Lesson 8: Investing in Gold

Gold is not new to us. Come marriage and there is the shameless talk of gold for dowry. We still have some auspicious day to buy gold. The shining yellow metal has attracted humans (especially indians) a lot and there are good reasons for that. Gold has always been equated to the status symbol. It does not get rusted or for that matter loses its shine. It is extremely ductile and can be easily converted to another form (jewellery).

Well we can go on like this and a chemist can give much more information like its symbol (Au) and what not. But let us focus our attention to its investment oriented features. Gold can be readily converted to money (sell/pawn). But the best feature is that it is a good hedge against inflation and it does not lose its value as the years go by, like an idle cash does. It is also accepted throughout the world. But it also does not generate returns (Two gold coins does not give birth to another one).

So what then. Diversification is the key. Have some amount of your money in gold. Of course if you are buying jewellery then your wife should be very happy about it. But we are not talking about jewellery. We are talking of pure gold coins . Jewellery gold may not be pure and also we need to face loss in the form of ‘Making charges’ and ‘Losses while the jewel is made’. When we resell, the person buying it may again ask for losses as he will have to recast the jewel to some new model. So it is loss all the way. Instead we need to buy gold from reputed sellers like ICICI bank, where you get a nicely packed gold coin along with its purity certificate. It is available in 5g / 8g / 10g. So next time, gift your wife with a beautiful gold coin.  And you can be happy that you have invested in gold too….

Lesson 7: PPF – Still a strong contender

We saw in the last lesson how ELSS can bring energetic returns. But we must keep in mind that Diversification is still the key. Also there are many out there who are apprehensive of investing in a Mutual Fund, especially the ones tied to Stock Market. What else? We cannot just pump in more money into LIC policies as we know how detrimental it can be. If you are ready to forgo liquidity you get another excellent investment vehicle – The Public Provident Fund, a Govt backed scheme. Please note that PPF is different from PF. To open a PPF account all you need is to go to a Nationalised bank and shell out Rs 500/- PPF is a 15 year time bound investment. It can be best used for long-range planning. Instead of describing PPF let me list out the key points alone.

    * The total tenure is 15 full financial years. Suppose you start today (June 15, 2005) your PPF account will mature on March 31, 2021.
    * You must invest min of Rs500 per year to keep the account active
    * The maximum limit is Rs 70000 per year
    * It hax Tax Exemption as per the section 80C (The 1 Lakh limit)
    * You can avail loan on your money(part of it) from the 3rd year onwards
    * You can withdraw money (part of it) from the 7th year onwards
    * The rate of return is 8% compounded (as of now. Please note that the rate is not fixed. It can go up or come down and Govt decides that)
    * The returns are also tax free (Unlike NSS/fixed deposits where the interest are taxed)
    * Every year you can pay the money in 1 to 12 installments, whichever suits you
    * It is an excellent choice for conservative investors to plan their retirement as it is a Government backed scheme
    * An example : Investing 17000 every year will give you 5 lakhs at the end of 15 years.

Stepping on to the 5th Year

Yesterday, I completed 4 years of IT experience in Embedded domain. Got a call from my wife (she is in cuddalore now) and she wished me. Started my career from SCM Microsystems 2.5 yrs there and a lot to learn, then stepped on to Honeywell for another close to 1.5 yrs and finally back on track again with Broadcom.

I thank God for what I am am today. He was the one to put me in SCM, where I joined immediately after my college. (Just two weeks after the final exam), while there were many who had to wait as their companies delayed the joining process. And when I wanted to come over to bangalore again at the correct time I got the opportunity. Now when I wished to join back to the embedded development area, I got a wonderful opportunity in Broadcom.

Kadhal – a gripping film

Balaji Sakthivel must be a very happy man. The director had tried hard to get Shankar’s attention to produce the film. After a long time, he did get the nod and the rest is history. ‘Kadal’ is certainly a different film from the usual love stories. Reality is everywhere in the film. The love shown is natural and appealing. Bharath is a mechanic and Sandhya is the daughter of a Don in Madurai studying her +2. They fall in love and run away to chennai. With the support of Bharath’s friend Sukumar they get married. But on the same day they are hunted down, deceived and taken back to Madurai by Sandhya’s relations. The rest of the story is really gripping and you will remember them for quite some time.

The best aspect of the entire film is its simplicity. There is no unwanted gimmicks or grandiose.  The characters are so real, that you feel the entire film is happening outside ur house. Love has been told in many ways in our films, but none has depicted it so realistically. Joshua’s music is good. Comedy is also surprisingly good. The film is based on a real-life incident. The screenplay is the life of the film and even without any popular star cast, the film easily is a hit. In fact it falls in line with some of those one in a while list of good films. Kudos to the team.

Rating :: 75/100

‘Azhagan’ – a classic

Sorry for the review of a very old film, but when I happened to see the film yesterday in K Tv, I couldn’t control myself from writing this. The film starts off superbly. The screenplay is really wonderful to say the least. Balachander has proved himself many times and Azhagan is just one more feather to his cap. There is a special touch by Balachander in many places throughout the film. When Mamooty says that his wife is no more, Banu priya acts as if she is very sorry for him, but in a split second she is seen smiling to herself as she is in love with him. The same is the case with mamooty who likes her very much but thinks the rangan in Priya rangan (Banu priya’s character name) is her Husband. The way they express these are really mind-blowing. There is scope for everyone in the film. When did we last see such a movie.

Madhu bala comes as a young, energetic and a bit crazy girl. She is also in love with mamooty but mamooty explains her about their age differences and that he had always considered her as his daughter.

Geetha is a triple MA degree holder and aspriring for her fourth. She too falls for Mamooty. Once mamooty explains a song of Bharathidasan in which the author asks us not only to think of ourselves and our family but also about others. Geetha wanting to inspire mamooty writes a poem out of the concept. It goes ‘Jaadhi malli poocharamae’ … The verses are excellent and very meaningfull.

Also the song ‘Sangeetha swarangal’ where mamooty and banu priya talk thrroughout the night on their phones is too good.  It is rare now-a-days to get such decent movies with very decent songs and wonderful lyrics. The music is by Maragathamani.

But the climax is a bit slow and also a little boring considering the pace with which the remaining movie goes.  All in all it was a great treat to watch the movie.

Rating :: 75/100

Lesson 5: Mutual Funds – An Intro

If you have come this far, I take it for granted that you are now aware of the basics and raring to go further. At this point, you must realize that you as a person are unique and there may be 1001 reasons why one investment vehicle won’t give you a pleasant ride, while the same may be the best for someone else. But there are a few well tested vehicles that I will review from now on. Still the decision is yours.

A Mutual Fund, as the name suggests, is a trust where many people put in money and this pool of money is managed by a  professional, who on behalf of the people invests the money and the profits/losses are shared (Of course we need to pay the professional too). Since there are many types of investment, there are even more types of Mutual Funds. There are many private players like HDFC-fund, Prudential ICICI, each with a long list of funds and to sort of these hundreds of funds and find the right one for you will take quite some time. Each fund has units that you can buy at a NAV (Net asset value). Say if the NAV is 100 Rs and you invest 2000 Rs in that fund, you will be alloted 20 units of that fund.

Let us see the major types alone. One way of classifying funds is based on where they invest.

   1. Equity – Invest in Shares of Companies in the Stock Market
          * Equity Diversified – Invest in a broad range of companies
          * Equite Sector – Invest only in one type of companies
   2. Debt – Invest in Bonds of Companies and Govt.
   3. Balanced – Midway of the above two

As you must have understood, Equity funds give the highest risk and highest return. Currently some funds are giving in the range of 40-60% per annum too. Debt funds are less riskier and lesser returns.

Another way to classify funds is by the way the profit is shared

   1. Growth Fund – Here the profits are used again for further investments (like compound interest) and so the NAV rises as profits grows.
   2. Dividend – The profit is given to the unit holders on a timely basis

Yet another way to classify funds would be on the basis of when one can invest in them.

   1. Open-ended funds – Open throughout the year. One can invest anytime.
   2. Closes-ended funds – Open only at specific intervals for investment

So if you happen to see details of a fund you can find that it could be “Equity Diversified Open Ended Growth” Scheme or “Balanced Dividend Closed” scheme or any other combination. There may be many gimmicks in the actual name, but you must take care to see the complete details.

Risk and Returns are the two things that you got to note down. For that you can see how the fund had performed in one year, three years, five years and since it was started. You must compare it with similar funds and with BSE/NSE. Also don’t get carried away by the fact that the fund has a great 3 year avg of 50%. It could be due to one 100% and two – 25%. That is not a good sign especially if the – 25 % is from the recent year. So check each year’s performance also separately.

Major Advantages of Mutual Fund

    * You get a professional to manage your fund
    * You can invest in Stock Market with just a few hundred rupees/month
    * You get instant diversification across shares of many companies

Major Disadvantages of Mutual Fund

    * Returns are market linked. So there is a possibility of losing your capital (negative returns)
    * All depends on that one professional. He may not be efficient enough.
    * Cost overhead
    * Sometimes too much diversification can dilute your profits

Situation in India – In India still, people are not very aware of this new type of investment. More are still bound with their love for recurring deposits, fixed deposits and savings account. But Mutual funds give a good method to invest some part of your money in stock markets and give yourself some chance of making greater returns.

Lesson 6: ELSS – The Elixir of Investments

We saw that mutual funds are really a great way to invest in the stock market (through the Equity Diversified Schemes). But there is one more wonderful thing. You can save on tax as well as you invest in the funds. What more can you ask? The ELSS (Equity Linked Saving Scheme) are Equity Diversified Schemes that offer you tax benefits similar to PPF or your Insurance policies. So get ready for the ride.

This category (tax saving funds) is by no means performing any less than the others. So where is the catch? It is in the liquidity. You are locked in for 3 yrs. So you are eligible to sell the units only after 3 yrs. But the good thing is that since you are dealing with equity (shares), experts suggest that it works out in your favour if you stay invested for minimum 3-5 yrs. So the lock-in is no more than a boon to you as you will not be able to withdraw and it works in your favour.

The returns from these funds are quite good (Since there is a 3 yr lock-in the fund manager is also able to better invest the money without any tension that it might be withdrawn prematurely). Some are phenominal and in the range of 40%. The leaders are “HDFC Long Term Advantage Fund”and “Prudential ICICI Tax Plan” followed by State Bank of India’s “Magnum Tax Gain” and a lot of others. In the last year alone “Magnum Taxgain” gave an astounding return of 140% !!!!! and what more, if you consider the tax benefit of 30% you end of getting 170% return on the whole (This is a specific case and is not likely to happen again. But this shows the capability of shares to give great returns). To put it simply. can you guess how many years it would have taken to get the such a return in PPF (8%) or Insurance (4-7%) . Atleast a cool 15 years !! and that is why I am insisting that part of your investment (portfolio) should go into mutual funds (Of course you must know the current staus of the market and the returns before doing so).

ELSS gives you 30% tax advantage, so when you invest 10000 in such a fund, it means you have already got back 3000 Rs as profit and the rest is just an addition. Cool Isnt it. Your ELSS contribution  will be taken in the 1,00,000 limit (Section 80C) and will compete with your PF, PPF, Insurance and Pension  contributions to get a place in the 1,00,000. But don’t you feel they deserve a place……

Lesson 4: Let us begin Investing

It is always a good idea to read all the Investing lessons in order to get the maximum benefit.

Now that we have understood a lot, let us start investing. But wait. There are a few key points to be noted.

1) If suppose, by any chance you are in to credit card debt then stop the idea of investing and go ahead and clear the debt first. (Credit card debt is one where you still have the balance payment on the card that you should have paid a month ago. That means you have paid only the minimum amount and carried forward the rest. To remind you the interest on the credit card debts is in the order of 30-35%. So if are servicing such a loan and trying to invest your money for annual returns of 10-15% it is sheer stupidity.

2) If you have other personal loans that are very high, again stop and try to close them first. Please note that we are not talking of home loans here. but of other personal loans that do not have tax benefit and also have interest rates of 12-20% range. Of course if you do have a home loan and a car loan but still enough money than go to point 3)

3) If suppose you get expelled from your job today, what would you do? The question may seem irrelevant, but you will know its importance soon. What I am trying to tell you is that you should have enough cash in hand (or in savings account of your bank) for emergency situations. It should ideally be capable of handling your family’s 6 months expenses, but it should atleast be enough for 3 months. This emergency cash should NOT be used for ANY OTHER PURPOSE. Not even for helping others in the same situation. In fact you should never feel like having it. (Think that it is not yours till emergency strikes). Believe me, when it comes to money, there may be none left to help you. (You may not be as lucky as I am !?!)

4) Now, you have cleared all your high-interest debts, you have 6 months expense cashed in for emergency and this is the time to start. But remember another golden rule of investment. “Don’t put all your eggs in one basket” – Diversify it. So even if you feel that it is the best option don’t put all your money on just one investment.

First step] Manage your monthly expenditure. By this I mean that you should be in a position to tell that I would need X Rs every month for the expenses. It is difficult to predict the exact amount you would need each month, but with a small buffer you can easily tell the amount. So the first step is to find exactly how much you will spend each month and so how much will be the balance each month that can be used for investing.

Second Step] Whether married or not, the first step must be Life insurance. Time and again we have been cautioned that the LIC agents will do anything in their power to lure you into some stupid scheme. So the best thing is to take a ‘Pure Term Policy’ for the amount you wish to insure. The premium per annum will be very less.  I have taken Anmol Jeevan from LIC for 10 Lakhs and the premium is just 2890 per year. Great isnt it. You can also go to private players. I heard there is a scheme where the premium is very less if you are a non-smoker.

Third Step] Open a PPF account in some nationalized bank. Put the intial amount of 500 Rs atleast and even if you don’t like PPF at all keep the account alive by putting the minimum of 500Rs (max is 70000) every year. For a risk-averse investor PPF is really good. Currently it is the only investment (as far as I know) where the interst also is tax exempt and the principal has tax-benefits.

Fourth Step] The basics are over now. So from now on, where you are going to invest depends on many other factors also like your risk capability, mentality, need, tax planning etc.

Lesson 3: Tax Planning

We will take a quick look at all the tax planning that we can do. I will try to make this simple enough without taxing you too much!!, if you do intend to know everything from top to bottom go to Rediff->Getahead->Money

As per the new budget rule we can save upto 1,00,000 and show them for tax saving. Someone might ask, if I save 1,00,000 how much will I save on tax? For most of us the answer is 30000 in that year or 2500 per month. But truly that depends on how much you are earning per annum.(Tax Slabs).

The next question is where all can I save? You can take an LIC policy (Premiums you pay towards a Life Insurance policy), you can open a PPF account  (Public Provident Fund,70000 max ) , NSS, Post Office Savings, Bonds, ELSS (Equity Linked Savings Scheme – Mutual Funds which offer tax benefits), Pension Plan (10000 max), the amount you pay towards your home loan principal, tution fees (24000 max) of your child and a few more. Please bear in mind that your contribution towards your PF account (If you didn’t know, you and your employer contribute equal amount every month to your pension account) also falls in this 1,00,000 limit.

What else? Is that all? NO. There are a few more things. Over and above the 1,00,000 limit you can save the entire amount on your home loan interest part (principal falls in the 1,00,000 limit), Medical bills (15000 max), LTA, HRA, Conveyance, etc.

Since you have so many options don’t fall prey to some intelligent agent attempting to push you to some schemes that gets his maximum benefit.

Lesson 2: Investing is not ‘Tax Planning’

 It is a cruel joke that we spend hours together working for an MNC to earn the best salary in the industry (and we are very proud of it too), but spend very less time and effort when it comes to investing the money wisely. The painful fact is that with prudent investing someone earning half as much as we do can go ahead and get a lot more than us.

For many of us Investing has become synonymous with ‘Tax Planning’. when we land in a job, our parents take up the financial planning for us or so they say. The first thing that they advice is to take up a LIC policy and introduce us to some LIC agent who is their friend. That agent is wise enough to lure us into some policy that is good for him (in terms of the comission that he gets) than for us. And he says you will save so much on Tax. Wow!!! How happy we were to escape from tax. We are not to be complained for such a stupid decision to get some endowment policy where we pay around 65K per year for insuring our life for a mere 10 Lakhs. Wait!! Didn’t the LIC agent say that it will also act as investment since if you are alive at the end of the term you would get 13 Lakhs (Wow!!, but believe me this is all due to compounding and not due good annual return).

Tax has been a deadly word for many of us. I still remember that I could not digest the fact that I was going to pay 1500 Rs per month as tax in my first month of pay. I was totally shocked. To me  it seemed that 1500 was good enough to be someone else salary for a month. Hmm.. But then we learnt the hard truth – There is no escape from the Taxman. This is the main reason that we jump on to anything that says ‘Tax Saving’ not knowing what it is and do we stand to benefit from it.

Now let me show with an example why Insurance / Tax Planning / Investment are three different things entirely. Everyone must be insured. Good and all insurance policies including LIC have tax benefits. But never fall for the tax benefit alone. For example let us assume you indeed take the endowment policy we mentioned earlier for 15 years. That means for all the 15 years you will pay 65k and if you alive at the end of 15 yrs you get 13Lakhs, else your family gets 10 Lakhs. You get tax benefit for the entire 65K every year. Great you thought… But let us consider an alternative. Let us assume that you chose a term policy (Where the money you pay is not returned to you if you are alive Hmm..) for 15 Lakhs. For this you pay per annum only 3600 Rupees (way less than the 65k you had to pay for endowment policy). The remaining money you put in PPF for the same 15 yrs. At the end of 15 yrs if you are alive you don’t get any money from LIC (since it is a pure term policy), but from PPF you get 18 Lakhs. Also both you contribution to LIC and to PPF are exempt from tax (65k) Now you see the difference. No difference in the investment tools, both are very safe, both give tax benefits, but just a 5 minutes thinking would have saved 5 Lakhs !!! for you.

I know there are hundreds and hundreds  of people opting for endowment LIC policy and paying more than 50k without even a second thought just because they are too busy earning their money and they thought that it was the only option to save on tax!! How stupid we have been. Please don’t ever think that LIC is the only key to tax saving. NO. There are many wonderful ways to save on tax. We will take a look at them in the next lesson. Until then, Bye from Simon