Posts Tagged ‘personal finance’


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A few days ago, I had this terrible headache. My first reaction was to take a pain relieving pill thinking it must be a normal headache but my friend gently castigated me saying ,”Don’t take self-prescribed medicine. From the outside, it can look like a mere headache but you don’t know what’s within. There are myriad ailments with common symptoms. Your job is to go to the doctor and let him decide on the cause and remedy, so that you can go back to your job at the earliest.”

Let’s relate this example to our finances. We often think we know everything about finances. We have chosen star rated mutual funds, fundamentally good large company stocks, we are well informed traders, etc. Of course, we know that the medicine is good, but the key question is – are we taking the right medicine?

When it comes to our savings, we are saving in a disciplined manner. But do we know, what’s the optimum level of saving for ourselves and our family -are we saving less or more than we require? We are often under an impression that if we save a certain portion of our earnings, thats good enough. However, we still aren’t sure about the level of saving and types of investments that suit our age, goals, expenses, etc. As far as investment products are concerned we may be excited by some product which is apparently very attractive but, are we sure it’s really good? Or even if its good, is it suitable for our requirement?

If we admit that we need a specialist to handle our health, we need a specialist to manage the health of our finances as well. The specialist who will guide us through all our important transitions and be with us as a ‘FPG’ (Friend, Philosopher and Guide) for all our financial decisions.

Like a doctor who will first focus on your problem and not on the medicine to be sold, your planner will always be interested in you, your financial goals, needs, abilities, etc. and not on a product. Is it not time you stopped being your own doctor?

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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







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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Over the last few months, India has been in the news for a lot of reasons that have not exactly been flattering – corruption scandals, high deficit numbers, a sharp fall in its currency, a decadal low in terms of GDP growth, etc. All of this negative newsflow had made investors wary of investing in India and Indian equities, with most investors getting comfort by being in fixed income, real estate or gold. In spite of the sharp correction in gold prices, a large number of investors are viewing this sharp correction as an opportunity to add gold, rather than looking at it as a possible indication of the end of a decade of supernormal returns from gold.

We strongly believe that it is time for investors to start looking outside this comfort zone , that is, look at equities for four reasons:

Number 1, Low valuations – With forward earnings in the region of 1.3 to 14 times currently, we think that there is great merit in investors looking at what has happened in the past, when markets have been in these valuation zones. Investors buying into these valuation levels have in the past been rewarded with significant returns over the next 3-5 years. Whilst it is very common to hear that investors in the last 3-5 years have not made money in equities, we need to remember that valuations 5 years ago were closer to 20 times forward earnings, and therefore the advantage of investing in a low Price to Earnings environment did not exist at that stage.

Number 2, Sharp fall in gold prices and other commodities – A significant portion of the deterioration on the current account deficit has been on account of higher gold imports. With 1 year returns on gold now being negative and 2 years returns being in line or lower than bank deposits, we believe that it is only a question of time before investors start to question the future prospects of gold. We believe this is very common as most investors tend to look at returns from a rear view perspective, and just as they are uncomfortable with buying equities, because of its poor performance in the last few years, this is likely to start showing up with their gold purchases slowing down as well. Lower demand for gold should be good news for India’s current account deficit and currency.

Number 3, Low correlation between election years and stock market returns – Data from the past election years or the year before election years, do not seem to show any evidence of a strong correlation with equity market returns. In fact, if anything, equities have tended to do very well in these periods. Thus, we believe that the fear of uncertainty around elections is already priced significantly into markets currently, and investors with a 3-5 year view should be focusing more on low valuations and less on guessing the outcome of the election, especially if data from the past indicates that election outcomes do not have a high correlation with equity market returns.

Number 4, Majority views do not work with investment portfolios – Investor portfolios tend to get polarized towards particular asset classes due to high returns in that particular asset class. For example, most portfolios we see today are significantly overweight gold and real estate. Fund flow data ie where the majority is investing, has tended to show that the majority normally gets it wrong, and strong outflows from a particular asset actually make it a good time to buy. The significant outflows from equities over the last many months and years, and the low level of conviction, in our view are strongly indicating that there is every chance that the majority are going to get it wrong again and wealth is going to get created for those who open their eyes to equity today and build it to add up to a meaningful part of their wealth over the next six months to one year.

The biggest risks to this outlook come from high oil prices, so if I was an investor wishing to get wealthy today, I would keep my eyes wide open to see what is happening to oil globally. High oil prices are therefore your biggest risk to getting rich.

I urge everyone who does not have a meaningful exposure to equities to open their eyes to this opportunity to get wealthy, that seems to be available for those who wish to take it for the next 3-5 years.

The windshield of a car is many times larger than the size of its rear view mirror, so that the driver can focus more on the road ahead, with the rear view mirror being used sparingly. Unfortunately, in an investment portfolio, the rear view mirror gains more importance than the windshield, which can be very dangerous for the driver. Look at equities through a windshield, and not through the rear view mirror.

I cannot help but quote Sir John Templeton here – The time of maximum pessimism is the best time to buy.


Disclaimer : This communication is for informational, financial literacy and educational purposes only. This communication should not be construed as financial advice.

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I absolutely love summer, despite the intense heat in India. There are two reasons for this – firstly, summer vacation for kids which makes them so much happier ( I’m not sure if it’s the vacations or the mangoes that brings a broader smile on their face though), and secondly, unlimited ice cream to keep oneself cool and refreshed. A recent afternoon out with friends and family allowed me a double delight – having icecream with kids. Whilst each of us made our selection of ice cream, I realized that it had taken us the better part of an hour for four adults and four children to decide which ice cream flavor we wanted. The decision making process involved multiple criteria from the way of the ice cream looked to the sweetness of the ice cream, flavor, mood, etc . As I stood there and watched, I realized how personal each decision was in terms of the ice cream that was selected.
This seemed to be in sharp contrast to the way many investors take buying/selling decisions on their finances. When gold fell sharply last month, investors flocked to jewelers to buy gold, irrespective of the gold that they already have in their lockers and homes. When stock markets fall sharply, everyone looks for the exit door before it falls further, even if all they have left in their stock portfolios over the last few years is only a small percentage of their overall wealth. The boom in real estate has made selling a piece of real estate look stupid unless it was traded for a bigger piece of real estate. As investors become aware of the benefits of buying term insurance, everyone wants to have some of it in their portfolio, so what if they are old enough or wealthy enough not to need term insurance any more.
In my view, there really is no one size fits all strategy for your finances. What’s good for your closest friend with a salaried income, may be terrible for you as a self employed professional? What seems like a perfect investment strategy for your parents who are retired in India could be terrible for the money that you are sending to India to take care of your retirement 20 years later?
Blog imageThe moot question is – Do you have a financial plan that is for you or is it someone else’s plan/ product/ suggestion that you are following? To me, following someone else’s plan sounds a lot like going to a pharmacy, to buy a drug on the basis of the doctor’s prescription for your uncle.
Your personal financial plan needs to be about you – your vision for your ideal retirement destination, your vision for your retirement lifestyle, your vision for the quality of education for your children, your vision of how you would like your family to be taken care of in case something happened to you or your spouse, your vision of how you would like to be treated medically in case something happened to you. Basis your thoughts on each of these, your financial plan should incorporate your ideas and desires, which can get you where you want to be.
Whilst you enjoy time with your children and ice cream this summer, please take some time off to think if your finances are about you and your thoughts and ideas. If not, it’s time to use the summer break to think and draw up your personal financial plan, a plan that’s about you.

Author – Vishal Dhawan

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