Monday, January 28, 2013

Letter to a Client

Dear Ajay,

We earnestly hope that this letter finds you in pink of health and mood. Hope your family is also doing fine. We wish to take this opportunity to write to you about our observations on your financial journey till now, i.e. when you contracted us to make a financial plan for you.

During our interactions at various points of time, we have realized that there are some common but serious shortcomings in your financial planning strategy till now. They can be broadly categorized as under:-

You joined this software company only 2 years back. However, the first thing you did was to take long term liabilities upon yourself without understanding its long term implications. Loans for house, high end electronic gadgets, car etc. are easily available today. A housing loan liability usually long term in nature --runs for 15-20 years. The initial period of 5-6 years from the day you joined the present company is when maximum savings happens and should happen—since you have no family responsibility. We are in no way intending to discourage young aspirants like you from acquiring a house property. What we are only trying to suggest is to postpone undertaking this big chunk of liability by a couple of years—by when you would have accumulated some savings. Your present salary as an assistant programmer is Rs. 50,000 pm. You have contracted a housing loan of Rs. 25 lacs for 18 years @ 11% p.a. The EMI for the said loan comes to Rs. 26,600 p.m. So over the next 18 years you would have paid Rs. 57.50 lacs approximately—nearly half of your earnings over the same period. With increase in responsibilities upon marriage, the increment goes towards meeting the increased expenditure rather than towards investments for meeting life’s goals.

The only scarcity faced by today’s middle & senior level managerial employee like you is TIME. Due to rapidly changing business environment compounded by globalization of Indian economy--responsibilities can and does only increase. The idea is to—and rightly so—justify their salary and the commitment towards the company keeps the employee constantly on the move. It’s good to be busy but it is also essential that you take time out for your life’s goals. In being honest towards your employers, executives like you forget or tend to overlook the fact that you only are responsible towards your life’s goals. “Employer’s role is to give you paychecks; his role is not to make you wealthy. Becoming wealthy or not is up to you”.

Non Planned Savings
Your travel plans and busy office schedules remind us of a statement made by a senior executive ”unfortunately I have only 24 hours in a day to finish my work”. Hence, it is only natural that you do not get time to plan your own finances. Important goals like retirement planning, planning for children’s future etc. are more often than not thought of seriously for want of time and hence, left to chance. Moreover, with ongoing various types of EMIs, there is hardly and investible surplus left to allocate towards meeting life’s goals in a judicious manner. To overcome this guilt of not doing enough for your family in general and life’s goals in particular, you have made some ad hoc investments without considering their suitability to your goals. Your cash flow indicates that you are virtually living on your cash flows—without any serious addition to your personal net worth.

Over emphasis on Tax Savings
Looking at your tax saving investments, it seems you have usually resorted to last moment investments. Last quarter of every financial year is a very tense period for the salaried people, while a busy and remunerative one for IFAs. This is tax planning or better still tax savings investment season. Tax savings seems to be the only goal now. There seems to be an urge to invest even the last rupee to save taxes. Different types of tax savings instruments viz; PF; ELSS, Insurance policies, infrastructure bonds, tax savings long tenure bank FDs  are all lapped up hungrily. Rather than plan out the tax planning activity all-round the year there is usually a mad rush for tax savings investments during the last quarter of the financial year.

However there is nothing to be disheartened about. There’s always a scope for course correction and that is exactly what we are going to do going forward. Remember, the more money you make, the more you spend. That’s why more money doesn’t make you rich—assets make you rich.

Assuring you of our best of services, we remain

Yours truly,

CA Vijay M Mehta CFPCM

Sunday, January 6, 2013

6 (Financial) Commandments for 2013!!!

2013 is here. Like the current Bollywood trend we thought of penning a sequel to our article “Mistake to avoid in 2012”. Here goes

2012 has ended on a much happier note for the investor --and rightly so after being “dented” throughout the previous year. 2012 was a year which saw record inflows into fixed deposits which was facilitated by outflows from equities. It was as if equity had become the dirty word. This perception was also perpetuated by a languishing economy and a dull outlook on the inflation front.

Time and again, investors make the same mistake—buy high sell low. Though history tells us that In the long run, markets do not sustain at either overvalued or undervalued levels rather move close to fair values. This is why investments made in adverse times typically yield above average returns and vice versa—this is one lesson that the Indian investor has not yet grasped—but faithfully followed by FIIs. (Read why investors do not make money)

So what is it that we ought to have practiced in 2012 also but did not? And what is it that we should resolve to follow in 2013 and thereafter? We give here below our 6 commandments for 2013 which we believe will hold us in good stead in the year(s) ahead.

1.   Thy shalt not trade:-
We often hear stories about how a person striking a pot of gold by trading on stock market. You must have been advised by your advisor to exit from a mutual fund scheme while it is making say 21% CAGR and move into some other fund. We more often than not tend to forget that “it is not your thinking that makes big money. It is sitting.Differentiate between long term investing and short term trading. Rs. 1 lac cannot become Rs. 50 lacs through trading! Long term investing is the only route which can multiply your investments.

2. Thy shalt secure your family first

Every investment activity is done for family and directed towards their secure future. The first recommendation a financial planner makes is towards health and life cover of the investor. An adequate health and life cover forms the basis of every financial plan/strategy. After all health is wealth. A medical emergency for example can be a disaster for your financial well-being if you are not adequately covered.Read:- 5 things to do with your money

3    Thy shalt spell out your goals

An investment is not an end in itself, but is rather a means towards the end. The “end” referred to here are your “goals”. Ask yourself first before filing out an application form “why and for whom am I investing”? Will this investment help you meet your life’s goals? An investment without a specific goal is like a journey without a destination. Practice goal based investing. It’s your safety belt in your driving around in the investment world.(Read:-Right Way)

4    Thy shalt avoid information overflow

Do not be guided by free advice floating around in the business channels and pink papers. Since the advent of internet and business papers, nobody has become a millionaire following the advice of “stock gurus” who dole out stock tips in dozens. Though, records say that billionaires have in fact become millionaires.

5    Thy shalt focus on wealth creation, rather than on making money

Investment is not about making money. It is about creating wealth. Like Rome, wealth will not be created either by trading or in short term. Remember, investments are done so that they can be the 2nd. earning member of your family when you stop earning. To give you an example of the growth that Equities (mutual funds in particular)—Rs. 10,000 invested in HDFC Equity on 01/01/1995 would be worth Rs. 2, 76,571 as on 30/11/2012---despite all the wars, famines, floods, scams, assassinations ET all Do we have any data to suggest that the following 20-30 years will be any different?(Read "yahi hai right way to create wealth)"

6   Thy shalt spend time with your family

Do take time out for your family. Go on a vacation once in a year—where there will be no mobiles, or client meetings to worry about. It is said that a family that eats together stays together.  It has been rightly said that a man can face the rigors of life if he has the support or backing of his family. After all is the “family” not the reason why you work so hard?

Wealth creation is long journey without any guiding posts. We should invest in companies or Mutual Fund schemes with a clear focus on our goals and our resolve to meet them. Equity as an asset class will deliver inflation adjusted returns but over long term. This “long term” has to be calibrated to your goals. According to an interesting study done by a prominent foreign AMC, it was shown that over the last 16 odd years, there have been almost equal numbers of good bad quarters as far as equity returns are concerned. So theoretically, market (sensex) should be still trading close to 3000 levels. But it is trading at 18000 levels. And that’s how you create wealth with zero tolerance to loss.

Wish you all a very successful 2013—financially.