online Complaint : You can complain to Banking ombudsman online by filling up the form here . Once you fill up the form , you can also upload your proofs like bank rejection letter, banks reply or anything else (it has to be PDF or TXT format only)

Offline Complaint : You can also complain in offline mode to Banking Ombudsman. Just download this form and fill up the complaint.  You should provide your contact information, name and address of the bank against which you are lodging the complaint, documentary evidence and the compensation you need. Once you have filled up the form, you can send it to the Banking Ombudsman address which comes under your jurisdiction (Download the list of all 15 BO)

Should you complain ?

I dont see any reason why you should not ! . If you are frustrated anyways and the service is free and also does not take much time and effort to complain, then you should definately go ahead and complain to Banking Ombudsman for something which you feel you should get justice for. Forget about who will win and who will loose for a moment, but I would encourage you to atleast take the first step and be the part of this initiative atleast. If you case is genuine, I beleive banking ombudsman will help you for sure, It can take time, but dont let this get you get stopped . Go ahead .

Share your experience! .  A lot of readers have never had a bad experienced with their banks (like me) , so its your responsibility to share your bad experience in comment section and make them aware about what had happened in your case and how bad it was.  Also share what are you doing now ? Will you file a complaint with Banking Ombudsman ?

Auto Sweep Account – Enable it in your Saving Bank Account

Posted on by Jagoinvestor

Do you have a Bank Account? Off-course you do! How much money do you have in your account? 5,000? 20,000? or a few lacs? If you have a lot of cash, lying idle in your Bank Account, and at the same time you don’t want to commit to long-term investment, you need to enable the Auto-Sweep facility in your Savings Bank account. This will make sure you earn good interest on a major part on the cash lying in your Savings account.

Auto Sweep Bank account

What is Auto-Sweep Account ?

“Auto Sweep” is a facility which provides, the combined benefits of a Savings Bank account and Fixed Deposits. Auto-Sweep facility interlinks your saving bank account with a Deposit account and makes sure any extra amount lying in your bank account above a threshold limit is automatically transferred to Fixed deposits and you earn better interest on your money.

How ‘Auto Sweep’ works?

This is how Auto-Sweep works. You define a “threshold limit”, and money up to that limit will be in the form of cash in your savings account and any amount above this, “limit” will automatically be converted into a Fixed Deposit and you will start earning normal FD returns on that part of the money. At any point in time, if you need money more than is lying in your bank account, the money lying in the Fixed Deposits is Reversed-sweeped into your savings account and you can withdraw the amount you wish.

Example

Ajay opens a new Savings Bank account with SBI. He enables Auto-Sweep facility on his savings bank account and defines the threshold limit of Rs 30,000 . Now suppose he has Rs 10,000 lying in the bank, He will be earning normal 3-3.5% interest on this money. After that if he deposits Rs 60,000 in his account, his total balance would be 70,000. But as this is above his “threshold limit”, the extra amount of 40,000 will be converted into a fixed deposit automatically and start earning returns equal to normal Fixed deposits with SBI (for example 8%). This way he always has 30,000 in his account for his daily requirements, and he has 40,000 converted into Fixed deposits which again is available to him incase he requires it.

Now suppose he has to withdraw 10,000 from his account, he will actually withdraw it from the cash lying in saving bank , and his balance will reduce to 20,000. However on the other hand if he wants to withdraw Rs 50,000 . then in that case, as his account balance will be just 30,000, an additional Rs 20,000 will be auto-reversed from his Fixed Deposit and he can withdraw total 50,000 .

Opportunity cost

A lot of us don’t bother about how much idle money is lying in our account and for how long. This happens because we think “I might need it soon, so lets not commit to any investment.” But then, the money keeps lying in the bank for months and months and sometimes even years.

Suppose your account has Rs 1 lac for 1 year, it will earn 3.5% interest on it, which is Rs 3,500 for a year. However if you have auto-sweep enabled in your savings account with threshold limit of Rs 20,000, the additional 80,000 will actually be in form of a fixed deposit and it will earn an interest of 8% (assumption). In this, you will earn 3.5% of 20,000 which turns out to be Rs 700 and 8% of 80,000 which is Rs 6,400 , a total of 7,100 , which is almost 100% more than the first case .

A lot of people have much more than 1 lac in their accounts, not just 1 lac. You can earn some extra returns if you just enable auto-sweep on your saving account . So find out if your bank provides the facility, just do it, and get it right away!

Also note that different banks have different names for this facility. For eg., ICICI Bank calls it ”Auto Sweep” , HDFC Bank calls it “Sweep-In” account , and SBI calls it “Saving Plus.” . Here is a list of other banks and the name by which they call this Auto-Sweep facility (thanks for Gopal Gidwani for the info)

  • IDBI Bank – Sweep-in Savings Account
  • Axis Bank – Encash 24
  • Union Bank – Union Flexi Deposit
  • HDFC Bank – Super Saver Facility
  • Bank of India – BOI Savings Plus Scheme
  • Oriental Bank of Commerce – Flexi Fixed Deposit Scheme
  • State Bank of India – Multi Option Deposit Scheme
  • Allahabad Bank – Flexi-fix Deposit
  • Bank of Maharashtra – Mixie Deposit Scheme
  • Corporation Bank – Money Flex
  • United Bank of India – United Bonanza Savings Scheme

Disadvantages of Auto-Sweep Account

Auto-Sweep has some disadvantages too. In general the interest rates of normal fixed deposit and FDs under Auto-Sweep are same, but some banks charge a penalty if the FD under auto-sweep accounts are broken before some duration like 1 yr and 1 day . But I think that’s fine.  If not 8% , you will at least get 7%, still better than 3.5% .

Some banks are also known to give simple interest on the Auto-sweep Fixed Deposits and not compound interest as in case of normal fixed deposits .

Don’t over do it

While Auto-sweep is a wonderful thing for salaried class people who want to maintain liquidity, as well as want to earn more interest on their unused money, one should not over do it. If you are very sure that the money lying in your account will really not be used for long, better to use the normal Fixed deposit or Debt funds. Only if you are unsure of your money lying in bank and when you might need it, you should be using Auto-Sweep facility.

The way auto-sweep works, it makes it an ideal place to park emergency funds . So if you have kept 6 months of expenses as your emergency fund in Saving Bank, then you can enable auto-sweep facility and set threshold limit as 2-3 months of expenses, so that rest of the money can earn a better interest.

Comments: Did you know about Auto sweep account earlier? Do you think it will be helpful for you and do you plan to enable it?

JagoInvestor launches its Paid Services

Posted on by Jagoinvestor

Firstly I want to thank & acknowledge each reader of jagoinvestor.com for their immense love and support from the bottom of my heart. Each reader is like an extended family to me. It is clear because you read my articles I write, the more you read the more I get connected to you. I am always excited to reply you on blog comments and e-mails.

I am really committed that each jagoinvestor reader experiences huge financial breakthroughs in their financial life, every reader achieving financial freedom. For a lot of you, jagoinvestor is just a blog which teaches them about personal finance and makes them an informed investor; as a reader you may or may not be aware about our paid financial services. Today I want to share what was happening from last many months and what is our vision in this space. I also want to officially launch our services today which we are providing from last 15-18 months.

Around a year back, I happen to connect with Nandish Desai. He is a powerhouse of amazing ideas and carries a powerful vision which I never saw in anyone. It was very clear that he really understood the real requirements of an Investor and what kind of assistance a person needs in his financial life. It went way beyond traditional financial planning; his style is non-linear in nature. Rather than just focusing on financial data and giving solutions to rectify those, he actually worked with people on their day today financial habits and showing them those internal mistakes which is causing all the financial mess in their financial lives. He works closely with people to get them in control of their financial life by being a coach. It is not just a plain vanilla planner. His coaching skills are deep and transformative in nature. Nandish was also the main speaker at our Pune and Mumbai meets and lots of readers have already interacted with Nandish and Me at these two cities . We plan to re-launch these meets soon in future .

We were inspired by each other, identified our individual strengths and decided to collaborate and work together, hence we teamed up and now we are “Jagoinvestor team“. We then started serving some of the readers of the blog who contacted us and were committed in working on their financial life, as paid service. We started to apply coaching principles. We started working with them in a way which we believed really connects to an individual. After working with lots of clients and repeated experience, we came with something called as Financial Coaching, which I will explain below.

Jagoinvestor Services

For many it might be a surprise that we started our services from today, but it’s not the case. Let me share with you that we are actually providing our services from last 12-18 months, but didn’t open it up for public till date, as we wanted to make sure we dont compromise on the service quality. We have already served many clients till date which are from different parts of India and a lot of NRI’s across some countries who contacted us and asked if we had any services. We offered them customized services which helped them in creating a financial life which they always wanted.

This blog was there to serve readers and give them immense knowledge . This is going to continue and get better each day now onwards. These services are extension of our committment to serve those people who need our deep personal involvement in their financial life, so that we can closely work with them and serve them. Now we are ready to offer our services to everyone. Right now we have total 5 services and I will give a brief overview of those.

1. Financial Coaching

When you hear the name “Financial Coaching”, you get many ideas in your mind, you will relate it as a better version of financial planning, but you are mistaken. It is not Financial Planning, It’s the next level of Financial Planning, and it goes deeper than just financial data and your goals. It works mainly on YOU. It understands why you have messed up your financial life till date? It works on your relationship with money. In Financial Coaching you have a Financial Coach working with you closely , and not a financial planner !

Financial Coach is someone who stands for your financial success , who is a mentor to you in your financial life , who observes you , listens to your financial worries and identifies the flaws in your financial life which is causing problems and not letting you move to next level. Financial Coach will make sure you are on track with your commitment to improve your financial life, Financial coach makes sure you are on track in your financial life and take actions which forwards you with each action.

Let me give you an analogy. Suppose you are not physically fit and have health issues. What will you do? Read below –

Model 1 : You go to a doctor and do a medical check-up. Doctor gives you a report and prescription to you on what to eat , how much to eat , When should you wake-up and how much exercise you should do each day. This is very much like financial planning where you get a Plan, actions required to improve your situation and overall roadmap. If you think, this is exactly what is required, you are mistaken, this works for only a very small number of people who are committed to stay on track and do things on their own. A lot of people are again lost in their personal life after few weeks and months and forget all this planning. They need an extra hand-holding to stay on track.

Model 2 : Let’s now see the same above example and see how coaching can help the same person in the same situation. Now the same person who has health issues gets a fitness coach. The coach studies person’s lifestyle, body, habits and designs detailed action plan for him. He reaches his residence each day in the morning at 7:00 am. The coach will make sure that he will complete his exercise in front of him, he motivates him each day to go to a next level in his exercise, and the fitness coach will observe him coach him each week/month. We can see that this model is more of action-oriented and not just solution-oriented.

In the same way Financial coaching works, financial coach does not just work on your data, he works on you. Financial coach re-designs your financial life and gives you a new eye to look at your financial life, he shows you NEW possibilities possible in your financial life which you can’t see yourself sometimes. He makes you understand how your situation got created, he tries to reach the source of the problem and attacks the source or cause of the problem, not just “the problem”, because unless the source of the problem is fixed, the main issues will keep on happening.

You can read more about financial coaching here

2. Basic Financial Planning

In general Financial Planning includes lots of things which can range from cash flow analysis, your debt management, Insurance and other goals planning along with Estate management. All of this important and everyone should aim to have it in their financial life. However what we feel is that a lot of people get stopped by this complexity and the denseness of financial planning. Hence we have come up with Basic financial planning which focuses on most important aspects of your financial life.

What if you’re Insurance Planning, Children goals and retirement is complete? What if you get guidance on health insurance and Emergency fund building along with this? Won’t you consider 90% of your financial planning complete? I am sure you will and many have told us that this is what the core of their financial life, and that’s exactly basic financial planning does. We make sure we complete your top most priorities in life and guide you on how to implement your plan.

You can read about Basic Financial Planning here.

Clients Testimonials

We asked some of our clients to give their feedback and their testimonial on how our services helped them in their financial life and what they think about us . I am putting up four such testimonials

Testimonial 1

“I wish I had gotten to know Manish and Nandish 5 years back when I started my professional career. My personal finance status would have been much more organized. I have known them for 6 months now and they have been singularly responsible for correcting my last 5 years of mistakes. They not just guide but more importantly educate their readers and clients. And that to me is their biggest contribution. Nandish has gone beyond the role of financial advisor to actually become sort of a personal mentor to me and I owe to him for bringing to my notice the most important SIP we all should make but usually don’t – “Health SIP” – investing every month in ensuring we stay healthy and fit.

I hope we will continue to engage for a long time and I wish them all the best in their future endeavors”

Brij Bhushan

Management Consultant , Gurgaon

 

 

Testimonial 2

I have always been grateful to my teachers in my school and my college right from my childhood because they were the one who opened me up to a sea of possibilities and an ocean of knowledge. I am educated ‘formally’ because of them. But was I financially literate? No. I wasn’t. I, then, went in search of quest for financial freedom through Education and subsequently Action. As the maxim goes if you ask the Universe gives, I came across Jagoinvestor blog and took a decision to pursue it seriously. You were my teacher encouraging me to learn about the most important aspect of our life, Money, which others ‘choose’ not to talk about either because of ignorance or because they don’t want to project themselves as running behind money.

Today (PRESENT), I can say, I am lot better in my knowledge of money than I was few months ago(PAST). Importantly, I am more confident of my FUTURE.

And all this is possible because of the awareness created by you guys. In short the most vital thing I learnt is Education combined with Action will lead to your Dream Destination.

Thanks a ton for that!!

Srinidhi Rajshekhar

Software Engineer, Bengaluru

 

 

Testimonial 3

My Husband and I are both in our late 30’s. While we were staying in Cambodia, about 1.5 years ago, I came across JagoInvestor and got hooked on to his site. I contacted Manish to help us do our investment planning and and he put us on to his team mate Nandish Desai. Nandish and Manish both worked on a detailed investment plan after understanding our needs, income etc and helped us be on track and motivated us to implement the plan. They are extremely professional and thanks to them we have a disciplined approach to investing now.

Shalu Mehra

Hiring Lead, Human Resources , Gurgaon

 

 

Testimonial 4

Once a girl asked to her dad “From when should I start saving for my retirement”, Dad replied”The day you get your first salary”. These words got engrossed on my mind, I started searching for guidance before I got on job so that I can save right from my first salary. In my journey I had been through various financial advisers who recommended me “Whole Life insurance”, “Ulips”,”Sick mutual funds”. With my research I knew everybody was trying to misguide me to attain their targets. I had been to big branded financial advisors but I found the same thing over there. I thought I am stucked, but to my grace I called Jago Investor on 25th Sept 2010 for the first time. After that no looking back I had been in touch with Nandish Sir, taking guidance on financial planning almost every alternate day and I wanted them to be my only financial advisors but due to certain financial problems I postponed the process but finally due to Nandish Sir faith I became part of there family on 22nd Jan 2011. I had read “Rich Dad and Poor Dad” where a Rich Dad, Business Man, guides a young chap to his journey to become America’s one of the Richest person called Robert Kiyosaki. At the age of 23 I found one named Nandish Desai, I am on my way to be what i intend to be. Thanks to Nandish and Manish Sir for their immense faith.

Kamaljit Ridlon

Deputy Manager
Kotak Mahindra Bank
Mumbai

Comments ? I would love to hear what do you think about our services and what other kind of services we can provide in future .

How to plan for retirement and think about retirement in India

Posted on by Jagoinvestor

How will your retirement look like? Have you thought about anything on retirement planning ?

This is something, which you should spend some time on. Our parents and grand-parents might not have given much importance to their retirement, they might have just took it as it came to them, but can we also afford to do the same with our retirement? Would you like your retirement to take shape just like your parents?

Lets discuss it and take some food for thought from this article today. This is the 3rd and last article in the series called “Financial Planning and Social changes in India” . You can read other two parts here and here .

Retirement Planning in India Future

In our country, where a very small number (less than 10% of the workforce which is in the organised sector) has access to some social security like provident funds, but the rest – almost 90% of the workforce – has no social security, Retirement Planning is a major issue .

If you take care of your retirement planning, your future will probably be much better and in control than without doing anything. It has become extremely important to plan for one’s retirement and at least take a step towards it. I will list down some pointers which shows why retirement in future India will be much bigger and serious issue.

Look at all the points in totality and you will realize that planning for own’s retirement is not just an option but a necessity these days.

1. Increase in life expectancy in India

One of the major problem while doing retirement planning is to assume how long the retirement will last. This has a direct relation with life expectancy. As a country develops, its healthcare and overall life style level improves and life expectancy increases. You can see the life expectancy in India is moving up and up with each passing decade .

It was 49 yrs in year 1970 , increased to 64 yrs today in 2011 and is set to increase upto 73-76 yrs in 2040-50 (projections) .

Now this life expectancy of 76 yrs does not mean that everyone will die at age 76 , it’s an average . If you personally have a better life style , better health and better medicare access compared to a average Indian, chances are you will have a much more life expectancy which will cross 85-90 yrs .

Leave future, even today you can see more and more people living upto an age of 80-85 . So, you can safely assume that you will have to accumulate enough money which can last atleast 30-35 yrs after your retirement, else make sure you die with your money itself 🙂 .

Overall the conclusion is “Longer life in future will mean more money required in retirement compared to  today. Simple !”

2. Increase in Dependency Ratio

Dependency ratio means the ratio of Old age population vs Young population. To calculate it, just take total population above Age 60 and divide it with population between 15 yrs – 60 yrs and you will get Dependency Ratio.

You will be surprised to know that right now in 2011 , the dependency ratio is around 5% in India, but in year 2050 this ratio will rise to 15% , which shows you that more and more people are going to be in the old age group compared to young population . See the chart below .

india future age

Source : here and here

This is not a small issue. More and more people will be shifting to this “retired” category in coming decades with more load on the working population.

At this current moment, we are one of the youngest country today with as high as 50% population below 25 yrs of age , but will this continue forever? With more population control measures at government and public level, these numbers are going to be different in future.

Hence the conclusion is “More and more people will come into retired category as percentage of population in coming future”.

3. Decline of joint family structure

If it was 1970 , you could have safely assumed that you will be probably spending your retirement with your grown up kids , playing with your grand children, but is it happening anymore in these changing times?

More and more people are moving in different parts of country in search of education, jobs and settling there compared to old times. Parents on the other hand dont choose to move most of the times as they feel connected to the same place where they have spend all their life and more than that , they have their social groups at those native places.

Very rarely I have seen that parents leave those places where they have spent 30-50 yrs of their life .

Bigger opportunities in life and a complex life style has resulted in smaller family size and its going down each decade. As per research reports of National Family Health Survey , Ministry of Health and Family Welfare (MOHFW), Government of India , average household size in the year 1992 was 5.7, which means each family had 5.7 members, this came down to 5.4 in 1998 and as per last reports of 2007 , average family size is  4.8.

Now imagine this, each family having  approx 4.8 members , that’s today ! . Will it shrink further to 4.0 in coming decades , what do you think ? I think if it does not go down , it will definitely not go up ! . Thats my personal opinion .

This clearly shows that families size are shrinking on average. More and more parents these days are living in their home town where they raised their kids , but kids have moved to other places and settled elsewhere. By no means I am saying that not living together has resulted in less love or less harmony , NO !

All I want to say is people are living separately and “expecting” to live separately now a days.  This will only rise , and not come down by the time you retire.

So the conclusion is “There are higher chances that you will be living separately and not with your kids , by choice or by society structure , unless you are living in smaller towns and villages.”

Change in perception about Retirement Planning

Now leave all the factors we talked above. Lets look at how people today feel about their retirement in coming years. I ran a poll on this topic which was taken by as high as 412 unique participants and you will be amazed to hear that as high as 83% said that they would like to be self-dependent and want to save all the money they would require in their retirement.

Around 10% said that this is the first time they are having any thoughts about their retirement after seeing the poll and just 7% people expect to be fully or partially dependent on their children for their retirement. Which shows us that as high as 93% readers on this blog who participated in the poll want to be self dependent and plan their retirement themselves.

Look at the poll results below .

Retirement Planning in India futureBest Investment for your Retirement ?

So whats the best Investment you can do today which will make sure you live happily in retirement? If you thought that it’s some financial product or a strategy to make some extra bucks, you are wrong ! I am talking about your Health here.

Note that reaching destination is important, but after reaching the destination if you don’t feel joy and happiness and are not able to enjoy the fruits later, all the hard work you will put for reaching for destination will go waste.

You will be living for 25-30 yrs minimum in your retirement, Now if you have all the money , but no proper health at the end, you will not be able to eat what you want, you will not be able to roam around places , you will not be able to enjoy each moment of your life , what’s the use of all your hard-earned money in that case ?

I would say all your efforts will be waste. This is one serious point I want you to take home today. Think about it.

People who are neglecting their health and financial life today are living in illusion that future has a lot for them. Start working on your health today, do a daily SIP investment in your health through exercising in gym or working out in park or at least jogging. lumpsum investments in health does not work , It can only work in your financial life.

I want you to download this e-book called Food and Thought right now.

What do you think about retirement after 30-40 yrs ? I want to hear your action plan for your retirement in comments section. Do you think the points made for Retirement Planning by me makes sense ?

Write us your opinion in the comment section.

Goal Visualisation or Goal Setting ? – Which one is better ?

Posted on by Jagoinvestor

Do you know how to write your financial goals? How many lines or words does it take? Think about your retirement goal for a moment. Now if you thought, “I have to generate a corpus of 5 crores in next 30 yrs” is a goal, you are mistaken… to a really large extent! While this way of defining goals is better than not defining a goal at all, this is not how you’d do it if you want to be inspired each moment as you work towards that goal. After a point, you’d just be lost again in your daily life. There is another way of writing financial goals and today, I show you how to do just that.
 
Goal visualization

Let me ask you a simple question. When are you excited about watching a new upcoming movie? What if I tell you that there is a new movie out soon, called “Kuch Log”? Will this tiny bit of information do anything in your mind? Does it excite you any? Does it inspire you to go to theatre and watch the movie? No! .

But what if I show you a trailer? Some exciting snapshots of the actual movie that give you a feel of how it will look like? The best tantalising glimpses?  Won’t it then, create a shift in your mind and motivate you to actually consider watching the whole movie?  I’d say Yes! . In the same way your financial goals defined in just one dry, boring line, with a target amount & date can not motivate you enough. It can motivate only those people who really are disciplined and committed in life .

In this article, I’ll share something very personal about us at Jagoinvestor. This process, is what we do with our clients. The way we work with them, goes way beyond traditional financial planning. Instead of just goal setting in the traditional way, we do something additional called Goal Visualization! . Goal Visualization is converting your target amount and target date into a more descriptive paragraph and see how your life will be in future . It gives you more clarity and what you actually want your goal to look like .

Here’s an example…

Year : 2040

I am retired now, and living in my native town of Bangalore. My house is a little far away from the city because I like to spend most of time in nature related activities like hobby farming and some social causes like consulting with poor farmers on how can they use today’s technology in their work.

I am trying to get back to my routine work, these days, as I’ve just returned from Australia , where I spent a month-long holiday. Next year’s destination is South Africa which recently got added to my list as the next world cup is there! I have all the time now, to go watch my country win there. It will also give my wife a chance to explore various historical sites of that country, which she loves a lot. Its part of my “30 countries I visit before I die” target that I had set for myself.

It gives me immense pleasure and satisfaction, when I teach mathematics to a group of 30 poor students who can’t afford a fee! That’s exactly I am doing these days. As I am retired now and really love the subject, I want to help in sharing my knowledge any way I can.

Me and my wife go for a daily walk in the morning; we have been doing it for years now, the last 20-25 years in fact. We have made sure that we won’t be victim of deteriorating health which will make all the money we have saved, all our lives fruitless! We have always done our best to keep ourselves on the move and now we have joined one the biggest health clubs in the city. It’s cost us more than 70 lacs for a lifetime membership, but it’s been worth the cost and it gives us all the time and resources we need from it, whenever we visit it.

I have generated enough wealth in my life which takes care of my basic needs and luxuries in life. I never have to think twice, before buying  something important. Money does not come in the way of my leading the kind life which I always dreamt of! I have achieved this! While I like to live simply, I have created a situation where money is the last thing which I have to worry about, as far as my life is concerned.

I have spent most of the time working for software giants across India and US, and  I never felt as if “This is exactly what I want to do!” Now I am free of those worries, which came in the way of  my desired life. I feel I am really spending each day of my life the way I always wanted to, not the way I am forced to because of various reasons in life. I am happy!”

Goal Visualization is not Dreaming

Goal visualization is not dreaming ! . You need to have a visions in life and this goal visualization is looking at how your vision will look like in future . Remember that Dhirubhai Ambani never had a goal of have 5 crore in retirement , He had a vision and that vision inspired him each moment in his life to move forward. To do anything which makes his vision true .

Goal Visualization gives you the power, it inspires you ! . It makes you crave for your financial goal which you create for yourself. You will not believe but most of our clients discover themselves and are amazed to find out how they themselves wanted their future life to be , and it happens only after they approach us to work on their financial life. There is less of number crunching here and more of human activities which connect to a person , motivates them and fills them with energy.

Your Action today after doing Goal visualisation

When you do goal visualization, go into the future and see yourself – Are you are happy? Excited to see yourself getting what you really want?  Then, come back to reality (come back to NOW). The next step is to answer a bigger and important question. You now, have to write what commitments are you willing to make, what efforts are ready to do today which can lead you to the goals you want for yourself.

It goes a little like this…

Year : 2011 ( Today)

I was actually thinking of upgrading my car from Santro to Honda as my salary has gone up by 100% in last 3 yrs, but If I look closely now, I feel that it was a “wish” created out of nothing. It’s not actually a  “need” !.  If I ask myself whether it’s really required, I see myself answering “Not Really”. I can actually continue with same Santro for next 3-4 years. Better that I, use my increased income to reach my retirement goal at the earliest.

My wife has subscribed to a gym membership but her trips to the gym are very limited. On second thoughts, we will stop paying 3,000 per month fees and better use Rs 150 per day pass every time she goes. Anyway she goes about twice a week, so it would save 1,800 bucks without compromising what we are doing right now. It’s just that we have to relook things and restructure them.

I save around Rs 5,000 a month, but after doing the goal visualization exercise, now I am committed to achieve it at any cost. I am not just committed, reaching my financial goals is my sole focus now. I will car-pool, I will cut on my smoking, I will limit my outings (at least the ones that do not matter), & I will cut down wherever I really can.  I will not compromise on things which I love or add to my family lifestyle and happiness, but I will be really merciless when it will come to things which I truly don’t want in my life. I will be now committed, on finding a better opportunity to work, I will get out of my comfort zone and take some hard decisions in life to make things happen now. I am going to start my SIP next week, Wait… why next week? What’s stopping me from doing it today?  What’s keeping me from doing right now? I will call someone right now and find out how its done! I will not let “I don’t know” kind of excuses come on my way! I’ll use “I just want it at any cost, no matter what” kind of energy to reach it.

This is the new mantra of goal setting which we are trying to incorporate in each person we meet or each person we encounter at Jagoinvestor. We give them food for thought, we make them connect to their own financial life and show them the power of doing Goal Visualization and not just scribble some numbers. If we were just computers, it would have worked! .

We make them write these things down. We do more of listening and less of instructing, because we make people instruct themselves!

Goal Visualization is not a replacement of Goal Setting

Note that goal visualization is not an alternate of traditional goal setting , rather its a supplement and additional exercise to make your vision stronger , make your commitment more strong and a reason for you to look at your goal with high priority and seriousness.

I hope you appreciate the fact that this way of goal visualization is better than fooling yourself with something like “I want to create 5 crores in 30 yrs for my retirement?” . It only gives you a short-term orgasmic happiness and then you start you day next week in the same manner as if nothing happened ! , unless you are high on discipline to save for that goal . Only then it can work ! . If you mix goal visualization with traditional way of goal setting , it can be much better than just goal setting and finding a number which you need to save monthly .

If you don’t take action after reading this post, it would be waste of your time truly speaking. So now, is the time you start writing down your goals in detail and visualize it. Do it right now! Not later, not after dinner today, not on the weekend and definitely not when you are free!

It has to be today, right now at this moment.

Send your goals visualization to me (A strong exercise)

What about this ? Download this Goal visualization sheet, Take two prints, You fill one of them and let your wife fill another (incase you have). Goal visualization is a joint family exercise, not just yours. It has to be taken by your spouse separately. You will be amazed to see how much it differs for you and your partner even if the target amount and date was same. You two, might visualize it very differently.

Once you are done with the goal visualization, send the filled sheets to me at  manish [at] jagoinvestor [dot] com. I’ll do my level best to look at them and give my comments if they are of any help to you. I don’t guarantee that I will get back the next hour, but I will try to get back as soon as possible . This exercise alone however, will give you some power to take action which you are missing till now in your life!

Comments ? You can also pick up a goal and do goal visualisation on the comments section too. See if you feel it is strong enough! , Do you feel it helps you to generate some commitment and leads you one step closer to taking action ?

Disclaimer : The examples given in this article for goal visualization are created just for article and it’s not a real example of some person.

How Interest rate and Bond prices are related ?

Posted on by Jagoinvestor

Bond prices go up when interest rates go down! . Have you ever heard that and wondered how is it possible ? What goes behind the scene which makes it happen? It’s important for you to know this, because now a days there are enough financial products which depend on interest rates, for example Debt funds, Fixed Maturity Plans, Infrastructure Bonds and many products. In this article I will show you in simple language how bonds prices and interest rates are related.

Interst rates and Bonds prices relationship

How interest rate and bonds prices are related ?

You must have heard or read often that when Interest rates fall, bond prices go up and when interest rates rise, bond prices go down. Also in many articles you would have read a term “Interest rate Risk”, but always wondered why its is a “risk”.

Let me give you a simple example . Suppose in the market the interest rates are around 10% , Now Ajay lends Rs 1,000 to Robert for 1 yr at the interest rate of 10% , which means Ajay will get Rs 100 as interest next year plus his initial 1,000 of principle , so Ajay will get back total Rs 1,100 at the end of 1 yr. Now suppose they sign a paper where all these terms and conditions are written and we call this paper as “BOND” . Who ever has this bond at the end can go to Robert and get Rs 1,100 by giving them that BOND paper. Now imagine two situations where interest rates move up and down and a third person called Chetan wants to buy the bonds after interest rates has moved. Lets see how bond prices move in both the cases here.

Case 1 : Interest rates go down

Suppose interest rates in market falls to 9% because of government policies or some other reasons (in our country RBI keeps change interest rates).

Which means now if a person lends Rs 1,000 to some one, he can get only 9% as interest. But Ajay has a special bond! , which actually gives 10% return (also called as coupon rate) and not 9%.  He is getting 1% more than what a new bond in market will give. Now if Chetan comes to Ajay and wants to buy this Bond from Ajay, Will Ajay give this bond at 1,000 ? No , This bond is worth more now, because this bond is giving more than what a normal bond in market can provide. What will be price Ajay can charge from Chetan ? It’s very simple maths.

If Chetan goes to market and invests 1,000 , He will get 1,090 at the end of the year because interest rates are at 9% only. So how much should Chetan pay for the bond Ajay is holding as he will get Rs 1,100 with that bond. It’s a simple calculation

=> To get 1,090 at maturity , Chetan has to pay 1,000 in current condition. so ..

=> To get Rs 1 at maturity, Chetan has to pay 1,000/1,090 in current condition.

=> To get Rs 1,110 at maturity, Chetan has to pay 1,100 * 1,000/1,090 today = Rs 1,009.2 (approx).

Which means as Ajay bond is giving 1,100 at the end , Its worth 1009.2 because interest rates moved down ! . So Ajay’s bond commands a premium of Rs 9.2 . You can see that 9% of 1,009.2 is equal to 90.8 and 1009.2 + 90.8 = Rs 1,100 which completes the equation .

Case 2 : Interest rates go up

In the same manner suppose interest rates move up to 12% in market from initial 10% . Now if a person lends Rs 1,000 to someone , he can get 1,120 at the end . Now Ajay’s bond is actually giving less than the new bonds in market . Why will some one pay 1,000 to Ajay to get 1,100 at the maturity , when they can lend the same money in market to get 1,120 at maturity , which is Rs 20 more .

So now if a person has to buy Ajay’s bond they will pay a less price (discount) . Using the same process you saw above you can find out that the new value of bond will be 982.2

=> To get 1,120 at maturity , Chetan has to pay 1,000 in current condition. so ..

=> To get Rs 1 at maturity, Chetan has to pay 1,000/1,120 in current condition.

=> To get Rs 1,110 at maturity, Chetan has to pay 1,100 * 1,000/1,120 today = Rs 982.2 (approx).

Now both the examples I showed you was a very simple example, considering maturity after 1 yr. It was just to give you a brief idea about how interest rates and bond prices are interconnected. However in reality bond pricing is much more complex as maturity can be much more than 1 yr. It can be 5 yrs or 10-15 yrs (SBI bonds). In that case finding a new bond price become a little complex . However the overall funda remains the same . You see what are the future cash payments you can expect from the bond and relate it to the current interest rates and find out the Net present value of the bond in today’s term. We will not go into how the complex formula is arrived at , but I am giving you the formula below which you can use incase you want some time.

Here is the formula which you can use directly for Bonds New price after change in interest rate .

Interest rates and Bonds price change formula

Where

P = New Bond Price

C = Yearly Interest received from the Bond

i = New Interest rate

N = Number of years for bond to mature

M = Maturity value of Bond (generally its same as face value of Bond)

Real Life Example

Recently SBI came up with their Bonds issue. Lets say you invested Rs 1,00,000 in those bonds with maturity of 15 yrs and you are getting 9.95% interest on it and lets say that after 3 months SBI again comes up with another bond issue but this time they are giving interest of only 9% on those bonds. In this case your bonds will become more valuable now as your bonds give more interest that whats going on currently in the market . So now if you want to see your bonds on stock exchange it will quote a higher price which is P in the formula above and lets calculate it. Also lets see what are different variables in this case as per the formula above .

P = This what we have to find .

C = 9950 (9.95% of 1,00,000)

i = 9% (new interest rate)

N = 15

M = 1,00,000 (value you get at the end in maturity)

Now if we use the formula above we will get

P = 9950 * {( 1 + 1.09^15)/.09 } + {1,00,000 / (1.09^15) }

P = 1,07,657.7

Which means you will fetch 7.6% premium in market because of decrease in interest rates . Now you find what will be bond price if the next SBI issue comes with 11% interest ? Tell me in comment section . The example I gave you is based on the formula only and small details are not taken care of which can further affect bond prices in market.

Note that in your life, you make many investments where interest rates come into picture but it’s behind the scenes . I will talk about some of those here .

Infrastructure bonds and other Bonds

You know that we have infrastructure bonds offered in markets , Weather tax-saving or non-tax saving , most of those bonds are going to be traded on stock exchange, so if you bought any of those bonds  in future when interest rates fluctuate , you know 2 things , what is the current interest rates and what is the final maturity value , using just 2 of these factors you can discover what is the current worth of those bonds and incase you want to buy/sell those bonds in stock market , you can command the right price .

Fixed Maturity Plans and other Debt funds

When you invest in Debt funds or Fixed Maturity plans , you give money to mutual funds and the fund manager uses this money to invest in bonds issued by Companies, government and other bodies . Based on the interest rates fluctuations in market they fetch good or poor returns based on their judgement . You as an investor would have more clarity about whats going on behind the scene . Just don’t be an ignorant investor who does not know how things work .

What you should learn from this ?

This article shows you how an investment can become attractive or unattractive based on interest rates, so incase you are planning to buy anything which depends on interest rates , better look at interest rates and study a bit on how it can move in future . If you are planning to buy some bonds today and there is anticipation in markets that interest rates are going to be raised at some time in near future , Your investments today in those bonds will go down in value because interest rates have moved up . At the same time if you feel interest rates will move down , It’s the time to buy those bonds !

This simple information is used by companies and govt to issue bonds , in the recent issue of SBI bonds even though SBI is giving 9.95% interest , if after 5th year they feel that interest rates can move down , they have kept their options open to kick you out of bonds and close the contract. Where as if the interest rates move higher , you can’t do nothing but you are stuck in those bonds for all 10 yrs , unless you choose you get rid of it by selling it on stock markets .

Share your comments about this and don’t forget to forward this article to any of your friends who were always confused about interest rates and bond price relation 🙂 .