Tips on Financial Planning and Budgeting

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes

Financial Planning is Life Planning

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings - investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It’s easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al……. At times I feel the importance of the proverb: ” Ignorance is bliss”

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It’s critical to be responsible for your wealth and as I said in the beginning, it’s pretty interesting too! Here’s a indicative list of what you should know for a start and I promise I’ll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc….

Mutual Funds v/s Direct Stocks Investing

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn’t it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can’t we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

We should allocate our time to investment decisions in proportion to our income generation goals.

Convenience and hassle free investing should be a major factor.

Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.

The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.

MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you do when you churn.

We are likely to panic over market crashes. MFs can take advantage of a crash!
With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.

Is India Rising turning into an Illusion?

Summary: As inflation soars to 13%, and with the manufacturing and infrastructure sectors now in the midst of a decisive slowdown, international and Indian investors need to revisit the fundamentals which triggered the India growth story nearly three years ago. Was India Rising merely a slogan adopted on the back of the exponential growth in disposable incomes within upper middle class Indians? And, were government issued statistics, and related forecasts, entirely misleading since they failed to encompass the future impact of growth, not in the gross domestic product, but in the poor-rich divide?  

Over 250 million Indians continue to live on less than one dollar a day; roughly 600 million more live on less than two dollars. But, a dollar or two apart, if national poverty statistics are calculated on the bases of a basket of essentials, India is mired in poverty. Despite hundreds, probably thousands, of anti-poverty initiatives adopted since Indian independence in 1947, the wealth distribution matrix continues to shift, year after year, in favour of industrialists, landlords, money lenders, criminal syndicates and, of late, the 75-million strong upper middle class.

Blaming rising energy and commodity prices, New Delhi has just announced a downward revision in the 2007 growth estimate to 7.7%, from 9%. But already, a broad range of economists are emphasizing that 5% is a more realistic target for 2008. “Then, of course, we have to see the impact of the monsoons on the harvest,” a senior cabinet minister said yesterday on condition of anonymity. “Mother Nature remains the biggest single component of national performance data, regardless of the marked expansion in manufacturing and services.” 

International asset managers have failed to understand the most fundamental of truisms: that India Rising is a meaningless slogan without significant, material and sustainable changes in the vast agrarian hinterland, where 75% of Indians live. While it is quite possible for an investor to extract short and medium term profits from a stock market driven by massive infrastructure spending, consumer demand and the outsourcing window, it is not prudent for portfolio strategists to assume that the factors which justify short and medium term trading lay the foundations for longer term rewards.

In other words, India-related valuations currently employed by equity and debt investors need to be dramatically revised downwards. The price of oil and food is now placing tremendous pressures on middle class families who have been surviving or thriving, thus far, on ill-advised credit; the poor are already enveloped by a sense of desperation and hopelessness. With domestic interest rates trending higher, default ratios for mortgages and credit card loans are due for a sharp rise towards the end of this year. More importantly, while rural poverty and marginalization is sparking unrest in at least two dozen pockets of conflict, the working poor in India’s cities are rapidly embracing the agendas of radical religious and social groups.

Quite obviously, the level of impoverishment has not kept pace with the growth of political consciousness, as many Indian progressive and leftist intellectuals would have liked; as such, nobody should expect anything remotely similar to a mass revolution. But impoverishment does impose severe constraints on consumer surpluses and purchasing power, and on debt servicing abilities on usurious loans. The question is: at what point will the collective degradation in family balance sheets, in the villages and in the townships, cause a genuine reversal of the real growth cycle? 

Bear in mind that, as opposed to the commonly-recognized GDP, real growth in India needs to be measured by benchmarks which fully incorporate all the intermediate stages of production, starting with the agricultural sector, and which identify core trends governing the process of capital formation and capital spending. 

The GDP framework is not structured to incorporate one other salient fact: that the Indian economy is, to a considerable extent, driven by the vast pool of underground capital, acquired through organized criminal activity, illegal logging, loan sharking, smuggling, widespread corruption and, of course, plain old-fashioned tax avoidance. Estimates of the size of underground capital vary; but conservative figures range from 25% of the official economy in places like Delhi and Punjab, to 50%-plus in Mumbai, and in certain cities in the states of Uttar Pradesh and Bihar.

Hardly any Indian economist has credibly explained the impact, negative or otherwise, of black money on national growth. Government statistics do not venture to engage the issue, and for good reason. Since more than 70% of India’s politicians survive on, or are the beneficiary of, handouts from the perpetrators of such money. But underground surpluses will, at the first signs of economic or political uncertainly, begin moving away from cash-generating activities to find homes either in non-dynamic items like gold or in offshore deposits which clearly offer a play on potential declines in the worth of the Indian Rupee over the next decade; at least three Dubai hawala outlets confirm a steady flow of transfers from India and Pakistan in recent weeks.

The inherent problems pertaining to the wealth gap between rich and poor, the inability to substantially upgrade the agricultural infrastructure over many decades, the vagaries of the monsoon rainfall, the looming prospects of loan defaults and the forthcoming capital allocation adjustments in the underground economy, all create unprecedented risks for international investors today. Are the rating agencies capable of defining those risks? That is the question which mutual fund managers should be asking prior to selling India Rising to their retail participants at this juncture.

Today’s Investment Portfolio Imperative: Asset Swaps

Summary: The recent crisis in the debt market has had a direct and adverse bearing on portfolio valuations. But all is not lost; asset managers need not liquidate bonds and debentures, or shares for that matter, at a loss. Asset swaps now offer a compelling method to exchange risk profiles. The chaos in pricing offers unique opportunities to trade risk, and to exit negative holdings in a non-traditional manner. 

In its most rudimentary form, an asset swap is an exchange of the cash flow or risk profile of one asset for another, for a given, pre-determined period of time. Assets swaps are undertaken for a variety of reasons but, fundamentally, they are driven by an investor’s need to improve or rationalize the character of an underlying asset (debt paper or equity) on specific terms.

For example, an investor might desire to switch from a floating interest rate profile into a fixed rate interest stream for a period of two years. Another investor might want to exchange a Euro risk for Yen for five years. Or, an investor might consider that the time is appropriate to switch from equity volatility to relatively stable debt paper. Briefly, the opportunities afforded by asset swaps are limited only by the numerous, virtually unlimited, opportunities available in the marketplace today. 

Why asset swaps today? 

The sub-prime crisis demands that virtually every investment portfolio be scrutinized from the twin prisms of re-pricing and reallocation; re-pricing because the risks embedded in any investment instrument have multiplied in recent weeks, reallocation because the quality of an overwhelming portion of the currently outstanding debt instruments is now being questioned.

The transition in asset valuations (and related valuation techniques) could well continue through the next 12-18 months. This transition is likely to cause serious damage to investment portfolios, given that higher oil and food prices are adding to the questions surrounding the core fundamentals of the debt market. The global economy, which is in the midst of significant re-alignment, will inevitably force wider spreads and lower liquidity in the months ahead. 

In brief, failure to take decisive measures to protect and, quite possibly, enhance your investment portfolio today is likely to degrade overall risk-reward profiles; a dormant portfolio is, quite simply, a disaster waiting to happen. 

Furthermore, it should be pointed out, that traditional hedges like futures, forwards and options are no longer workable in the current environment; either the costs are prohibitive, or hedge contracts are simply not on offer pursuant to the dramatic market shifts in recent weeks. An asset swap, as a consequence, is the only instrument which fills the void; asset swap structures are undeniably based on shares, bonds or convertibles; but they go beyond the scope of traditional investment vehicles by providing an extremely high degree of flexibility with respect to investment strategy, short or long term.

Significant Pointers

From the perspective of the junior markets, the most challenging asset swaps will be being influenced by the need to swap equity into debt, primarily due to the fear of renewed (and unprecedented) potential downside in hundreds of junior (growth-oriented) share listings; asset swap specialists already report a seemingly unending stream of inquiries seeking to cover downside risk in this area. The other subject of immediate relevance is the interplay between resource-based operations on one hand and debt or hybrid prices on the other. Given the founding premises of the collapse in the sub-prime market, real estate real will become another focus for asset swap traders. 

Most importantly, the asset swap is a structured product. While there are standard currency and interest rate swaps which are commonly used in the asset swap segment of the capital markets, incorporating risk transfers (e.g. equity to bonds, debt-quality exchanges and commodity-linked mechanisms) into an asset swap format requires a degree of innovation and engineering. 

For junior companies, the exponential rise in precious metals and energy prices has created a powerful window of opportunity in the asset swap arena. To take one particular example, there is now a growing demand, from the corporate sector, to swap out of equity or debt risk into gold and oil futures, based on production schedules. Resource-based companies must exploit this window now.

Conclusion

For over two decades, managements have struggled to precisely identify the relative costs between debt and equity. The lack of making that determination has been the root cause of the impairment in the hybrid marketplace, for convertible debt and warrant-driven instruments. The asset swap process needs to incorporate the relative valuations with a high degree of exactness. In fact, the recognition of the true cost of capital itself lays the foundations for asset swaps which significantly enhance investment portfolios.

 

Irda plans to review regulations

The Insurance Regulatory & Development Authority (Irda) has initiated a review of the regulations to ensure that they are in sync with emerging market needs.

Irda chairman J Hari Narayan said today that the scope of the revision was “not yet known”, but indicated that selling of mutual funds by insurance companies and that of insurance policies by mutual funds were aspects under deliberation.

Hari Narayan said Irda would soon take up the issue with the Securities and Exchange Board of India (Sebi), which is the regulator for mutual funds.

The insurance regulator is also studying the issue of portability of policies and is looking at options including using PAN (permanent account number) card as a tool for portability. While the general insurance council has already discussed the issue of letting health insurance policyholders change companies, without losing out on benefits like bonus and coverage of pre-existing diseases, a final decision is awaited.

In addition, Hari Narayan said, Irda will also constitute a body to review the broking regulations. To ensure adequate supply of brokers, the regulator said, it would be desirable to allow post-graduates or diploma holders into the field and then conduct examinations over a specified time.

The review of the regulations come at a time when the government is also pushing for amendments to insurance laws, which among other things, seeks to raise the foreign investment ceiling from 26 per cent to 49 and also extend the mandatory listing period from 10 years stipulated at present.

While many of the rules, first prescribed through the Insurance Act, 1938, are still in place, a bulk of the guidelines related to solvency, minimum capital requirement, advertising and approval of products were put in place in 2000 when the sector was opened up to private players. Some of the norms like those governing investment or agent training norms have been updated, while new ones for segments like unit-linked insurance plans or Ulips have been prescribed.

At the same time, there are demands from the insurance companies to shift to a risk-based capital structure or put in place a new product approval system.

The regulator also wants to get rid of legal jargon. “The insurance companies should take the lead and provide examples of policies written in simple language,” Hari Narayan said.

Mirae Asset MF appoints new personnel

Mirae Asset mutual fund has appointed Srinivasa Rao Kapala, Head-Product of Mirae Asset Global Investment Management (India) (the AMC) has been designed as Key Personnel with effect from 21 August 2008.
Mr Dae Kyun Mok ceases to be Fund Manager ?Overseas Investment of the AMC with effect from 21 August 2008. Further, Rajesh G Aynor, Investment Analyst has been designated as the Fund Manager -Overseas Investment of the AMC and is accordingly designated as Key Personnel of the AMC