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The cost of education is increasing at a rate faster than normal inflation. Do you have enough for your child’s education? Are you aware of the best options for doing so? Do you have to sacrifice your other goals for achieving your child’s education? Read the article by Vishal and do comment how you are planning your child’s education.image-0001

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RBI has , last night, once again introduced measures to tighten liquidity, so that the fall of the rupee can be controlled by removing liquidity for possible speculation on the rupee. Whilst this may seem like a localized response to many and unique to India, it is important to note that similar measures have been announced in Turkey, Brazil, Indonesia and China in different forms. Bond markets in India have reacted sharply to these tightening measures and are likely to do so every time these measures are announced. However, it is important to look at this from a historical perspective as the widely held view is that these measures are temporary in nature. If one looks at past measures of currency defence by the RBI, and the resultant measures and periods that it takes to reverse such measures, it provides some interesting insights. Four periods have been considered here:

1. 2011-12, when the rupee depreciated after the emergence of the Euro crisis and the US debt downgrade.

2. 2008, during the period of high oil prices and the global financial crisis.

3. 2000, post the tech bubble bursting

4. 1998, in the aftermath of the Asian financial crisis

PERIOD

DATE OF MEASURE

RBI’s ACTION

BOND YIELD IMPACT

REVERSAL DATE

PERIOD RUN

1998: Asian Financial Crisis

Jan 1998

· Increase in bank rate by 200 bps· Increase in CRR by 50 bps · Immediate increase in yields· But within 1 month yields decreased though it took a few months to fully normalize Mar 1998 · Policy: Approx. 2-3 months· Bond Market: 1 month
2000: Tech Bubble

July-Aug 2000

· Increase in bank rate by 100 bps· Increase in CRR by 50 bps, 25 bps immediately reversed · Immediate rise in yields· Yields peaked by Nov 2000

· But reached a new low within 6 months

Feb-Mar 2001 · Policy: Approx. 6 months· Bond Market: 2-3 months
2008: Global Financial Crisis

Jun-July 2008

· Increase in repo rate by 125 bps· Increase in CRR by 75 bps · Immediate rise in yields, however rates peaked before the last rate hike· Yields set a new low within 2 months of rate hike Oct 2008 · Policy & Bond Market:Approx. 1-2 months
2011-12: Aftermath of the US Debt downgrade

Sep-Dec 2011

· Increase in FCNR & NRE rates· Increase in repo rate by 100 bps · Yields peaked in Nov 2011bu reversed all losses by end Dec 2011· But reversed all losses by end of Dec 2011 · CRR cut in Jan 2012· Repo rate cut in April 2012 · Policy : Approx. 6 months· Bond Market: 2-3 months

Source: Bloomber,RBI, Axis Mutual Fund

As you will see from the data above, whilst bond markets sold off in response to RBI measures, bond yields typically peaked very soon after the policy actions and resumed the downward trend soon after. The total period of the bond market stress was 1-3 months, whilst RBI itself reversed the measures within 2-6 months. Thus, all these measures were temporary and were reversed when it became apparent that the impact on the domestic economy was worse than the marginal impact on the exchange rate.

Therefore, from an investor perspective, it is important to view your holdings in bonds and bond funds keeping this perspective in mind ie if you have a short term holding period, you need to be concerned about the volatility, but if you have a long term horizon, and are using bonds and bond funds as a part of your overall asset allocation strategy, you should look at these opportunities to buy into this volatility over the next few months.

Of course we should not forget what Warren Buffet once remarked “If past history was all there was to the game, the richest people would be librarians.”

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Independence and freedom are amongst the most inspirational words in the English dictionary in my opinion. They evoke a sense of hope, inspiration, choice and joy all at the same time, and could mean very different things to different people.  For example, a very large number of investors whom I work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When I ask them what financial freedom means to them, their answer is: When I do not have to work for the money and can actively decide how, when, and with whom I choose to associate in my professional life.

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people I work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis. Debt mutual funds of varying maturities can be used very efficiently for shorter term returns.

Sanjay and Rashmi (names changed) are currently 39 and 37 respectively and they have a daughter who is 6 years old. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens future, both Sanjay and Rashmi have already achieved their financial goals ie even if they do not save any monies from here onwards, and let their existing portfolio grow, they will be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regulary.

So what does financial freedom mean for you? Choose your financial freedom the way you want it.

This article was written by Vishal Dhawan, CFPCM 

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