Through the Looking Glass

The Economic Times - part 3 The case of dealing with a historical exposure is like determining the right proportion of currencies that you should have in your portfolio.  By Akhilesh Tilotia & Ramganesh Iyer In the last two articles of this three part series, we brought to you a perspective on the movement of the rupee vis-à-vis the dollar and how the relationship between the two currencies is undergoing a change and a few factors NRIs need to consider to manage their foreign currency earnings better.We conclude the three-part series with tips on how to take care of the foreign currency exposure that you have. We saw the last time that the Indian currency is ‘jumpy’ and that the direction of the ‘jump’ is getting increasingly harder to predict. There are more opinions than experts on the value of the Indian rupee going forward. We also saw some factors to consider while planning your investments. How do you then take care of the foreign currency exposure that you have?...

The Economic Times - part 1 NRIs have been hit hard by the appreciating rupee. Here is the first part of a three part series on what the appreciating rupee means for them. Investing tips for beginners By Akhilesh Tilotia & Ramganesh Iyer There are many reasons that lead a person out of his country. For the last many decades, one of the strongest was the possibility of leading a much better life economically, outside the shores of India. This was driven by a weak Indian economic growth and job situation, compared to the rest of the world. There was another big reason for this strategy of working outside to be attractive. The exchange rate of the rupee was very weak compared to its purchasing power; so a lot of NRIs would profitably earn in US dollars or dirhams and send money back to India. Either their families would live in India, or they would return a few years later, and have a sizable chunk of accumulated wealth to spend in India. For instance, take the case of Rahu...

Rediff Getting a bonus calls for a celebration. With the right investment tools, you can put your bonus to good use and create wealth. Finance experts, Krishanmurthi Vijyan, CEO, JP Morgan Asset management; Rajivdeep Bajaj, MD Bajaj Capital; and Akhilesh Tilotia, financial advisor, tip you off. How should you invest your bonus? Krishanmurthi Vijyan:  Calculate tax on the bonus. Most companies give their employees bonus only after deducting the income tax. If the net cost of debts is more than the cost of savings, you should pay off the debts first before you plan any savings. It is better to get rid of the high cost loans like personal loans and outstanding credit card bills. Next is investment. While investing for one year, go for a mix of 80-90% in debt and 10-20% in equity. A long-term investment should have at least 70% in equity and 30% in debt. As investors can't choose SIP to invest lump sum of bonus, you can certainly put the bonus in a debt fund first and the...

Rediff 'Beware of inflation: it eats into your savings,' your financial advisor would have warned you a number of times. What you need to worry about it not just the inflation number that the government publishes every Friday, but the inflation that is relevant to you. The traditional issue One of the biggest differences between the number that the government estimates as inflation and the actual inflation that impacts you is the difference in the basket of goods and services that both take into account. So, for example, your biggest cost items like rent, children's education expenses or health care expenses may not find the same weight in the government numbers as they do in your monthly budget. This concept has been written upon an implemented by financial advisors: they tend to advise you to take a buffer over the normal inflation rate and to account for higher inflation when it comes to goals like education. We will today explore a different concept called ...

The Economic Times For many NRIs, investing in India is more reliable because of tax benefits & better growth opportunities. In our previous article, we looked at some of the issues faced by the professional NRIs when planning their finances. This time let us look at the opportunities available to the NRIs when they move from saving to investing their money. Investment choices available locally We begin going up the risk-reward line and identify invest opportunities for the NRIs in their home country. We focus primarily on US. Checking/saving accounts: Due to inertia (checking account is opened as a salary account) or lack of financial advice, money typically lies in checking accounts here earning as low 0.25%. Savings accounts cost a fee or come with a minimum deposit requirement and can earn slightly greater 5% in the USA currently. These accounts are good for short-term liquidity and emergency needs. 401(k) contributions: Similar to our EPF contributions, 401(k) con...

Rediff A book was cast in stone more than 3,500 years ago in Babylon and was found by a British professor late last century. What impressed him -- and helped him come out of a debt crisis -- were the inscriptions on how to manage one's finances. The book is now available as The Richest Man of Babylon. It's a very small book, but with some very profound thoughts. 1. Pay yourself first When we think of budgeting against our income, we typically look at our expenses: how much do I have to pay my landlord, my grocery bills, my medical expenses, my entertainment bills, et cetera. Once we have decided on our expenses, we find out what our savings will be. Financial advisors and many credit card companies (or banks) today help clients in estimating their lifestyle expenses and help them understand where their money is being spent. The old book turns this theory on its head: it says 'pay yourself first.' Before you pay others for the services that they give you, yo...

Rediff In your early 20s and planning to make your first investment? The first and foremost, keep aside three times your monthly expenses, before you begin. Next, invest in life cover and health insurance. Many recommend buying young to lower your annual premium, which is because insurance at an early age means paying low premium. If you are between 20 and 25 years of age, you could pay a relatively modest premium of Rs 6,000-Rs 10,000 annually. Once insurance is taken care of, invest keeping in mind, future goals. Establish some short-term goals like marriage and house, etc and choose mutual funds that invest in debt instruments. To expect good returns from equity funds, you should invest there for at least three years. If you have no such short-term goals, invest in mutual funds that invest in 100 per cent equity. In case, you fall under the low income tax bracket, invest in debt instruments through fixed deposits. However, if tax returns are on the higher side, mutua...

Rediff - part 6 of 6 Mutual funds offer a variety of options through which you can invest in or divest from them: each option has its own advantages and it is very helpful to know of your various options. Lump sum investment: This is the simplest manner of investing in a mutual fund. You have a certain sum of money (lets say, Rs 100) and you want to invest it in one go. You approach the mutual fund company with your cheque for the amount you want to invest. The main risk with this investing strategy is that you are locked in to the valuations of the underlying security as on a particular date. If, for example, the prices were to go down from this point, you would lose money on the entire investment. Similarly, if you have timed the investment right, you will see a good rise on your entire investment. Systematic Investment Plan (SIP): In order to avoid the risk mentioned above, you can instead invest the sum over a period of time. Mutual funds allow you to periodically inve...

Rediff - part 5 of 6 When you invest, you can look at the investment from two perspectives: to generate a regular periodic return or to invest for a long term, without bothering about the intermediate returns. Mutual funds are a great avenue for achieving either end. You can either choose to invest in the 'dividend' option or a 'growth' option to achieve your objectives. When a mutual fund invests money on your behalf and makes gains on the same, it can either return the gains to you or keep the gains in the fund on your behalf. You can use either of these options based on your requirements. However, be careful that you know the tax treatment! Dividend option: If you are someone who requires money on a periodic basis from your investments, then you should choose the dividend option. This means that the fund will periodically (quarterly or mostly, annually) return some of its gains to you. Note that the fund is under no obligation to declare a certain rate of ...

Rediff - part 4 of 6 We have seen the advantages of investing in a mutual fund. Now let us look at some of the risks and costs of investing in the same. Risks of investing in a mutual fund: The biggest risk of investing in a mutual fund is one of underperformance. When an investor decides to invest in a particular asset class, he typically expects to get the return that the benchmark of the asset provides. For example, if someone is investing in large-cap equity stocks, he would expect to make at least as much return (with similar risk) as a benchmark index, say Sensex or Nifty. Mutual funds try to maximise the returns on the funds invested through them -- but all of the funds cannot succeed an outperforming each other or the benchmark. Hence, some of them under-perform the benchmark. Similarly, the cost of investing in a mutual fund (discussed below), eats in the returns. In high return years (like the last few years, where returns have been in the high 30% in equity, 2% ...

Rediff - part 3 of 6 Having grasped the basic of mutual funds, let us try to understand why you as an investor would want to invest in them. Professional expertise: Investing requires skill. It requires a constant study of the dynamics of the markets and of the various industries and companies within it. Anybody who has surplus capital to be parked as investments is an investor, but to be a successful investor, you need to have someone managing your money professionally. Just as people who have money but not have the requisite skills to run a company (and hence must be content as shareholders) hand over the running of the operations to a qualified CEO, similarly, investors who lack investing skills need to find a qualified fund manager. Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in India, fund managers are acquiring global certifications like CFA and MBA which help them be at the cutting edge of the knowledge in the investing wor...

Live discussion of Akhilesh Tilotia, Director, PARK Financial Advisors with CNBC Awaaz on the impact of rising interest rates, 31st March 2007 You can watch the video here: YouTube

Rediff - part 2 of 6 We have seen the basic types of assets into which a mutual fund might invest: equity and debt, and how this choice impacts the risk and return characteristics of the funds. However, you would have noticed funds which have now evolved and try to provide you with more fine-tuned products in a specialised niche. Equity funds, in particular, like to identify newer or better avenues of investment and hence they create products around those new avenues. Style of a mutual fund: Equity An equity fund can invest in a large-cap, mid-cap or a small-cap stock. You might have heard these words being thrown around rather liberally by all the new funds on offer. 'Cap' refers to market capitalisation (M-cap) of a stock. M-cap is defined as the total market value of the equity of a company. For example, if a company has 1,000 shares outstanding and the price of each share is Rs 20, the market value of the total equity of the company is Rs 20,000 (1,000*20). To ...

Rediff - part 1 of 6 It is almost always assumed that anyone reading an analysis on mutual funds (or the fund management industry) knows the intricacies of the same. This is not universally true and, at all times, there are a) new people trying to understand the basics, and b) people who want to brush up their knowledge of the fundamentals. We will use this 6-part series to understand mutual funds from their very basic concepts. Here is the first part. What are mutual funds? If we break the phrase 'mutual funds' and analyze the words, we realize that it refers to funds that are raised and invested mutually, i.e. on behalf of everyone participating in the scheme. If you and your friend both pool your money and invest it jointly, you have created your own mutual fund. When the concept of companies initially formed, people who knew each other and were willing to take the risk of the venture used to put in the share capital of the company. Slowly, entrepreneurs realized ...

Financial planning and products are all about number work and most of it is fairly complex. It helps if there are certain simplifications to make life easy. One way is to have rules of thumb, which can be quickly applied to understand the situation The Economic Times Here are a few commonly used rules of thumb categorised into mathematical, financial advice and mythical. Mathematical Rules There are some rules that are true due to mathematical properties: Rule of 72: This rule (written as 72/r) helps one determine the number of years it will take to double money, where r is the annual compounded rate of interest. If a bank offers you 8% p.a. compounded annual rate, then you can expect your money to double in approximately nine years. Similarly, in the earlier days of money doubling in five years, the implied annual compounding rate was around 14.2%. Real rate is twice ‘flat rate’: Many agents sell loans at a rate which appear mouth watering. But look closely and the fine p...

The Economic Times Choosing a financial advisor is like choosing your family physician. Once you are associated with him, it is difficult to restart with another. You have decided to do long term planning for yourself, but a big question remains: how does one choose a financial advisor? Here are a list of attributes that an advisor should have. Credentials Finance is a matter of trust. The most important element in your relationship with your financial advisors is the trust that he can build with you. To gauge his ability to win your trust, you should check his experience, client references, educational background and affiliation with national and international professional networks. A lack of experience may be compensated by references from clients who are satisfied. Many advisors insist that they cannot share the names of their clients to protect their confidentiality. However, there is no better endorsement than a satisfied customer. Becoming a financial advisor does not ...

DNA One needs to understand how big the retirement corpus needs to be to lead a comfortable life in the golden years Aman Jain, 27, is an MBA from a top-rated business school with a great job with a major retail chain. He has recently married his batchmate, Namita (also 27), who has a similar work-profile. Both live in a rented apartment in central Mumbai. Their parents have settled in their respective home towns and are well provided for. Both have good jobs which pay them Rs 35,000 each every month. They have now started thinking about their retirement. They need to understand how big their retirement corpus needs to be so that they can lead a comfortable life in their golden years. They both expect to retire at the age of 58. Let us understand a few concepts before determining their pre-retirement corpus requirement: 1. Life expectancy: With increasing medical progress, life expectancy is increasing. The average life expectancy in India is around 63 years. Urban and afflu...