3 stories that might change your perception about your own financial situation

Today I am telling you 3 short real-life stories. This is a random post, which I thought would be a good read for all the readers not because it gives you some knowledge or it teaches you some financial stuff.

But It might change your perception of your own situation and how lucky you are to have what you have.

change perception about financial situation

#Story 1 The Broken Person

A poor man from “Belha” village (District Sonebhadra, Uttar Pradesh) has 5 children. Some years back he had to sell his cattle and some household things to pay for hospital expenses for an accident. The Expenses were just Rs.3,000 After that incident their life got miserable day after day.

For years they are living a life which is unimaginable … They work in other fields and as a labourer’s whenever they get some work. They don’t get work for more than 50 days in a year. They have to travel to nearby “towns” which by my standard itself are poor villages.

They earn close to Rs.10-15 by working in Fields and around Rs.30 as labourers. But most of the time they get work in fields only. One of their children died last year because of malnutrition and all of them had nothing to eat for close to 4 days, not even a single meal.

Other children survived somehow. On an average this family eats once a day, sometimes full stomach if they are lucky. From last many years the only sweet thing they have eaten is some “sugar”.

Because of bad monsoon this year there was no work in fields, Last Month this person comes to my hometown to earn some money by pulling Rickshaw.

There are already hundreds of people like him in my hometown doing that work and one more person in that list will not worsen the situation of unemployment, So its fine I guess. He thought that he would be able to do the work because his legs are “strong” he thinks.

After working for 3-4 days and earning money which he thinks is excellent (Rs 100 in 3-4 days), Next day he fractured his legs because of a severe accident with a Car in the town. With no money with him, he can.t do any thing but to live with the situation. With his broken legs he was doing some “Wall painting work”.

His family is some how managing to survive in village and waiting for him to come and feed them for several days without any break .

This person is too weak to work now and accidentally fell on ground because of imbalance and broke his one hand too . Frustrated , Now this person cries for hours and finally decides that god has tested his patience for surviving his life and now he cant take it anymore . After that day this person is missing and there is no trace of him .

This is real life story of not just one person but most of the people in poor villages of this country . I had met this person long back some 4-5 yrs ago when he came to my home , He is close relative of a person i know personally .

#Story 2 The Old Lady

“Jeera” .. This may be a kitchen ingredient name for you , but this was a common name for females in poor villages . (Many people are named on vegetables, masalas and fruits in villages). This is a women who is in her 60’s, elder than my Father. She does not know where are her children from last many decades. They ran off from village with the bad companies they had.

She comes from her village 6-7 kms from my home town and washes utensils, cleans rice and wheat etc. or Washes clothes some times .. Any petty work at home “on demand”. She gets Rs.5 per day from each Family. Btw, she works for just 2-3 families anyways.

So on an average she earns Rs.10 per day , some times Rs.15 . Rs.10 is actually good enough to feed her two times, because she has no other expenses other than Food. Transportation is free (She walks up and down daily) and hopefully gets a Saree once in 3-4 years from some family on Diwali or Holi may be).

Her biggest Wish in life is to own a Mobile phone someday , but deep down she knows very well that its not possible in this life. I see her always cheerful and smiling, and some times her level of satisfaction and happiness in life seems to be much more than any average person in this country.

Story 3 #The Rickshaw Wala

When I was in School , I used to go by Rickshaw to school , and my rickshawala was a dark-long beard muslim person (don’t remember his name) who used to yell and shout on every boy and girl every day for whatever we did, even if were 1 min early , he yelled 🙂 .. if we were late by 2 min, he yelled.

I was really scared by this person all my life (my school life) and after I left my home 12 yrs back for further studies, Whenever I go home, I see him pulling rickshaw to same school, same rickshaw (in bad condition), No changes at all … Either he sees me accidentally or I see him accidentally and then This person comes to meet me at home, Our talk generally ends in 3-4 minutes with just a general “Haal-Chal” talk.

Every year he looks 2 yrs older than last year and more weak than earlier. One common sentence every year I hear is that “He is trying to make both ends meet somehow” and “he is not able to pull his Rishshaw these days , But some thing needs to be done to support his Family of 8” .

I was surprised to hear that he had 8 people in family and even more surprised when he told me that this is after his 4-5 sons ran away from Family because of being involved in “Gaanja-Sharaab” (opium-alcohol) activities.

This time, He came to meet me again, His pauses longer this time between the conversation. I realized that he expected some monitory help from me (He expected it every year, but I never understood, I thought he just came for “Haal-chal” talk).

I gave him Rs 100, and I could see tears in his eyes, because it was too much and beyond his expectations. I think he expected not more than Rs 10-20).

I think he will take a small vacation now (for 3-4 days) and rest at home, anyways no work because of Diwali.

———

Conclusion

Most of us earn per day more money than what these people make in a month . Early Investing is key to financial freedom , “Satisfaction and Being Content” is the real key 🙂 . See what you have rather than what is missing and you will be much more happier than ever.

I am telling you these stories so that we understand how good our situation is and we worst situation is literally 100 times much better than the best life these people can ever think of. I hope it hurts less next time your Mutual funds drop by 10%, or your Home Buying is delayed by 1 more year, or you are not able to go for vacations for a year or your “life is miserable”.

Donations

Incase you are too touched by these stories , I would be happy to accept donations and give to these people [mail to [email protected]], You can give donations of as minimum as Rs 50 or Rs 100 .. Even if you are ready to skip a movie or Dinner outing with Family, That much money can provide a months worth of food or some happiness to these families.

Time to do something really nice this Diwali 🙂 .

I am not sure If the first person will be available or not [Family is available], but other two will hopefully be there …

I know all these people personally and most of us living and working in big cities might just hear these kind of stories in news or in newspapers but its very common in small poor villages .

Comments are Welcome, Please share your views on these Real life stories and Let others know What are your ideas on making the situation better.

Mis selling by an LIC agent

Many people have been sold LIC policies without making them understand what is that policy and how is that structured for you.

I have recently been informed by one reader how an LIC agent sold her a policy claiming it to be “a great opportunity” and gave her wrong information about the policy and the actual thing was totally different, which she discovered from another LIC agent years after.

Now the situation is a total mess. [Written in Train, Posted from Home]

mis-seling

Mis-selling from an LIC agent

Hello manish..

I have been taken for a ride by a cheating “char so bees” LIC agent. Please help me. In 2006 I got married and moved in with my husband to a very remote mountainous region. Soon we had a Lic agent pestering my husband about taking a ” good” life insurance.

I had read in a Readers Digest issue about term insurance and asked the agent about the same. But that shameless fellow said that such a thing was not available in LIC.

Since he was the most “renowned” agent, I trusted him and took the next best thing he offered – a 22 year 16 lakh money back policy Jeevan Anurag in which I would have to pay Rs1.21 lakh per annum for 7 years after which we would start getting money back( Rs80,000 in the 7th, 8th, 9th, 11th, 12th, 13th, 15th, 16th, 17th, 19th, 20th, 21st year and 3, 4, 5, 9 lakhs in the 10th,14th,18th,22nd year).

He also said that our as our policy got older we would have to pay less premium. I did’nt quite understand when he gave us 4 policy papers and questioned him about it on two occassions. But he asked us to trust him and ” reap the benifts of this incredible policy”.

I had my doubts but I was naive and did not want any trouble. 2 months back we got transferred to a more” civilised” town and soon we had a new LIC agent knocking our door. As we talked about my previous policy this new agent said that he has never heard of such a policy and asked to see the papers.

I was dumbfounded when the agent told me that I dont have a 16 year policy but 4 different policies of 4 lakhs each for 10,14,18 and 22 years of which the premiums are Rs 46032, Rs31842,Rs 24355, Rs19357.

Jeevan Anurag provides the following assured benefit-“..an amount= 20% of of basic SA at the start of the year during the last 3 years before maturity shall be payable . At maturity balance 40% of basic SA+bonus…”.

That cunning man had arranged the policies in such a way that when one reached maturity the other just stared paying up. I feel so stupid for having been duped. I have already paid 4 premiums(4.9 lakhs)…

now I am in such a state of confusion that I dont know what to do next. Should I discontinue or should I continue ???

I see a lot of sense in what you say and I would really like to invest into some of your ideas but my money is stuck and I dont know where to go from here..Where I live the only financial advisor available is the LIC agent and I dont trust a word he says so please show me a way out.. I really need your help.

And is there a way I can get back at that sleazy agent? Help?? please..

Read the review of Jeevan Tarang Policy from LIC

Answer

oops .. that really hurts ..

I can see that you are mis-sold the policy , The returns which you mentioned to me also looks little cooked up , please check the numbers once again , if needed involve that new LIC agent to find out what is the exact money you are going to get back in different years .

If you have 4 lacs policy for 10, 14, 18 and 22 years, then that 80k figure is correct. but looks like the 3,4,5,9 lacs thing little cooked up . you should be actually getting 1.6 lacs + Sum assured in each 10th, 14th, 18th and 22nd year.

Looks like this has overestimated the sum assured part and made it 3,4,5 and 9 lacs, This might happen but the probability for that is close to 0. Ask the new LIC agent to estimate how much is it…

My estimate is not more than 2.5 lacs in each 10th, 14th, 18th and 22nd year. max 3 lacs… Apart from this the premium of 1.21 lacs is to be paid upto 7 yrs, that is true, but after that, only the first premium will stop, the other 3 will continue and then 2nd will stop in 10th yrs .. and so on.

As you can see from https://www.licindia.com/children_need_001_benefits.htm that the premium stops only at n-3th year of a policy . Please try to understand the policy yourself.

Truly speaking, I am more mad on you guys than that LIC agent

Regarding tracking down that LIC agent , you might have phone or address or some sort of contact . If not , Contact LIC and find out your LIC agent name and agent number or something . File a complaint with LIC on this matter and once its not taken care within 2 months, file a compaints with IRDA on this .

Take this matter to consumer court . I am giving all these suggestions but not sure if this will be of too much help , because you guys have signed the document which says “I hereby understand and agree with Policy Document and am responsible for all the invesment decision” , Hence I am raising my hand to help you but fingers are crossed .

Apologies if I my words sound little rude , but I am an emotional person .

Comments

What do you think about this issue, Do you know how to track that agent again, Anyone can help this person? Contact me…

Questions and Answers , Part 5

Here are a set of 5 questions and answers asked to me on “Ask a question section”. These questions are on the topics on ULIPs, General Investing and Achieving Financial Goals, Stocks. You can also look at other Questions and sections part here at Part 1, Part 2, Part 3 and Part 4

ask a question

Question 1# [Stocks] – by Ramesh Rao

sir, I bought rei agro ltd at Rs.48/- for short term of 1 week or 10 days.
I am observing it for the last week its not moving much higher than the price i bought. so what should I do, please guide me, shall I wait for a week.

Answer

I do not give recommendation about stocks as I mentioned in the form itself. Anyways its too late now for me to reply, but I will give you basic advice, I can see that you dont have a strategy in place for trading, thats very dangerous in long term.

Please understand one thing very clearly, Random trading will never make you money in long term, its just a blind gambling. So learn Technical analysis basic, Master the psychological issues involved in Trading. Once you make money in Paper trading for 3 months ,then move to real trading, there is study and experience both behind my advice.

Question 2# [ULIP] – by Vivek Kumar

I am looking to invest around 6 lacs in next 3 to 4 yrs period with a view to get a return of more than or equal to 15 lacs in next 10 years. Considering the recovery mode of market what should i go for, I have come across this plan called TATA AIG Invest Assure Apex, should i go for this ulip or something better u all cud recommend…! cons

Answer

Expecting 6 lacs to become 15 lacs in 10 yrs is very realistic and acheivable target, Here is the plan

– Invest 12,500 per month for 4 yrs (total 6,00,000) in Mutual funds through SIP. Take 3 different Mutual funds.
Assuming a return of 12% (1% per month) over 10 yrs, which is like very much possible, you will have 15.8 lacs in 10 yrs.

>>> (12500 * (1.01) * ((1.01) ** 48 – 1)/.01 ) * (1.01)**72
1582275.5728728396

You can mix up your investments like this

– totally in Equity diversified Mutual funds,
– Mix of Equtiy Diversified + Balanced Funds
– Mix of Equity funds + Some Debt funds
– what ever else you can make yourself (be creative)

I don’t like to take plans from companies because thats like giving away all the fun in other hands then, Dont hesitate to excute your investment plan as I suggested, Its too easy to execute and does take much time and you get to learn seomthing out of it.

Question 3# [Making Long-term corpus] – by Aakaash Nair

Your blogs are excellent coming from someone of your age. Kudos to you. I can save about 60K per month and would like to have that multiply to about 2 Crores in the shortest possible realistic time. What would be the best way to achieve this, apart from Gambling of course 🙂

Answer

Thanks for the appreciation, Regarding your Query .. The best way to find the answer of shortest possible time is to find out what is the realistic rate of return you can expect over some tenure. I would say that over a long term you can expect 12% and it can go upto 15-20%, but let’s be conservative and expect 12% only.

So if its 12%, then it’s pretty simple equation where we have to find the tenure which generates 2 crores from 60k per month

>>> (60000 * (1.01) * ((1.01) ** 156 – 1)/.01 )
22555868.687736

With simple maths, we can see that 156 months (13 yrs ) is a good time frame to achieve this. It might be achieved early also, but let’s be conservative in this as the amount invested per month is high and there can be changes of slumps in between which can affect psychologically.

I would recommend this

– Utilize PPF for this as it will take a small part of your investment. (70K per year)
– Put a small portion in DIrect Equity after doing some research on stocks and give them time to grow (monitor them every year)
– Start a SIP in 2 good Sectoral Funds (10% amount)
– Start a SIP in 5-6 different good Equity diversified Mutual funds.
– Rebalance your Portfolio every year as per your asset allocation (let’s have 80:20 or 75:25)

The above mix is quite good in Risk appetite. which I assume is fine.

Question 4# [Stock Trading] – by Shubhankar

Hi, I am very much thankful to whatever information u have provided. I trade in options and its intraday or 3 to 4 days positional. So can you please suggest what time frame I will select to get the right moves -for example today is 28th August.. .

Now what time frame I will choose fr Nifty/Stock PE for September series so that I can capture either side of nifty/stock movement.

Answer

You have asked very innocent question, The answer is, that right moves are in every time frame, its you who have to configure yourself for some condition and time frame and startegy, there are people who make money in every kind of time frame,

Decide what is your time frame as per your life style, level of involvement you want, kind of strategy you have. Read my ebook : https://manish.pucsd.googlepages.com/A_Small_Guide_For_Newcomers_In_Stock.pdf

Question 5# [Financial Planning] – by Manpreet

You have a great site. I must congratulate you first for your efforts!

Frankly, your articles have been eyeopeners for me, and I’m now in a fix, about what to do with my existing insurance/ulip policies.

I have the following policies:

1. Birla Sunlife Dream plan:

Premium = Rs. 50700 p.a.
Sum assured – Rs. 1908000
Coverage period = 20 years
Start date – 27/07/2009 (have paid 1 premium so far)

2. LIC Profit Plus (T.No. 14)

Premium = Rs. 20000 p.a.
Sum assured – Rs. 200000
Coverage period = 20 years (premium paying term is 5 years)
Start date – 18/12/2007 (have paid 2 premiums so far)

3. LIC Endowment Assurance Policy

Premium = Rs. 27540
Sum assured = Rs. 600000
Coverage period = 21 years
Start date = 28/09/2008 (have paid 2 premiums so far)

4. MNYL Life Maker Premium ULIP

Premium = Rs. 20000 every six months
Sum assured = Rs. 400000
Coverage period = 10 years (premium payment term is 5 years)
Start date = 07/09/2008 (have paid 2 premiums so far)

And, my wife has the following policies:

1. LIC’s Money Plus (T.No. 180)

Premium = Rs. 100000 (single premium)
Sum assured = Rs. 500000
Coverage period = 20 years
Start date = 06/02/2007

2. ICICI Prudential LifeStage RP

Premium = Rs. 100000 p.a.
Sum assured = Rs. 500000
Coverage period = 10 years
Start date: 08/02/2008 (have paid 2 premiums so far)

After going through your articles, I’ve realized that I’m wasting my money by investing in these policies. How can I exit out of these policies? When should I do it? And, where should I invest my money instead both from investment & tax-saving POVs?

My age is 27 yrs, and my wife’s age is 25. We both work in the IT sector. And, we would love to buy a house/apartment in 5-10 years frame. What can be the best financial plan for us?

Any kind of advise would be helpful. Thanks for your help.

Answer

OK , lets take it easy .. Manpreet , your Finances are not in great shape .

You people are paying 2.37 lacs per year as premium (excluding single premium) for your Investment Planning , please dont tell me you still think its a Insurance Policies 🙂 .

WIth this kind of Premium every year , you Insurance is still a tiny 41 lacs which seems to be a small coverage for you guys . I can smell around 1 crore Insurance requirement for you people (assuming no assets) .

Your Insurnace Requirement can be met with a small premium of 23-24k per annum for 30 yrs tenure . You will be left with 2 lacs every year in that case to invest somewhere else ..

Using PPF + SIP in Mutual funds and may be some Pension products , you can generate atleast 12% return which is totally possible , you can generate close to 3 crores in next 25 yrs .

Regarding getting out of your Policies now , I can see that you have paid 1 or 2 premiums in most of them .. this is a very critical situation , which can not be handled easily now .. I would recommend still pay for polices you have to and once they recieve surrender value after minimum lock in period, then take them out and make your Investments more easy and simple .. for now .. make sure you take Term Insurance for another 60 lacs .. for a penny amount of 13-14k per annum ..

The current situation is too messy and complicated , I would not day BAD , but messy . Its not simple .. too much clutter there . You need a simple Term Plan for you and your Wife , Two PPF accounts (you and your Wife) , a bunch of mutual funds linked to your Financial goals , A family Floater Plan and may be 1-2 FD’s .. thats it ..

Some ULIPS you have might be goodone and can be used for some investment , but still they wont be the best thing .. This the all advice i have with the given situation . You might want your Financial planning to be done professionally , because there might be small small issues and one time restructuring for long term is required I guess . take your call ..

And one more thing , I almost forgot .. How are you claiming for tax deduction with so much of premium? Tax planning is also not up to the mark .

Apologies if I scared you , but thats my 100% real reaction .. I cant lie 🙂

4 Charts which will change your perception about Equity

“Invest in Equity for Long term” You might have heard this sentence from me and others numerous number of times, but have you ever thought, why I say so? Or what is the logic behind that? What is the authenticity of what I say? Why should you believe me?

Hence, I came up with the most time consuming article of this blog till date. Lets explore the world of Equity today and I will show you some amazing numbers and graphs which will change your perception about Equity.

Equity

To make this article Crisp and short, I will show you 4 charts and explain each of them that will show you Power of Equity. Mainly the idea of this post is to show you the return potential of Equity in Different time frames and to find out what is the kind of return we should expect from equity in Long run like 15-20-25 yrs.

For the sake of calculations and source of reference, for almost all of the article I have used value of Sensex Index, but it should be almost similar for any Index Fund, ETF, or a Equity Diversified Mutual fund.

All the below study is based on historical 30 yrs of Sensex data from the year 1979.

1#Sensex Return Chart

Sensex has returns close to 18% CAGR in the long term till date for One time investment and SIP investment.


This chart shows you the CAGR (Compounded Annual Growth Rate) return of Equity after each passing Month. I have manually noted down the Index value for each month starting from Mar 1979 – Sept 2009 (total 350 months approx) and then did some number crunching (actually a lot) and came up with the CAGR returns the index has given for that time frame.

For example: for the month 36, the Index value was 218.82 and my starting Index value was 122.23 (Sensex actually started from 100, but I had a little late data). So the actual return was 23.16% for SIP investment and 20.78% return for one time investment.

So this chart shows that if you had Invested your money in the start and then hold it for a particular time frame then what will be your CAGR return till that point.

The chart shows the return for two kinds of Investment modes: SIP and One time investment. So Blue line shows the CAGR return if you did SIP investment and the RED one shows the CAGR return if you had invested in Start and sold after ‘n’ number of months.

View Data

Points to Note

  • In the Short term, returns have Wild Swings which is the basic nature of Equity
  • In the long run, returns were in the range to 18-23%, where it goes up and down because of Bull and Bear markets. See Nifty PE Analysis
  • SIP performed better than One time for starting 4-5 yrs and then SIP and One time investment were close enough.

2# Nifty Return Chart

Nifty has given returns close to 18% for SIP investment and close to 12% in 12 yrs from 1997-2009 .


This one is similar to the above chart just that it is for Nifty 12 yrs data. This chart shows you the CAGR return of Nifty after each passing Month. I noted down the Index value for each month starting from 1979 – 2009 (total 146 months approx) and came up with the CAGR return the index has returned up to that point.

For example: for month 120, the actual return was 23.33% for SIP investment and 13.17% return for One Time investment. So this chart shows that if you invested your money in the start and then hold it for that particular time frame then what will be your CAGR return till that point?

View Data

Points to Note

  • You can clearly see that the returns kept increasing with Tenure and there were less wild swings up and down with Returns.
  • SIP performed better than One time Investment in all the time frames. See that blue line was always higher than Red one for any given month.

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3# Absolute Average Return for Each month (Sensex Data)

This shows you how much of absolute average return in percentage terms would you get if you hold your investment for X months.

This is an interesting Chart. It shows how much of absolute return can you expect when you hold your Equity investments for 1 month, 5 months, 50 months or 200 months. I will tell you how each duration is calculated.

Let’s say duration is 12 months, so what I did was that I took all the 12 months time periods like Apr 1979-Apr-1980, Mar 1979-Mar-1980, June-1979-June-1980 and like this the last 12 months time duration Sept-2008-Sept-2009, total of 113 different values, then calculated the Returns for each time frame and calculated the average of those 113 time frames.

I finally got average returns of 12 months Investment horizon (total 113 values for 1-13, 2-14, 3-15 month Index value). So I got a single value of 25.60% for 12 month time frame. This is absolute Return and not CAGR return.

So, if I invest 100, I get 125.60 as return.

Please make sure that you understand that this 25.60% is the simple average of 113 values, there might be many values which may be negative, 0, or may be 100%. But we are more interested in what is the average of all such values.

In the same way the Absolute Average return for 120 months was 672.60%, which means that 100 invested would have become 772.60 in 5 yrs. Please understand that we are just trying to show this as the time frame increase the return potential of equity goes up and up.

Don’t interpret it as the return guarantee for any time frame. It’s Equity, Respect it else it will punish you badly for your Ignorance.

View Data

Points to Note

  • In the long run, the average return has increased
  • For close to 15 yrs, the returns on Equity kept increasing but at a lower speed.
  • from 15 yrs to 29 yrs, the Absolute return increased very fast
  • So the real power of equity comes with long term.
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4# Number of Times the return from investment was Positive for some time Frame (Sensex Data)

This graph shows that how many times an investment has returned positive for some particular time frame, for example for 4 yrs time frame (48 months). There would be many 48 months time frame like Mar-1979-Mar-1983 OR Jan-1994-Jan-1998 or any other date, out of all those 48 month time period, the investment gave positive returns for 87.36% times.

So this graph shows how the number of times went up and up as the time duration was more and more.

For a particular time frame like 50 months, I calculated returns for all possible 50 month window and then saw how many number to times it gave positive return and then divided it with total number of times to get the percentage of times, the return was positive.

So if there were total of 200, “50-month” period and 180 times the return was positive. The result would be 90%. I did this same thing for every time duration from 1-300 months and plotted the graph.

View Data

Points to Note

  • One an average the chart was rising, which kind of proves that Risk of losing in Equity decreases as time duration increases.
  • After 11 yrs, there was no instance when equity return was negative, which means that you invest any time in Sensex index and take your money out after 11 yrs, you will not lose. The return would be positive always.
  • For smallest time frame of 1 month, the percentage was around 55%, which shows that for smaller time frame the equity returns are random like coin toss which is 50%-50% possibility. But as time horizon increases its more of power of Equity, rather than randomness.

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Conclusion

Many people are afraid of Equity because it can give negative returns, which is 100% true and possible, but people do not understand that its not a short term wealth building asset class. Its some thing for long term.

When you invest in Equity for Long term, you are bound to get excellent returns given that you have faith on Statistics, Historical performance and the concept of Equity in general. You can also maximize your investment performance by active participation in your investment and honoring Asset-allocation and portfolio re balancing from time to time.

Time spend and tools used to this article

You might have spent 20-30 min to read this article, but I spend close to 25-30 hours on

  • Finding data
  • Doing calculations
  • Making Computer program in Python: See the Python Code written by me for this article
  • Making Charts in Excel, See Chandoo.org for excellent Tips
  • Actually Writing this article

Comments Please, I would like to hear your views on this article and your views on Power of Equity. Is there something to be added? And Did this article succeed in changing your views about Equity or not?

Note : I will be on vacation now and will keep posting some articles whenever I get time .=”

What is Dividend Investing and How to find Dividend Stocks?

How do we get a consistent income and good growth both at the same time from our investments? In this article, I have talked about, what is dividend Investing and what are the important things we have to consider for investing with the purpose to build consistent income from such investments.

We will see the concept of Dividend Investing and the risks involved and some examples of stock which are considered to be good Dividend Stocks.

Dividend-Investing

What is Dividend and Dividend Yield?

When a company earns the profit, it has two choices:

  1. Either invest that profit in back in the company advancements
  2. Payback profits to its shareholders so that they get some return from the investments they made

So, generally, companies declare some part of the total profit as Dividends to its shareholders. Suppose a Company earns the profit of Rs.200 crores and it wants to give 100 crores as Dividends back to shareholders and there are a total of 10 crore shares in the market.

It will come out to be a dividend of Rs 10 per share. Now, if the face value of each share is Rs.100 (10/100), then it will be called as 10% dividend declared by the company, but if the Market price of that same share is Rs.200, then the dividend yield would be just 5% (10/200).

So what matters is the Dividend Yield and not the percentage of Dividend that is declared.

Suppose, you have 200 shares of Infosys and its current market price is Rs.1000, whereas the fave value of Infosys was Rs 10 and Dividend per share is declared at Rs.50, then the dividend percentage will be 500% (50/10), but the yield would be just 5% (50/1000) and your Dividend income will come out to be just Rs 10,000, which is 5% of your shares current market value of Rs 2,00,000.

See the Video Below to understand a little more.

How to create a regular and consistent Income from Dividend Investing?

So, the basic idea here is to invest in those stocks which have an excellent history of paying Dividend. The important point is to note the dividend yield earned from these stocks. You might be interested in Stock Market Analysis using Nifty PE

The advantage of Dividend Investing:

Your Investment Growth: The stock price will have good growth over the long-term and the share prices will grow.

Consistent Income from Dividends: You can also get a good income from the dividends you receive from Stocks

Tax-Free Income: As per current income tax rules, the dividend received from Stocks are 100% tax-free, unlike Mutual funds dividend where there is Dividend Distribution Tax.

Note: So Even if your Stock grows at 7% per year over long term and has a Dividend payout of around 5% every year… your actual return from the stock would be 12% approx which is a very good return.

Example of Some good Dividend Paying Stocks

Also, see this chart with Top 20 Dividend Paying Stocks list by

Top 20 Dividend Paying Stocks

Where to find out the Dividend Information for a Stock in BSE and NSE?

Click Here For BSE

https://www.moneycontrol.com/stocks/marketstats/nsetopdiv/index.html

See this NTPC Analysis by TIP GUY, You can refer to his blog for all your Dividend Investing related queries, He is an expert on this Topic

See other articles on Dividend Investment Here

Conclusion

People who have a good amount of money to invest in the stock market and also want consistent returns per year can look for investing in good (researched) Dividend Stocks. This will give them good investment growth and regular income.

Top 10 doubts and answers in Financial Planning which every beginner investor has

Most of the newcomers and even some experienced people struggle with basic questions and concepts of Financial planning. I hear most of the readers on this blog and even over the chat with them asking the same kind of questions over and over again.

So here are top 10 questions and their answers. Read them and find out if it contains some of your doubts too…

Financial Planning

Question 1# I want to Buy a Life Insurance for my Financial dependents. What Should I buy?

Answer: Term Insurance, split the Insurance between 2 Insurance providers, better to take 5% increasing Cover option.

Question 2# I have to save for my retirement and Children Education and Marriage. It’s more than 15 years away. I can take small risk to moderate risk, where should I invest?

Answer: Invest in Equity Diversified Mutual funds via SIP. Keep reviewing the funds every 2-3 yrs. For now, choose the funds from this list of Best Mutual funds in 2009.

Question 3# I have no Idea about Stock Market and How it works and I am not even Interested to know how it works! Is there any way I can invest in Equity and Enjoy high returns?

Answer: Yes, The answer is same as #2. Invest in Equity Diversified Mutual funds via SIP method. Keep reviewing the funds every 2-3 yrs. For now, choose the funds from this list of Best Mutual funds in 2009. If you are not a big risk taken and have some heart problem then Invest in Balanced funds.

Question 4# I have recently got very excited by the idea of doing Stock Trading and make some consistent money from it. Any Tips?

Answer: Better do what you are doing right now… Trading is not everyone’s cup of tea. Unless you are very determined of making it as a career or a semi-career, don’t even try Trading unless you have no hobbies to keep your self-busy with. Read How a newcomer should start in Stock Markets first.

Question 5# I want to invest in FD or Endowment Policies for my child Education or Retirement which is more than 10 yrs away, Shall I?

Answer: No!! FD and Endowment Policies provide very bad “post tax post inflation” returns… most of the times… it’s Negative return after adjusting inflation and tax. The purchasing power of your money will decrease drastically in these kinds of Endowment policies.

Always remember

Short term = Debt
Long term = Equity

That’s the RULE NO 1. Look at how to choose the best FD for yourself.

Question 6# I need some money for my Sister’s Education or Marriage in 2 yrs, shall I Invest in Stocks or Mutual funds. I can see markets are rising now and I am sure that it will give me great Returns.

Answer: No!! It’s an Important goal and you can’t risk with that. Stay Away from Equity…The first thing you have to ask yourself is “Is Direct Equity for you”? And what do you mean you are “sure” about the markets moving up?

There is no such thing.. Markets didn’t even like Einstein and Newton who tried Predicting the movements, who are you !! Even though markets look easy, it’s too tough to make such calls…

Question 7#I have invested in some Endowment and money back policies. What can I do now?

Answer: Better make it a paid-up policy and take a term policy. You will save a lot of premium and hence you can invest it for long-term in Equity which you provide you much better returns. See the Review of Jeevan Tarang Policy from LIC.

Question 8# Should I hire a Financial Planner? I can read about Financial planning on blogs, through newspapers. I have increased my knowledge to an extent I can take care of myself. What to do?

Answer: It’s great that you have learnt it yourself, you should be able to take care of most of the things by yourself, but most of them will be day to day decisions when it comes to Financial Planning. It takes much more than just that!

Financial Planning is more than “Taking term insurance” or “Choosing some great mutual fund” or “good attitude about saving”

It requires

  • Time
  • Analysis of Current Situation in detail and linking each component with other for best results.
  • In-depth knowledge or at least basic level of knowledge of overall Financial Planning …
  • An attitude of thinking in terms of Financial planning.

It’s not everyone’s job. We all have expertise in some or the other field, we may be okay or good at Financial planning. If your Home electric wires have issues… better call an electrician even though you have learnt some basic Electronics in college and know what needs to be done.

It’s always better to hire an expert and pay him what it deserves. We all are in this world for some reason, better do your own part and let others do theirs.

Note: I am talking about overall Financial Planning and expert advice… taking basic advice can /should be done by yourself.

Question 9# How is an Insurance agent or Wealth/Portfolio Manager different than a Financial planner?

Answer: From decades, Agents and petty advisers with some basic knowledge in a single field claim to be a financial planner. Financial planning is a very different thing than just Insurance Planning or Investment planning.

They are part of Financial Planning and much much more than that. Its like surgery of current situation, trying to find the issues in the current situation, the defective parts of overall Financial life and then correcting those mistakes by linking different parts.

CFP is the standard certification accepted all over the world for Financial Planning; So if you are looking for your Financial planning. Only look for people who are some way related to CFP certifications.

They can either be pursuing it, completed it or have been given CFP certificate. You can also look for any trustworthy person you think have required Skills.

Question 10# But Why to do Financial Planning at all .. I have never done it and I think I am in a good shape .. I don’t see any financial issues with my life.

Answer: It’s an innocent belief. There is time for everything.. wait for 20-30 more years and you will be amazed to see you are so much short of your Retirement corpus. You are still alive, hence you can’t imagine your family Financial situation once you are gone …

Everything shows up later… There are people claiming to be “healthy” and then dying of “Heart Attacks” 2 yrs later .. and young people complaining for “Backaches” in Early 20’s … These are the people who don’t believe in regular checkups…

Just to save few hundreds these people take risk with there health and let it deteriorate to an extent when it’s too late…

There are people who have decided to do their Financial Planning, but they are already in too much mess now… because they have taken those junk Endowment policies long back thinking it will make them rich… once you analyse your Financial Situation by your Future eyes.

You will be amazed to find out how much of restructuring you are doing…

Comments please .. Do you know of any more common question which can find a place here. Which one of these was one of your doubts? Please leave a comment …

What are Income Clubbing Provisions and Tax Implications?

I have invested some money in Fixed Deposit in the name of my wife as she is not earning any income. Will she have to pay tax on this?

This is an innocent questions because of inadequate knowledge of Tax Provisions on Clubbing of Income and how it attracts tax liabilities. Let us see some Must know tax rules for Clubbing of Income.

Income Clubbing Provisions and Tax Implications

Top rules of Clubbing of Income

  • Income of a minor child is added to husband or Wife’s Income depending on whose total income is greater. So if Child earns Rs. 1 Lacs and Wife is earning 5 lacs and Husband is earning 4 lacs, then the income of Child will be added to Wife’s Income and it will be 6 lacs of income for Wife and it will be taxed accordingly. Do you think you can live with 90% of your Salary?
  • If you invest money in your Minor Child’s or Spouse’s name then all the income earned from that investment will be clubbed into your own income. The main thing to note here is whoever is the original owner of money will be taxed on the income.

Exception: Income of a minor child shall not be clubbed and is taxable if the child is suffering from a disability (under Section 80U) such as physical disability, complete blindness or if he earns the income through manual work or any activity involving application of his skills or talent or if both his parents are not alive.

  • The compounded income is not subject to clubbing. Which means that the income arising from the income which is clubbed is not clubbed. So, if Ajay invests 30 Lacs in an FD in his Wife’s Name, suppose the Interest on this FD comes earns Rs. 2.4 Lacs and the interest from this FD will be included in Ajay’s income, but any income which comes from this interest of 2.4 lacs will be considered as his Wife’s income and not Ajay’s income and hence will not be clubbed back to Ajay’s income. So if his Wife uses this Rs. 2.4 lacs and makes an income of 1 lacs from it, then this 1 Lac will not be considered in Ajay’s income. Do you know How to find the Best Fixed deposit?

Some Tips Use can use to save Tax

#1: For High Net Worth Individuals

If you are a High Net worth Individual and your Spouse does not Work, you can make the investment on his/her name. So that the income which comes from the income arisen from that investment is at least not taxed.

Example : If Robert invests 50 Lacs in Stocks and Earns 20 Lacs, It will be considered as His income and Taxed and now if he invests this 20 Lacs in FD, all the Interest he gets is also taxed.

But If he Invests this 50 lacs on his Wife name, the 20 Lacs income generated will be taxed as his income, but then when that 20 lacs is invested in FD, all the interest coming from that will be treated as Wife income and If Wife is not doing anything, Her Total income will just be this interest, around 1.6 Lacs considering 8% interest and hence It will not be taxable at all as its below the limits.

#2 Invest on your would-be-Wife or Son’s-Would-be-Wife name

Tax Clubbing rules do not apply when you invest money on some one’s name before Marriage (only your would-be and Son-would-be, not your-friends-would-be). So Any income earned from that investment will not be clubbed within your Income.

Example : If Manish is going to be married (thanks you guys) and He wants to invest 20 Lacs in an FD . He can do a simple tax trick, He can invest this money on his would-be-wife name.

Now by doing so, all the interest coming from this FD will be considered as his wife Income and if her total income comes under minimum limit, She will not pay any tax on this. Where as If he invest this 20 Lacs on his own name or in his wife name after marriage, The interest will be taxed.

#3 Make sure the Investment on your Child Matures after their 18th Birthday

Clubbing Rules applies only for Minor Child’s, It’s not applicable for Children above 18th. So make sure your Investments on Child Name mature after they are 18th so that any income which arise from it is not your income. Read why you should open a PPF account even if you don’t need it.

Example : So if you have a child aged 12 and you are planning to buy a Bond for 5 yr on this name, It will mature when child is 17 and hence will be taxed in your hand, better extend the Tenure by 1 yr and make it to 6 yr or 6.5 yr, so that The income arised from it is Child income and not taxed in your Hands.

#4 Give a Loan to your Spouse or Child, not a Gift

Clubbing Rules does not apply for genuine Loans Given to your Spouse or Child. So instead of just Gifting some money or Doing investment on their name, give Loan to them which they can use to invest them self. All the income from those investments will not be clubbed in your income.

Make sure that you have a documentary proof of Loan, A simple letter of Loan with Signatures of both the party will be enough as Documentary Proof, no need to run for Lawyers for these.

#5 Create a HUF for Family investments and Family Properties

If you have a Joint or Big enough Family, Its better to Create a HUF, so that then all the investment which are for whole family and all the assets which belong to whole Family are on HUF name, in that case HUF will enjoy all the Deductions and exemptions just like an Individual.

I don’t have much idea about HUF more than this .. so please control yourself before shooting detailed questions on HUF 🙂

Conclusion

Knowing Clubbing of Income rules can help you in saving your Tax in different ways and Without the knowledge you may also loose many times. So better use these Tax rules to make best use of your situation.

Note: There are many exceptions and details in Clubbing Rules which are not covered here. These are just high level rules and not detailed rules. So please handle with Care.

Don’t Judge a mutual fund by its Short Term Performance

“Don’t judge a person by their Sunday appearance” applies to Mutual funds also. Best Mutual funds are the best over most the time frame and Worst mutual funds are the worst performers in most of the time frame.

What I mean by this is that the best performers return wise in 5 yrs, 3 yr and 1 yr are almost at the top and worst performers are always in the bottom for 5 yr, 3 yr and 1 yr time frame. Let us look at the Chart of mutual funds performance

I compiled a list of 78 top mutual funds on the basis of 5 yrs Return and plotted a graph of returns for 5 yrs, 3 yrs and 1 yrs for them accordingly. To smooth out the data, I took a 10 period moving average (i.e. I took an average of Top 10, then an average of 1-11, then 2-12…) Just want to see what is the pattern of Mutual funds list. Have a look below:

Source: Valuereserchonline.com

If you look at the chart above, you will see that the Best performers (Top 10) were in the best performers list for 3 yrs and 1 yr time frame also. And at the same time, the worst performers in 5 yrs time frame were the worst performers in 3 yrs and 1 yr time frame, whereas the opposite was not true… See this video post on how to choose a good mutual fund for yourself?

Here are the Learning’s and conclusions:

Do not judge a mutual fund by it’s short-term Performance like 1 yr

There were many mutual funds who gave top returns in 1 yr time frame (See the orange line, see all the top positions) but not all of them were the best in 5 yrs time frame. The same thing happened with 3 yrs time frame: there were 2-3 mutual funds at the top in 3 yrs time frame but they were not best in 5 yrs time frame. See why SIP works well in long-term

Short-term performance does not give enough indication of Long-term

This is common sense, just like meeting a person for few hrs or days cannot tell us about his/her nature or behaviour, the same way a mutual fund cannot give a good indication of its long-term perspective from short-term performance.

In the above chart you can see that if I gave you just one year performance chart and it was sorted by returns, you could never tell which amongst the top would also be at top in 5 yrs time frame.


Bad performance in short-term should not be taken too seriously.

This is kind of same thing which I said above, but let’s see it with a different perspective. Short-term performance should not be the only reason for selling your mutual fund or Shares. We generally take our decisions based on short term performance, that is true for Life also.

We need patience and give time to our investments to show its true colors. Good investments happen by giving time to your investments and Early Investing, not just by choosing one.

Comments please, your 4-5 kind words will help me know if you liked it 🙂

Current Situation of Stock market , What should you do now ?

Markets are at their 15 months high. Retail investors are back and I am sure you must have got the left out feeling by now, as stock market have gained more than 100% in last 6 months.

What shall one do now, Shall we invest for long term now, Will markets go up or down. Trading is Probability and hence we shall take our decisions based on probability only. Lets see what are my views on current market conditions.

People who have just started in Stock market should have a look at my “How a beginner should start in Stock Market” Ebook.

Current Situation of Stock Markets

Markets have crossed important levels of 4850 before some days and have been stable there for some days .. Once it crosses 5300, which is another important level, I would be very much bullish then and will be willing to agree that markets can again see the all time high of 6000+ in another 1 yr.

See the chart below.

Source : icharts.in

Above is a 3 yrs weekly chart of Nifty. If you see the chart below you will see that another important resistance is at 5300 and you can also see some good negative divergence on ADX . This gives an indication that we must be cautious at the moment .. The upside might be limited to 5300, from where it can take a reverse turn.

But, As you must be knowing, markets are supreme and hence if it sustains that level. We will have to obey its order and remain bullish. You should have a look at Deepak Shenoy article on Nifty P/E and EPS growth some days back.

What about Nifty PE?

As of 21st sept 2009, current Nifty PE is at 22.40. Now this kind of number is not show very attractive valuation for long term. Below is the chart of nifty PE for last 3 yrs .. you can see how its has crossed important zone of 20+ and now heading to 25 which I personally consider as “SELL at any cost” level at the moment.

Nifty PE

Even though High nifty PE of 22 does not reflect great valuations, it can be used as short term indicator for catching some momentum move . So I would love to buy right now to get out at 10%-15% profit in another 1 month or so, or till market reverses heavily . But I would not like to make some long term commitments right now at this level, Better wait than never.

So what are the Possibilities

  • Markets can reverse now anytime before touching 5300 levels
  • Markets can sustain 5300 levels and then see 6000+ levels from where it will crash again

Conclusion

This post is just trying to see where we are and not trying to entice you to do trading, trading is a personal activity and can be done in many different ways. Where is will market go is a trivial question, the more important thing is “what will you do when market moves in any direction”

If you have any doubt you can leave your query in our comment section.

Responsibility of any Financial Calculator and its Impact on your Thought Process

I got an opportunity to do a guest post on two very good blogs some days back. One was on How to interpret Warren buffet rules and apply that to trading and another one was how to save for your Future Financial goals.

The response to the second article was more than expected and I had a very good learning experience with some of the readers on those blogs, I would like to share some of the comments with you so that you learn from them and share your ideas about it.

Read more Below.

financial calculator

 

 

I am putting some comments I got from the second article, They were very long, fruitful discussion on the separation between “Using a Financial Calculator” and “Influencing your Thoughts”. You can read the comments and actual discussion at the guest blog post itself which would be better for understanding.

Comment from Reader

Still I feel, some where the essence of reality is missing. Not getting convinced with the proportion of earnings and savings.

Eg:- (following the values to be entered in the fields in the tool)
Car – 2015 – 3L needs Rs. 4139 to be saved per month
holiday – 0 – 0 needs Rs. 0 to be saved per month
D’ Education – 2025 – 5L needs Rs. 1909 to be saved per month
Sons Marriage – 0 – 0 needs Rs. 0 to be saved per month
Retirement – 2040 – 10L needs Rs. 864 to be saved per month

Closely, the total amount to be saved per month comes to Rs. 7000.

For a guy earning 30K, to save Rupees 7K with all other expenditure, is not a small thing. To meet his requirements, should be a miser then – no movies (it costs around Rs. 1000 for a family – dad, mom & son to watch a movie ), no luxuries to wife (shopping) and children (say pocket money).

One thing I want to clearly tell you is my intention is not to find the tool as wrong calculator. My intention is to project the scope of the tool to be used by a common man. How a common man will really take the inputs based on the result from the tool and get influenced with.

Yes, it is the person’s personal problem – how to save and how not to; whether to go for saving or not. But it’s the tools responsibility to sustain the thought of saving in the users mind. It just should not be an analyzer or calculator.

It should be more than that. Of course, final decision is left to the user. But my view is, how is that, the tool is going to influence the users thoughts. That influence can lead to change the definition of savings for the user. See GFactor

When a person uses any tool, apart from the direct result, the impact of the tool on the usage also matters. Here, in this case, if the tool scares the user about the saving and if he stops planning for saving (lets just think this can happen for a while) then what is the scope of the usability of this tool.

Once again I am telling, I am not criticizing the tool and its functionality, I was just wondering about the kind of impact it can have on a common man. Coz, Common man never thinks about the logic behind the tool. He and his thoughts will be just carried away with the values. He definitely feels that the tool is misleading him.

Reply from Me

As I said … The tool is a just a giving you values based on the date you provide ..

I saw the numbers you have put in and to achieve these goals comfortably , 7k per month investment is required at any cost . Now if a person earns 30k , then no one can do anything .. Either he forgets some of the goals or earns more ..

There may be many 30k earners and many might be able to save 10k also , and some may not be able to save 1k also .. Now for them Its there personal problem of how to cut their expenses in such a way or optimize the expenses in such a way that their Future goals are also met .See an article on “Can you live with 90% of your Salary ?

Let me know your views on this .. this is an important aspect . Also let me know how is the tool responsible for . As I said earlier the biggest problem is not early investing .. if a person starts investing Earlier , then most of the problems which arise later can be minimized .

Personal Note :

The example you have given

Car – 2015 – 3L needs Rs. 4139 to be saved per month
holiday – 0 – 0 needs Rs. 0 to be saved per month
D’ Education – 2025 – 5L needs Rs. 1909 to be saved per month
Sons Marriage – 0 – 0 needs Rs. 0 to be saved per month
Retirement – 2040 – 10L needs Rs. 864 to be saved per month

1. This example has all the Target dates same as what is was there by default .. I hope you are changing it to your personal Target dates ..

2. Why is Retirement Corpus 10L ? Is it really you think is your Retirement Corpus in 2040 ? By then your Monthly expenses would have increased to 7 times to today :) .

I understood that its not your intention to find fault with calculator, you are trying to say that the tools must have more than what it has right now .. Which is a personal view I think ..

My personal views are different which you may not agree and that’s totally fine ..

I accept that the calculator could have been made more detailed and “influential” with more data in it , putting a “auto0-generated” Suggestions form .. That would be some “work” on my side. . which I will do some day .

However , coming to “Influencing” the thoughts , That is not a small task which will be very easy with a calculator . It takes lots of reading to develop it .. My readers who have been actively reading my articles or other sources are now fully influenced with the idea and now getting good feel of how to develop an attitude towards “;how to save and invest” .

you said “if the tool scares the user about the saving and if he stops planning for saving (lets just think this can happen for a while) then what is the scope of the usability of this tool.”

My views are different .

If a personal can not accept that he needs to save a certain amount based on the numbers he himself gave in the calculator , then he is not accepting the fact that there is some “problem”.

He has to accept this and find solutions for that rather than stop planning for saving altogether .. I agree than it can be disappointing for some one saving just 5k per month and seeing that he needs to invest (not only save) 15k if he wants to achieve his Financial goals (based on whatever info he gave in the calculator) .

He either has to increase his earnings or decrease his expenses or lower his expectations.

Now this reason why he is in this situation is because “most probably”, he is too late in his life planning for things.

At the end, all kind of tools have been made for people who know/can use it. I would like to mention that I assumed that everyone who is reading the article or taking a calculator has that minimal amount of understanding of Financial planning. I guess it was mistake to assume that. I should have mentioned that. Apologies for that.

I would love to hear your views on this. I am not sure if we are on the same ground when putting your ideas, maybe you are trying to say something and I am replying without understanding that thing and hence triggering another “I don’t agree with you” reply.

It may be a communication issue on my part, Let me know if that’s the case. Thanks for this wonderful conversation. at least I have learned too much. Thanks to you.

Manish

Special Thanks

Thanks to Barel Karsan and Mohan for letting me blog on their wonderful blogs, The biggest thanks to readers of Mohan who have made this conversation so enriching with their disagreements, Disagreements are the best things in the world, if its missing, there is no learning.

Note: Please no personal Attacks over comments by taking the name of anyone.