Why you should NOT buy gold coins?

[Picture courtesy Nii Noi]

Gold prices are hitting the roof as indicated by the current prices of INR 1909.71 per gram. The www.goldprice.org indicates the movement of the gold.

This may be a decade of increasing gold prices and an amazing CAGR of ~17%. The website accurately describes gold as

Gold has been called a "barometer of fear." When people are anxious about the economy - they turn to gold and bid the price up. Gold has the remarkable ability to store value in both deflationary and inflationary times.

In India, most people invest in gold through jewellery since that has been a traditional and safe method perceived by many households. But in recent times there have been many different means through which you can buy the gold, like gold coins, gold bars, gold ETFs, stocks of gold mining companies etc. As a consumer buying physical gold either in the form of jewellery or in the form of coins/bars is still prevalent over the EFT/Stock route, especially given the household trust over the local jewellers.

I have realized over the period is that buying gold coins is not a profitable proposition compared to buying jewellery or investing in ETFs. The most common mechanism to buy gold coins is either through local jeweller, but apart from that a lot of Indian banks sell gold coins. The Indian post office also sells gold coins and some of the nationwide sellers like Tanishq too sells gold coins.

The problem in buying gold coins are manifold, especially not in terms of buying process but if we look from an investment perspective.

• Buying gold coins from non-reputed jewellers often pose the problem of gold purity. Typically in India you get 24 as well as 22 Carat Gold coins.


• Buying gold coins from reputed banks and post-office incur a premium over the price you may get from local jeweller. The premium reduces your overall investment gain.


• The biggest issue with gold coins is that banks/post-office does not buy back the gold coins and you have to sell it to local jeweller if you wish to en-cash it. The local jeweller will happily buy back your gold coin but with a significant reduction in selling price and sometimes also incurring a “melting” charges which could be totally random depending on jeweller. I have given 1.5-2% as melting charges.


• Another issue is that if you buy gold coins at one local jeweller and try to sell at another (think of re-location) you again will get significantly lower charges. The local jeweller is willing to buy their own gold coins at current selling rate, but impose some or the other charge when the same purity coin is from other jeweller.


• I have also faced the issue that most local jeweller will agree to exchange of gold coins if you are buying some jewellery from their shops, thereby deducting the coin value, but if you want cash, they simply refuse it. Also if some jeweller is willing to pay back in cash, there you have to accept a lower selling price compared to current market price.


• It is also important to be aware of many cheats (including reputed jewellers) who can con you without you even knowing it. Here is a technique, some jeweller provide you with a nice packing of the gold coin (of the size of credit card), mentioning all the relevant details on the packaging. Since you would trust the jeweller and also since you are in a hurry (especially during festival seasons) you would not ask him to remove the gold coin from the packing and weigh it. I had the experience that when I wanted to sell it the jeweller opened the packaging and found it less in weight than what is mentioned.




So if you are looking for investment in gold, I recommend either buying a jeweller (some of the big jewellers are now coming up with no making charges) or to invest in Gold ETF, which are hassle free and more liquid compared to gold coins.

Failed to file Income Tax by the deadline, so what!

These are taxing times, especially since the Income Tax filing deadline is so near. In case you don’t know the IT-return filing date has been extended till 4th Aug 2010. So there is still hope that if you could not file the Income Tax return by 31st July, you have few more days to go.

It is said that “There are only two things in life which are inevitable : Death and Income Tax”. If death comes calling there is no escape, but fortunately there is some breather if you fail to file your income tax by the deadline.

Picture courtsey Jeremy Brooks

So what really happens if you fail to file the IT-return by the due date (4th Aug this year)? So IT sleuths are not coming to your house, nor you will be put in the jail or be asked to pay heavy penalty. Actually, nothing significant happens if you fail to meet the deadline, so do not panic at all.

When it comes to filing your Income Tax returns, the tax laws are not so stringent. Let’s first understand the terminology:

Income Year: The year in which you earn income. This year’s income you are liable for tax.

Assessment Year: The year in which you need to file the return or assess your income. The assessment year is next year of the Income Year.

Case 1: No Net Taxable Payable

Net Taxable Payable is any tax after the TDS/Advance Tax paid. In such case, there is no penalty for filing tax return till the end of assessment year.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 without any penalty. Anytime, after that you need to pay a penalty of Rs 5000

Case 2: You have some Net Taxable Payable

If you have some Net Taxable Payable, the only difference with case 1 is to pay an additional 1% per month penalty on the Net Taxable Payable.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011 Net Taxable Payable = Rs 1000. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 with penalty of 1% per month on Rs 1000. Anytime, after that you need to pay a penalty of Rs 5000 + 1% per month on Rs 1000

In case you have any losses to carry forward, you can not if you do not file your IT return on the due date. The only exception is the losses due to “Income from house property”, which can be carry forward irrespective of whether you filed your return on due date or not.

It is known that IT department has started some random check on taxpayers (computer randomly selecting a taxpayer). The IT department can ask the taxpayer for proof of various income through investment, fixed deposits, stocks etc.

Consequences of not declaring miniscule income

So what happens if you “forget” to declare those small miniscule income like Fixed Deposit Interest or Bank Interest? For e.g. you accumulated an interest through FD/Saving account interest and fail to declare it to the IT department, with Rs 1000 as tax payable pending. In that case:

1) You are liable to pay a penalty of Rs 1000 – Rs 3000 (100% – 300%) of the tax not declared.

2) The interest on Rs 1000 @ 1.5% per month simple interest from the due date of tax filing to the date it is discovered that you missed declaring the income tax

3) If by adding this undisclosed income, you change the tax bracket (e.g. if your declared income falls on the border of 20% bracket and when adding this new undisclosed income you fall in 30% bracket), then additional penalty is applicable.

The interesting aspect is that most people file through CAs or Online tax websites or tax consultants. But when the above case happens with you, then you can not blame any of these agents. You and only you are entirely liable for such missing from IT return.

So don’t consider IT return filing as just another formality, take extra care to ensure it is error free.

Time Value of Money

You must have heard “Time is Money”, but do you know what is Time Value of Money? No… then blame the economists. I guess economists love to twist the common sense language into incomprehensible mumbo-jumbo to confuse the common junta.

(Picture courtesy Sam Fox)  Okay, here is another way to look at the this terminology: If you are offered 10,000 INR today or after one year, what will be your pick? Easy, huh. Only a nut-head would choose the later. But why? Well because money “NOW’ can be invested to earn more money later, or it can be utilized right now for any material gratification or who knows what will happen one year later!! What-ever the reason, everyone attaches some “time value” to the money.

                                                        

 

There are basically two reasons why people attach time value to money :

• Possibility of growing the money over a period of time
• Possibility of purchasing less in the same money over a period of time 

This simple concept becomes extremely complicated when we start applying this to practical situations. Here are some examples, where this concept is utilized:

1) How much is the present value of 100Rs paid after a year?

2) What is the monthly payment of a mortgage of Rs 200,000 at annual rate of 6% for 10 years?

3) If the investment scheme promises 10% annual interest, in how many years my present money of Rs 100 will get doubled?

4) In a different way,how much rate of interest should a scheme have if I need to double my money of Rs 100 in 5 years?

5) If I invest Rs 1000 for 20 years at 7% rate of interest, what is the final future value discounted back to its value today?

6) You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of Rs10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%.

7) If you get payments of Rs 15,000 per year for the next ten years and interest is 8%, how much would that stream of income be worth in present value terms?

8) How much would you pay for an investment which will be worth Rs 60,000 in three years? Assume interest is 5%.

9) You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs16,000 at the beginning of each year for 8 years. Annuity B will pay you Rs12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and each costs you Rs75,000 today, which would you prefer?

10) You deposit Rs17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money invested for another 5 years how much will you have in the 15th year?

All these and many more questions can be answered correctly if you understand the concept of time value of money. If you are mathematically inclined, visit the wiki page or check out this video.

Superman syndrome

I came across an interesting term called “Superman Syndrome”. [Picture Courtesy: frazer4eos] If you try to google the term, you will be surprised by the lack of single concrete definition. You may find many books with title containing this word, but not a single definition. But each definition essentially contains a similar idea which imply:

“the concept of a supernatural ability, desire, drive to outdo and to overcome.”

It is not a positive term but rather connotes a negative meaning implying the exhibitionist attitude of a person busy in showing off and satisfying other people’s desires eventually working so hard that the person looses important things in life.

 "Life is what happens while you are busy making other plans." --John Lennon

I looked back and realized that many times in the past I have done one of the following:

1) Insisted on paying entire bill for friends at coffee shops

2) Bought cloths just because others think they look good on me

3) Purchased those expensive high-end cellphones when I went with friends, just to show-off

4) Purchases lot of junk items just ahead of  guests coming, since this may impress them

These are all behaviors of “Superman Syndrome", which essentially made me do things that are not based on prudent and realistic decisions but an attempt to satisfy other people's expectations and desires. But I was still fortunate that I did not spent large amount of money on buying house or that expensive four-wheeler just because I can impress friends, but  many do.

If you have done any of these or are still doing it, then you need to be extra careful and really need to think about why you are spending money on satisfying what other's value?

I have heard of many people complaining about busy lives, late night conference calls, 24X7 email/phone connectivity and hard life with this new information age. The entire idea is that "control of you life will come from within you",  so getting out of superman syndrome is most important task you will do for yourself and your family.

Robert Kamm writes in his book "The Superman Syndrome: Why the Information Age Threatens Your Future and What You Can Do About It,"

"the Superman Syndrome is a dangerous workplace success formula that forces men and women to leap tall buildings and outrun speeding bullets -- at the expense of personal lives, families, children and even business productivity. This represents a major hypocrisy implicit in nearly every boardroom in America: The belief that we should be accountable to work but not to our families."

Whether you spend money or your personal time or energy to satisfy what other people value most is surely a suicidal tendency towards life. If you are trapped in superman syndrome, take some concrete steps and hard actions to come out:

Actions to save your precious time which can be spent with family

1) Keep in mind that you do not need to answer that every email 

2) 24X7 connectivity does not imply getting addicted to emails and social networking

3) Work in an "interrupt mode" rather than "polling mode" with information high-way.

4) Keep aside minimum non-negotiable 4-5 hours of quality time everyday with your family, friends and kids

5) Celebrate a "no-gadget" day every week or at-least every two weeks.

Actions to save your hard-earned money

1) Keep in mind that you do not need to pay the bill every time you go out with friends

2) Limit yourself to spending not more than say 1000 Rs for impressing others, rest all purchases should be your value based.

3) Promise yourself to take that shopping list before going out for shopping and sticking to it.

4) Find other activities with friends that leads to least buying (e.g. jogging in park, going to library etc)

5) If your friends expect you to buy things for you, get new friends

6) Share "Superman Syndrome" and its effects with friends and family, spread the word and awareness

You will get, what you genuinely want. It is never too late or too early to ask for good life.

Legal Guide For Indian Bloggers

I came across an astonishingly detailed guide for US bloggers on the legal issues that a blogger can face due to various acts. It clearly mentions that the guide is exclusively for US bloggers since there is strong constitutional protection for speech. I tried to search a similar guide for India and failed to find anything useful. With the advent of social networking, blogs have become an extremely viral media, so apart from the financial risks of social networking, there are definitely legal issues for any public dissemination of information including blogging.

(Picture courtesy Over the Top of NY)

India has been typically laggard with respect to cyber laws, not only in implementation but unambiguously defining it as well. One of the biggest reason I would assume would be that law makers themselves may not be able to keep pace with the fast changing technology. The first indian IT law was introduced in 2000 called the IT Act 2000 [Summary Slides from IIT-M - PDF]. This act was further modified in 2008 The Information Technology Act 2008.

The pertinent question is “Why blogging cause legal issues?”. The problem is the extremely viral nature of blogging, since it has now become more ubiquitous with millions of people getting influenced by what they read on blogs.

I would provide you a real world analogy. Let us say you bought a product from Company X, unfortunately it turned out to be a junk and useless product with not keeping up to the promise that was given before you purchased. You go to the customer care or their office and nothing happens, no-body listens to your complaints. But instead of “chalta-hai” attitude you decided to tell it to few of your close friends and let them be warned about it. It is still fine with the company, but now imagine you called up a public meeting and started talking about your rough experience with the product. Initially there might be just few of your friends but slowly hundreds and thousands of folks joined your meeting and started getting warned about the junk product and the pathetic customer service from Company X. That is illegal, you just de-famed the Company X.

This is exactly what happens when you blog. You are disseminating information for public consumption which can have significant influence on people either in their behavior or opinions about something. The first indian blogging controversy happened for exactly same reason.

It is so difficult to read through the mumbo-jumbo of legal laws, as Mark Twain rightly said

Only one thing is impossible for God: To find any sense in any law on the planet.

So how do bloggers (just about anyone with internet connection can become a blogger) keep themselves safe from the legal wrangle? Here are some simple DO’s and DON’Ts that will help any blogger to avoid cyber law (typically applicable to Indian bloggers):

• When in doubt about any post violating any legal law, just don’t publish it. It is better to be safe than to be sorry.


• Do not write “hate messages” against popular personalities especially political people, you might get caught by police like Nitin Sajja from Hyderabad or Rahul Krishnakumar Vaid from Gurgaon.


• Do not write “derogatory remarks” against organizations which Ajith D learned the hard way. A similar tamasha was done by Shiv Sena for anti-Shivaji Community on orkut (TOI 1, TOI 2, Rediff 1, Rediff 2, NDTV, Financial Express). Some of the interesting articles that criticize these are by Amit Verma and Sevanti.

The ultimate expression of a government’s lust for power lies in a term coined by Orwell in 1984: thoughtcrime. Thoughtcrimes are thoughts that have been criminalized, and if the technology to detect emotions existed, It is not unlikely that the Indian government would ban hatred. Or, at least, hatred of things that it deems should not be hated.

• Do not write negative comments about any religious personality, deity or organization.


• Do not criticize any company’s products or services. You may not like the product or services but publicly criticizing it for spreading the word is not the right way. If you absolutely have to do it like a review of a book or movie or mobile phone, please put a disclaimer mentioning these are your own personal thoughts with no legal liability on you. Defamation is extremely complicated subject in the books of law, and so is proving your innocense.


• Do not post pornographic material including anything slightly sexually explicit (especially pictures or videos). It may be just a fun video or fun pictures for you, but it can hurt someone’s sentiments and hence an absolute NO NO.


• Do not publish any confidential information from within your company. I would suggest do not post anything related to what you do within your company (unless you own the company and want to promote it through blog). Any information on what you are currently working on or what are the future releases or any inside information say company want to layoff people or planning to acquire any organization, absolutely everything is confidential. This information is typically governed by trade secrets which are complicated.


• Do not plagiarize. If you copy paste the text from another website or you copy that beautiful picture or video without the consent from the original author and publishing it without providing the link to original source, then you are plagiarizing. One of the biggest and innocuous way of plagiarizing is to search that image you need from Google Images or Flickr and put it in your post without bothering about copywrite issues. You should only use legal pictures from flickr or any other website for your blog posts. Also it is illegal to edit the pictures or videos (removing watermarks or just any editing action like cropping) that you downloaded without permissions and then publishing it. Note that small actions can lead to copywrite violations.


• Do not publish any data, numbers, figures, charts that you do not own. Always reference to original source from where you found the data. If you do not have the original source, stop and do not publish it.



• Do not share private information about anyone you know without his/her permission. So you went with your girl friend on that famous beach and posted those pictures without asking her, think again. You just gave your friends contact details or wrote that caustic remark providing private details of the person you hate, beware you are surely violating privacy laws. I would advise not to even post edited pictures of film celebrities.



• But if fate decides to screw you, it can not be avoided similar to when it caught Lakshamana Kailash and what he got is 50 days with 200 under-trials at Yerawada Jail, finally ending with a “sorry” from Police and Airtel.

Read some more interesting posts like “Bloggers and Defamation” and “Restricting Freedom with Excuses of Responsibility” on this issue. Here is an interesting video on this subject.

Please note that this list is not exhaustive (and definitely not legally scanned and is not a substitute for legal advise) in nature but just the common sense approach to avoid any legal issues. Just to be on safe side, here is the disclaimer, that this list does not guarantee avoidance of law-suite due to material published by you, so I would not be liable for any damages :-)

Super Tips to increase your debt

Yep! you read the title correctly. So you want to live your life King Size, in a royal fashion with the meager amount of salary that you earn (peanuts huh..). Here are some of mind-blowing tips to spend you money faster than you can blink your eyes:

• Never read money saving posts or weblogs which may contaminate your mind towards efficiently managing your personal finance. These are evil!!
• Spend more than you earn. This is not the “common sense” approach, but who needs any sense, common or uncommon. And if you are struggling to meet your ends every month, then you are just about learning this art. Keep it up.
• Never pay your bills on time. Would a royal king in older times, bother himself engaging in such mundane tasks, like paying those insignificant telephone or electricity bills on time? It is for those mere mortals, who would setup email reminders or use those large desk/wall calendars with sufficient space to write notes and remind themselves of paying up these irritating bills, month after month, on time, thereby saving those tiny-miny amount on late fees. Such money-saving tips are a kill-joy for living life royally.
• Never worry about emergency fund. What is the use of the money lying idle when it should be running around with you in shopping malls. Some crack-pot websites urge people to keep six months of expenses as emergency funds Why should you worry about keeping such a huge amount, since you will never get hit with any emergency. Those nasty accidents, job-loss (Job loss insurance, OMG) or sudden illness happens only to others and not to you. So why bother about emergency funds?

• Never pay-off your credit card debt. You should keep a poster of John Biggins of the Flatbush National Bank of Brooklyn, New York and make him your GOD, since he invented credit cards. This is the greatest invention of man ever (forget fire, wheel etc). I bet that humans would still love credit cards even if it would have been invented during the stone age. Why credit cards are so addictive: 

• You do not need to think, how much your bank balance is, just think how much credit card balance exists on credit card. It makes it so easy to remember, even if you never done any math subject in your life.
• Also credit card companies are know to be generous enough to increase your credit card limit over the period of time sometimes without intimation. But isn’t it a pleasant surprise to suddenly find, during an impulse buying that your credit card just worked when you thought the limit has been crossed.
• You can have as many credit cards as you want with so many flavors and banks. Just look at in India and you have so many choices of type of cards.
• RBI has so many regulatory rules for credit card issuing banks that you are very safe. It has been seen on so many occasions that credit card companies flout these rules and also charge exorbitantly, but these are just small blemishes spread by the enemies of credit card industry.   Here is an example on how credit card companies make money.
• Buy on credit card and pay a meager amount monthly. This is called revolving credit and it is a revolution. Some people try to scare you with revolving credit maths, like this, but you can safely ignore such realities.

  Let us take a simple example. If you are spending Rs 30,000 every month and repaying half of it, you end up spending Rs 3.6 lakhs in 12 months. You pay back Rs 1.8 lakhs and owe the bank Rs 1.8 lakhs. But what the bank wants back is 40,000 rupees more than what you've spent...and keep this going for another year…this will become a runaway figure...On the same amount of Rs 30,000 spend, if you take it really easy and pay back only the minimum due, that is Rs 1500 a month, you will owe the bank Rs 2.3 lakhs. The bank will demand back, Rs 3.5 lakhs back from you and that’s Rs 1.2 lakhs more than what you've spent. Keep compounding this and you can fairly figure out where this could go.

• Credit card can get you cash from ATM if needed, what if they charge so much extra on cash withdrawals, think of the flexibility.
• Credit cards also offer rewards to customers (see here and here), although very few people diligently and consistently try to re-deem those reward points. But isn’t it so nice of credit card companies to offer rewards, which we do not redeem even when it can lead to significant saving, but that is just a small niggle. It is a supreme gesture from credit card companies.

• Impulse buying is the name of the game. We are talking about folks who are obviously above “roti-kapada-makan”, the basic necessities of life. So what good your money would be if you can not spend it when you feel like buying something. It is separate matter whether the thing you buy has any real value in your life but why worry about it? If you got it, flaunt it and if you haven’t got it, credit card will help you flaunting it. 

• Planning your money is insane. Why waste time and energy into something which is inherently unmanageable. If big companies like Satyam or Dubai World can not manage it, how would you? As you must have heard that “Money is the root of all evil”, they why keep the evil with you or try to manage the evil, get rid of it as fast as you can and you will be happy. So turn deaf when you heard words like tax-planning, investment, saving, retirement planning etc. You obviously want to turn religious during old age in post-retirement life  (to repent all your life’s sin) rather than having crores of evil roots with you.

So if you follow this advise, this is a sure-shot way to leading a luxurious life. The one lifetime you have, live it King Size.

PS: This post was written in humorous jest, so if you seriously follow the advise, you would not have enough money even to sue me for wrong advise. So get real and serious about your money!!

How to reduce your monthly expense?

I recently got a stealthy email from my a very good buddy. The content of the email was crisp asking me for some 15,000 Rs, he was short this month and needed to pay-back someone. I helped him out, but it got me thinking why he got himself into such a situation. He is earning decently (I would imagine around 20 Lakh PA), do not have any family responsibilities (all his sisters are married off) and just has one kid.

As per me, this is definitely not a good sign when you have to borrow from your friends. I am not against borrowing money, after all  friends are for helping you out, but it should be for a genuine reason.

Why so many educated people fail to manage their personal finance?

The single underlying principle for managing money is

Make your expenses lesser than your income

Is this so difficult to understand, that to save money, your expenses should be less than what your earn.  Yet, I find so many people struggling to maintain this equation, eventually letting themselves buried into debt.

So how exactly we should implement this in our daily life? How to spend less and save more? How to reduce expenses? The answer lies in getting into “good financial habits”. If you are single, you need to develop these into yourself, if you are married you need to share these thoughts with your spouse and inculcate these within both the partners. It is more difficult with kids, if you have any, but once these become part of your family, it will go a long way in helping your children in their lifetime.

Here are some great techniques to reduce your expenses:

• Start on 1st day of the month and every night note down all the money you spent that day. You can do it as a combined list of family (preferable) or you can do it separately for each family member. I assure you that this is extremely painful to start with since it wont bring any immediate relief but do it diligently without fail. Note down every detail of what you spent through cash, credit card, online purchase or any other mechanism. Also note down the channel you are paying through. You can use some software on your desktop or mobile to keep track of you expenses or use just a plain paper

                  You can also use application like this for iPhone

• Once you have this list (the hard-work has to give you some benefit) ready, then it is the time to walk through it and arrange the items in following categories
  • Must-Haves like rent, electricity bills, food bills
  • Emergency Purchases like medicines,
  • Casual/Impulsive Purchases like clothing, mobile phones, books, eating out etc
  • Social purchases like gifts
  • Useless purchases
• Then, go through these monthly bills or recurring expenses and see if there is something that you really need. For example do you really need to buy these costly books every month or you could just subscribe to a near-by library in your locality. I have actually reduced these expenses in my budget (I am a voracious reader). I used to buy books/novels worth more than 20K per year, this is exorbitant (not only in terms of buying but also in terms to keeping them, I spend more when I have to relocate since these books make those so many extra cartons). So I joined one of the local libraries and I have reduced by expenses to mere 1K per year along with gaining immense variety of books. There are hundreds of such expenses that you can cut-down without sacrificing your living standards or the returns in terms of value that you are getting.
• Some of the expenses can be saved just by tweaking your daily habits. You would be amazed that simple habits like switching off lights, fans or chargers can provide significant savings. We did that by switching off chargers or TV switch (not just switching off from the remote, but actual switch). These have given me a saving of as much as 100 Rs per month on my electricity bills (i.e. 1200 Rs per year). It may sound like too much pain for saving such miniscule amount, but think of it as serving to the society, doing this in the larger interest of the country. You can install CFLs instead of those big bright tube-lights or don’t run those geysers only when needed and not for long period. These are non-renewable energy and such saving by millions of people can be simply huge.
• One of most effective tip that I use consistently is to store my all credit cards in least accessible places like in the locker or a suitcase which is stashed away. The idea is not to keep credit cards at places where you can quickly pick up before going to a shopping mall. I also have a credit card with a credit limit of not more than 10K, this helps me to gain the real advantage of credit card (use it to so that you don’t need to keep the cash with you and useful during emergencies). So why keep those other credit cards with huge credit limits? Well they would be useful when I want to travel or for making those big purchases so that I can convert them into equated monthly installments with a small fee or to get those discounts at specific services (e.g. I get one ticket free when I buy two movie tickets on a ICICI platinum cards in PVR cinemas).
• Never buy on impulse, one of most crucial principle for money saving. The entire idea of those glitzy shopping malls and front displays is to attract the consumer and make him buy impulsively. Some people justify that impulsive buying is good sometime since you can get good bargains. I absolutely dis-agree, impulsive buying can never be good. What is the definition of impulsive buying:

An impulse purchase or impulse buy is an unplanned or otherwise spontaneous purchase. This can metamorphise into a serious disease.

• So if the purchase was not planned, it means the consumer actually do not need it and hence even if the product is free, it is a bad bargain. So it brings to another point is that when-ever you go on shopping make a list of items that you intend to buy and just stick to it. No additional purchases should be made even when it is so much necessary (it will automatically inculcate better habit of planning ahead more carefully for the next trip)
• I recently got invited to a birthday bash of a 1 year kid from my neighborhood. I was totally amused that how a 1 year kid would know at-all the difference between a small @ home birthday party vis-a-vis a lavish party in a fancy restaurant. It was an absolute useless expenditure and it was coming from the urge to show-off (I have loads of money or I care for my child etc etc) rather than a genuine focus on the child. I would rather invite only kids with their mothers in a small party at home, since seeing so many kids playing around will probably be more entertaining for the kid.
• Un-clutter your house, because clutter saps energy and money. Christopher Lowell says “Clutter is dandruff on the shoulders of your room”, so don’t give excuses for not de-cluttering your life. You need to get rid of “can’t-get-rid-of-that-because-it’s-valuable” gene, it is so harmful. check out this 9 Tips for Decluttering (Zen Habits)
• It is important to give up those harmful habits like cigarettes, alcohol or drugs. These not only save money in short-term, it also saves money in long-term by improving your health and reducing medical bills over the years. Invest that in a gym or personal improvement programs.

At every step in your life, while dealing with money, keep in mind that “Expenses have to be lower than what you earn”, and even after so many efforts in reducing your expenses you are hitting the debt, then it is time to look for earning more. That would be of-course another post.

Mystery of Dividends – Stock Vs Mutual Fund

I was talking to a friend about dividends in stocks and he suddenly came up with “What are dividends in mutual funds?”. I said it is different. Here is the answer:

Stocks : When an investor purchases a share of a company, he is essentially owning some part in the company.  Dividends are payments made by a company to its shareholders. When a company earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. A dividend payout typically indicates that the company has confidence in earnings growth and sufficient profitability to fund future expansion. Also for investors, it makes sense to earn that extra income for investing in the company, rather than waiting for the share price to rise up to get the profit.

Mutual Funds : When an investor purchases units of Mutual Fund, he is essentially contributing to the mutual fund corpus (similar to thousand others), which the MF will invest in various shares. The price at which these units are purchased at any particular time is called NAV. The problem with mutual fund NAVs is that when a mutual fund declares dividends, the NAV is affected.

For example, say for an XYZ mutual fund scheme, the NAV today is Rs 50. If the mutual fund declares a dividend of Rs 2 per unit. So if an investor has bought 100 units, he will get Rs 200 as cash. The problem is that this immediately reduces the NAV to Rs 48 (Rs 50 – Rs 2). Hence essentially the investor’s remaining worth has been reduced by Rs 200.

So whatever profit an investor has made due to increase of NAV, MF has given some part of it as cash back to the investor and called as dividend. The net worth of investor remained same, just that he has received some of it in cash.

EMI calculation using Excel

I mentioned the formula used to calculate an EMI, but putting values in the formula and calculating it is a cumbersome task. So I did some research in Microsoft Excel and found out that it can done quite easily in excel.

EMI calculation in Excel

Step 1: Open the excel sheet and locate the fx button

Step 2: In the pop-up menu, click on Financial Catergory

Step 3: In the Function Name click 'PMT'

Step 4: A box will appear as shown, fill in the values mentioned and voila you get the EMI.

Interest Component of the EMI

• Just choose the IPMT function instead of PMT

Prinicpal Component of EMI

• Just choose the PPMT function instead of PMT

How EMI is calculated!!

I decided to purchase a house in Banaglore (an extremely tough task) and the first thing that struck me is equated monthly installment or EMI. This is the single most important parameter while taking any kind of loan. This is the amount outgo every month from your personal finances which will cover both the principle as well as interest.

I talked to few people and everyone is bit confused on how EMI is calculated. It is really simple and just few steps would enable you to calculate EMI at your end.

So here is a rather simply formula for calculating EMI.

You would wonder why EMI is called "equated", the reason is that EMI is nothing but loan amount plus total interest divided by loan tenure. If that is the case then why this complicated formula. The reason is because as you keep paying EMI, some portion of EMI goes as interest but some portion goes as principal repayment. So if you pay an EMI of Rs10,000 for a house loan, not the entire Rs 10,000 would go as interest payment, but some portion goes as principal repayment, which essentially reduces the principal on which further interest is calculated. It is extremely important to understand what goes for interest and what goes for principal repayment.

It is very clear (for mathematically inclined) that when Loan Amount goes up, so does the EMI. Similarly if the interest goes up again so does the EMI, but if 'n' (loan tenure) goes up, EMI reduces. A note of caution, a low EMI for longer period does not necessary means a good bargain. A good bargain depends on your requirements as well as the total interest you pay over the entire loan tenure.

Another thing to keep in mind is whether the reduction in loan amount happens on monthly basis or yearly basis. Any loan which reduces the principal on monthly basis should be given preference. A monthly reduction implies less interest payment from next month onwards, definitely a huge savings.

Also usually interest rates comes in flavors of fixed and floating rates. A floating rate changes based on market's prime lending rate (PLR). A fixed rate stays fixed for the tenure of the loan. For a longer period of loan, my personal preference is always fixed interest rate, even if it is 1-2% higher, at least the monthly outgo is fixed, so planning of your outflows can be planned pretty well. I personally think that similar to rupee averaging for mutual funds, the floating rate almost remains same as fixed rate over a long tenure of loan. [The floating rate will go up and down and hence your monthly outgo]. And for short tenure loan, in a high interest regime, go for floating rate, but in a low interest regime choose fixed rate.

Car dealer tricks

Let me ask you one question, if you have to choose between the following loans for the car which one would you choose:

a) The dealer has a tie-up with various banks who provide you loan at the prevailing rate of 13% for five years and 13.5% for three years. Although it is a huge interest rate (on a reducing interest basis) but its the same across all the dealers of the city. Most banks asks you for a margin amount as a downpayment (something like 10 - 15% of the cost value of the car). The dealer provides you a discount of 10,000 Rs on a particular car model.

OR

b) The dealer has a specific tie-up with a government bank which provides you the same loan amount at 7.75% interest rate for three years. This is almost half of the interest rate in option (a). The dealer does not offer you the discount mentioned in option (a) and all other terms remains same.

Which one you would opt?

Well this is the true fact that came to light when I proceeded with buying a car in the city of Bangalore. I went to the Maruthi showroom (Sagar Motors @ Bannerghatta Road) and inquired about a particular car model. I was told the on-road cost as X Rs. I told them that I want to take up a loan of just Rs 1.4 lakhs and the remaining amount will be as a down-payment in cash (which was way higher than the 10% margin required by most banks). Surprisingly even with so large a cash down-payment there was no special discount. I was told about the exorbitantly high interest rates charged by banks (13% -14%). I went home and talked to few other dealers and everyone came up with the same figures with no additional benefit.

Then one day we got a call from a dealer who said there is a special scheme with UTI bank which will provide loan on an interest of 7.75% for three years. I was ecstatic but was little curious that how could a bank provide me with such a low interest rate when all other banks are charging such higher rates. I asked the details and sure they were providing the loan at aforementioned interest rates, just that the dealer mentioned that he wont give the 10,000 Rs discount for this scheme.

Always do your own EMI calculation

So I got suspicious and decided to calculate the EMI. For a loan of 1.4 L for three years at 7.75% rate of interest the EMI comes out to be Rs 4340, while for a loan of 1.3 L for three years at 13.5%, the EMI comes out to be Rs 4360. In essence both the scheme are more of less the same (just a difference of 720Rs over three years period). It is just a gimmick used by the bank and the dealer to fool the customer with flashing a 7.75% rate of interest. I would suggest do your own calculation everytime.

Investing Fundas Revisited

I was just reading this article at seekingalpha website and found

Peter Lynch, former manager of the Fidelity Magellan Fund says in this article :
You’re already highly exposed to your job - after all, it’s your job that pays your salary and probably your retirement contributions and health insurance. The last thing you want to do is to increase your financial exposure to the industry you work in or its suppliers or customers.

I saw this clearly in my job as a research analyst covering the communications equipment sector during the boom and bust of 1998 to 2002. Many of my industry contacts were intelligent and sophisticated people who saw that demand for their firms' products was strong, and in some cases realized that their own company (or a competitor) was gaining market share. So they mistakenly bought stocks in their own sector. When the market for communications equipment subsequently collapsed to the surprise of most people in the industry, many of them lost not only their jobs, retirement contributions, health insurance and other benefits, but also took a severe hit to their investment portfolios.

So in theory, instead of buying stocks based on your work knowledge, what you actually want to do is to hedge your exposure to the industry you work in.

This echoes with what I wrote earlier.