“A suggestion I can make is that if you were sure that you could follow a dollar-averaging program, you could start [investing] right away. Dollar averaging is a method of investment under which you set aside regularly a fixed amount of money and invest it in common stocks generally, either in a single common stock or preferably in a group investment through investment-company shares. By investing the same amount of money at regular intervals – say, every three months, you get two advantages.

One is that over the years your investment reflects the average market price rather than the high market levels – which is where you are likely to buy if you follow the crowd. Secondly, the arithmetic of dollar averaging gives you more shares at the lower prices than at the higher prices, so that your average cost is lower than the arithmetic average. If you are putting $1,000 in one kind of stock and the price is $10, you’d get 100 shares. If later it’s $20, you’d get 50 shares. You bought more stock at the $10 basis than at $20. Consequently your average price would be less than $15.”

Over the last two decades, I’ve observed that there is a tendency to participate in the markets only when it is rising continuously. Good investments are the ones which are mostly made in bad times than in good times. That is why I always believe in the paradox that bad markets are good for making investments.

What Benjamin Graham has said about investing regularly for a long term works well for a portfolio of stocks like mutual funds or index than an individual stock. By doing this, we are able to avoid one of most fundamental and costly errors in investing; investing money when the markets are high and redeeming or not investing further when the markets are low.

Not only that we get average prices instead of higher prices over the long term, the average price is lesser than arithmetical average because we buy lot more when markets are low and lot less when the markets are high.

Our behaviour and emotional discipline matters most. If this can be absorbed inside the skin, we would do fewer mistakes with our investments.

Early this month, I was chatting with a senior citizen who is in his eighties. He has retired from a private sector company around nearly 3 decades ago and has no pension. He married very late in life and so many of his financial responsibilities came much later in the life. He had done well in discharging his responsibilities without resorting to debt, having an own house and managing his affairs till date without seeking the financial help of his children. Infact he keeps giving his children and gets nothing from them.

What he has done for himself is quiet commendable given his social background. I asked how he is able to do this way. He simply said ‘stock market’. When I probed further, he shared his portfolio with me. I was surprised. It is very high for his background and infact I’ve not seen the same quantum of wealth even with many people having a very high earnings.

He never watches any business channels or read financial newspapers or magazines. He just read the finance page in normal newspaper to have a general understanding of what is happening. He reads the annual report of companies he has invested in and doesn’t tinker his portfolio frequently.

He holds shares in one of the best wealth creator of the last decade. He told me after he purchased this stock in 2000; it fell almost by 50%. He reasoned that if something was good at Rs.X, it is all the more better buy at Rs.0.5X. So he doubled his quantity when the price fell by half.

He does not have the knowledge of many of the professors in finance, investment and security analysis. He may even feel that something is wrong with his approach if these gentlemen start taking class and talk about efficient market hypothesis, beta, alpha, hedging strategies etc. But he can be rest assured that with out their jobs, many of these professors may not be able to survive leave alone thrive. Whereas this person, with his understanding and approach, has thrived without a great job or handsome income.

In early 2000 when I was exposed to writings of Warren Buffett, an elderly gentleman used to do some assignments on a freelance basis in the organization I worked. Sensing his interest in markets, I used to talk to him enthusiastically about Buffett. The subsequent two years was a strong bear market due to dot com burst, twin tower attack etc. He taught me about picking stocks for long term, how to analyze a company etc. Again this gentleman also had a career in the capacity of junior management employee in a private company. He used to share his portfolio which he has been building for decades. If my memory serves me right, his portfolio was worth couple of crores then, a big amount for anybody even today; much higher a decade ago both on absolute terms and more so given his career and income levels.

His kinds are the ones who make good money in stock markets in the long run. In the last 3 decades+, when Sensex has given an annualized return of around 17%, people with this attitude would be the ones who would have made money. People, who buy in bull markets and sell in bear markets or stop buying in bear markets, don’t get benefited by the market. It is not the mistake of the market; it is our emotional instability and lack of discipline which prevents us from making wealth which markets are capable of offering.

I’m not a ‘suyambu’. I’ve done lot of mistakes earlier and do lesser mistakes now. However in addition to learning from Buffett,  Graham etc.; I’ve met good investors who have made wealth absolutely disproportionate to their income; through ethical and legal means, by investing in markets. I’ve met people who have been staying invested in good equity funds for more than a decade and reaping an annualized return of even 20%+.

Like Buffett says for the snow ball to become big, the slope has to be long. I can say with fair degree of conviction if I live long and mental faculties remain intact, making a sizeable snow ball isn’t that difficult.

When I was talking to a friend in business media last week, I told him that no one would have ever made money by following their recommendations. Newspapers and TV channels keeps recommending doing something everyday and magazines on a weekly or fortnightly basis:-). There is no point in blaming them. When we perceive value only through activities and like to be entertained, media do their part. It is the question of what entertain us- sports, cinema, religion, music, history, adventure or stock markets. For every need, there is supply available. The problem in investing arises only if you start taking everything in the entertainment seriously.

Entertainment, by its very nature, cannot be monotonous. It has to be different everyday. There has to be villain- be it FII or RBI or Government or Europe or USA. It needs to create fear and make us jittery; create enthusiasm and make us jump with excitement. All these are absolutely fine if you do not make decisions on investments or personal finance solely on this. If you cannot avoid getting impulsive by this entertainment; then better to avoid it all together. Otherwise our life becomes a most tragic entertainment:-)

I’m not against acquiring knowledge or educating oneself. I do it all the time. But this is of no use if there is impulsive behaviour and zero emotional discipline. It is unfortunate some of the very intelligent people I know easily succumb to noise around them created by media. There is an information and opinion overload. In the web world, everyone including me is a philosopher and a genius:-)

Because of human nature and behaviour, only a small percentage of people in the markets can reap the benefits it can offer. I feel it would always be so, because influencing the behaviour, even that of our own is the most difficult thing. I’m trying to see if majority of our clients can be part of this minority club. If it happens, the credit goes fully to you.

Not that we are good in forecasting. Nobody is. We do not even believe in forecasting, especially short term. However based on certain observations and trends, we’ve been pointing out for some time the possibility of interest rates peaking out, inflation coming down and rate cuts start happening. The first two has already happened and as for the last one we feel it is not the question of whether but when. We too get it right, at times:-)

Though 2011 has been second worst year (the other one being 2008) in our stock markets in nearly two decades, we attracted good amount of FDI. FDI is sticky and long term investments when compared to FIIs. This has not been highlighted.

With the present growth rate itself, we are projected to be the 5^th largest economy in the world by 2020. I believe that if the government gets the infrastructure story right, even double digit growth rate us is very much possible. Keeping in mind long term bigger picture helps us not to be distracted by day to day news flows.

As far as rupee movement goes, though many variables influence this, given our economic growth rate and possible capital inflows from overseas, in the longer run the way forward looks like strengthening of the rupee.

In markets, they use two terms ‘time correction’ and ‘price correction’. It so happened that our markets are still lower than where we were in January 2008. Both in terms of time and price, the correction has been there for the last 4 years. So there is a strong possibility that the coming years would take our markets to the next level as the earnings have not stopped growing during the last 4 years and they always command a better multiple in bull markets.

Never forget the cyclical nature of the market. We may have a fresh top and bottom at the next level.  But when the market moves to the next level; so do our wealth.

When the interest rate starts falling down and equity markets starts picking up, MIPs are capable of doing very well. For this debt oriented hybrid plans, next few years may be rewarding.

It’s a good time to weed out poor equity funds and stocks and move into better ones.  As far as funds are concerned, we can help you and you’ve to take your own call on stocks.

Irrespective of market conditions, always continue your SIPs and whenever your financial situation permits, make it a point increase the monthly commitment. You would definitely be very happy about your decision in the long run.

My profession demands that I wish you prosperity too:-)You would do well financially if you stick to the chosen philosophy and approach. More of it later. 

I was able to write to you only once last month due to a viral infection which liked staying with me for longer than required. I would continue to stick to writing twice a month.

I’ve been getting mails asking to write more than twice a month. I’m grateful for your interest. I would see what best I can do from April onwards.

Today is not only the New Year but also we stepping into 6^th year of our profession.

When I walked out of BPO career in December 2006, I never thought I would get so many excellent relationships.

Markets, industry and regulatory environment have not been favorable for most part of the above period and in fact been very tough. We survived because of you. Even now, there is no clarity and visibility on professional model due to ever changing and uncertain regulatory environment. Once I used to worry about these things. Now a days I worry a lot less. If you are ready to fail, the worry level automatically falls:-) 

As someone who is wired to anticipate failure more than success, this relative success in the last few years despite strongly counting (!) on to fail is itself a pleasant surprise. Thank you.

We understand from industry sources, in Chennai, under ‘Independent Financial Advisors’ category, we’ve the largest SIP book size, in terms of value, as at the end of 2011. Assuming this information is true, I’ve to thank you again for the same. As per our philosophy, we do not focus on instant gratification and probably that is why we are here. Personally I’m not bothered about these ‘positions’ as they would always keep changing. I do not have any targets to work for and by nature neither ambitious nor aggressive.

Sensex has fallen by 24% in 2011. This is the second worst year in nearly last one and half decades.

Since we normally suggest a tenure of not less than 10 years for equity and as most of you have a disciplined approach of investing regularly, these kind of falls help you to acquire more due to cheaper prices.

We strongly believe that investing regularly for long term or SIP or rupee cost averaging is the best way to create wealth through equity by participating in long term growth of our country. As I always repeat, what I tell for our country now need not hold good for all the countries. Likewise if you apply what I tell for equity funds blindly into stocks, the result may be disastrous.   

Globally lots of negative things are happening since 2008. Despite that, our absolute growth from April’08 to March’12 would be around 30% (assuming a 7% growth rate for this fiscal). This is real rate of growth (i.e.) after adjusting for inflation. Considering both external and internal factors, this is really significant.

The only other major economy which can talk about similar growth during the above period is China. But no one knows the reality of Chinese numbers. The growth models of both the country are different. The economic stories of nations tell us that if a country follow hyper investment and creates excess infrastructure or manufacturing capabilities, it leads to a bubble and collapse.China is having a double digit growth rate for nearly 2 decades without democracy or freedom. Being an export dependent country, it’s fate is more closely linked with that of  U.S. and Europe and their future protectionist policies.

Real estate prices in many parts of China have corrected by 20% to 30% in 2011 and there are forecasts of further correction by even 50% in 2012. If it happens, it is actually good for the country in long run. Asset prices, if it does not correct periodically would result in over heating and a subsequent crash. But considering the amount of NPAs already held by Chinese banks, I’ve no clue what impact this correction may have on their banking system.

Talking about asset prices and banks; someone in media asked me about gold finance companies. I’m skeptical about their model. I hear that they provide around 75% of the value of the gold mortgaged as loan. Gold of olden days is not the gold of today. It has become a very volatile asset class as it is being traded in derivative markets too. So if all of a sudden gold falls by 40% in a short period, how they would be able to recover their loans? Even if they sell the gold, distress selling coupled with the fact most of the mortgages are not pure gold bars or coins but gold ornaments, they may realize lesser than the prevailing (reduced) market value. So the assumption seems to be gold prices would not fall by more than 25%. This is questionable, especially at these price levels.

Internationally, in 2011, in dollar terms, gold has given a return of 11%. Due to strong depreciation of rupee, the return inIndia is around 30%. What if gold prices fall by 20% internationally and rupee appreciates by 15%? I don’t know what model of risk analysis and management are in place by these companies.   

When some became very bullish on silver at higher levels, I suggested caution and moderation. You would have noticed how wildly the prices fluctuated during last year. Precious metal prices are no longer determined only by demand and supply. For gold, silver etc., the position in the futures market may be far higher than their physical availability in the planet. These are speculative positions which may be aided by leverage too.

So unwinding of these positions by entities like hedge funds can cause significant price correction. Not only that when the prices fall, they may even go short resulting in further fall or even crash.

That is why no asset is safe if you’ve leveraged your position. When the tide is favourable, your gains become multifold by the aid of leverage. But when the tide turns, which no one can predict precisely, leverage can actually destroy you. If you loose lot of money, it is very difficult to make it up again. We’ve to get rich only once in our life as long as we don’t do anything stupid. The greed and fear in us would naturally nudge us to do stupid things. How we avoid them is all about the investment game. 

CDS (Credit Default Swaps) has been allowed in our country recently. We’ve to wait and see how they are going to be regulated. As I’ve written before, CDS allows you to insure things on which you’ve no financial interest. This would lead to lot of speculation and even occasional collapse of financial system.

For example, if I feel that a gold finance company may default on its bonds, I can buy insurance for the bonds that I don’t own through CDS. If I feel that company may default, I can insure Rs.1 crore worth bonds say at 0.5% of its value per annum. So by paying Rs.50,000/- premium every year, I’m protecting myself against the default of bonds I don’t own. What I get by doing this? Simple, if the company defaults, I get Rs.1 crore:-) If it doesn’t, the other side pockets the premium as income.

What is wrong with the above? We need to understand that there has to be a counter party for every contract. So if I’m taking insurance for Rs.1 crore by paying 50K; someone else is providing me the insurance from other side. In the recent financial crisis, the other side happened to be insurance companies like AIG, banks etc. That’s why they collapsed. Why did they do it? The 50K premium received can be shown as income in their statement. So they were able to show more income instantly boosting the bottom line, rewarded themselves with fat bonuses, share prices went up and finally ended up being bankrupt:-) 

One of the reasons for our growth being moderated in the recent time is the raising interest rate cycle which peaked out recently. There has been 7 rate hikes in 2011. There was 6 rate hikes before in 2010. 13 rate hikes in less than 2 years did take a toll on the economy and it came unexpected. The good thing is that we may even expect falling interest rates (rate cuts) this year. It looks like the question of  how soon and how far they will do than whether they will do. This is because the food inflation is now close to 6 year low and the overall inflation is expected to be around 6% in next 3 months.

This year may be a good year for debt oriented funds like MIPs.

As far as equities are concerned; it is always a combination of sentiment and fundamentals in the short run and mainly fundamental in the long run. Being the election year, we may expect some positive sentiments from U.S. Some short term boosters may be given to the economy in lieu of elections though the long term direction is unclear. Europe; I may have to write a separate piece even with my limited understanding. No one expected dollar to get strengthened last year. The dollar got better because Europe got worse. Any more unexpected negative news from Europe can even strengthen the dollar further; though the currency is intrinsically very weak.

As the interest rates start going down, the investment cycle would pick up here. Pick up in investment cycle would have positive impact on growth in the coming years. Market has discounted lot of negative news including the possible further downgrade of corporate earning in the coming quarters. Likewise it may start discounting the future growth once the investment cycle picks up. Market act in anticipation rather than to the current situation. So it is not the question of whether the bull market would happen but when.

Since you are in the accumulation phase, ‘when’ need not be a concern. ‘When’ should be the question only when you plan to withdraw money for your goal. That planning needs to start generally two years before the goal. So as an investor with a disciplined approach and long term outlook, cheaper prices in terms of lower market levels should actually make you happy. I know it is emotionally not easy, but definitely worth giving it a try.

Our long term growth story is intact and I would not be surprised if we enter into a double digit growth phase during this decade.

All we’ve to do is be a disciplined and regular in investments. Additional lump sums can be invested when the markets are attractive but never in the heated up bull markets. Sticking to the asset allocation proportion (in terms of equity, debt, real estate and gold) and being emotionally disciplined would make us reach destination safely.

Remember the investment in bear and flat markets contributes for long term success than trying to time the market. We’ve seen in the past as to how just missing the ten best days in a decade would have halved the returns and how missing the best 30 days would have infact eroded the capital. These best days happen randomly and cannot be predicted in advance. Staying invested for long term ensures that you reap the benefit of these best days.

If you want to do well in the world of investments; please do not keep looking at the value frequently. It is a dreadful disease. A yearly review would suffice; that too more from accounting and planning perspective, not from an emotional perspective. Getting emotional with investments would kindle fear in the bear markets and greed in the bull markets. These two emotions, when becomes excessive, can end up being our own enemies. Though I don’t believe in New Year resolutions; if you are in the habit of having one; I would suggest trying the above.

We’ve to keep looking at markets because it is our profession. We don’t ask a Doctor why he goes to the hospital or a jailer why he goes to the prison every day:-)

NHAI have come out with tax free bonds. I read that retail portion alone has not been subscribed fully. A tax free return at 8.2% per annum (interest payable in October every year) locked for 10 years is really attractive. NHAI is not a government company but part of Government of India itself. So there is an implied sovereign guarantee. The limit for retail investment category (per person) is Rs.5 lakhs. The flip side is that you may not have liquidity though the bonds would be listed; because there is not much depth to retail bond market in India. If you do not need this money for ten years at all, then you may consider investing the same. If interested, we can facilitate this for you.

Request you to bear with me for this longer than usual long piece:-) Since I’m writing to you after a month and wanted to cover few things…..

Once again, thanks for sustaining us and help us get into our 6^th year today. Happy birthday:-)

There are some who say that I’m an eternal optimist. Nothing can be farther than truth. Had it been so, I would have avoided lot of worries; most of which never happened:-)

It is just that I’m lucky enough to come across Buffett and Graham and able get some of their perspectives deep inside my skin. Can one cultivate their abilities? Extremely difficult and personally I would say it is impossible for me. But can one fine tune his approach and perspective like them? To a greater extent, the answer is yes.

The term ‘long term’ is itself is confusing for many. Rightly so. There are various analogies floating around that if your forefathers started with an ounce of gold at the time of Christ, how much your family would be owning now and so on.

For people who forget cyclical nature of the markets, economy, civilisations and above all human behaviour and keeps projecting compounded growth rate forever; the following analogy mentioned by Jeremy Grantham of GMO may serve as a useful pointer. If ancient Egyptian civilisation which has been there for 3000 years, had they just started with a cubic meter of physical possession and compounded it annually at 4.5%, it would be worth 10 to the power of 57. A billion of our solar systems would not be sufficient to store these!

Look at where Egypt is today. Likewise nobody would have imagined today’s Greece in the period of Alexander.

So projection of power of compounding for 2000 years is at best amusing.

How many families we know are able to pass on the wealth successfully atleast for couple of generations leave alone for centuries? Let us assume I build some significant wealth and pass it on to Vedanth. I would be naïve if I assume that it would continue to grow the way it grew when I managed it. He may decide to spend it all! Since the sex ratio is getting skewed, he may have to end up gifting the entire wealth to marry a girl of his choice:-) 

At best what I can do is to educate him, if and when he is ready to listen to me. At present he his completely preoccupied with how many times he can keep on turning around; a skill he mastered recently:-)

The interesting thing in finance is the nature of history to keep repeating itself. It is not progressive but cyclical. Innovations are rare to make in this field and even when it happens it is mostly counter productive. For people who think that derivatives are of recent phenomenon are not aware of the future contracts the merchants and traders have been engaging in for centuries. What is recent is turning a hedging instrument completely into a speculative one.

Earlier only parties who have financial stake in a contract used hedging and now people who have no such stake whatsoever keep speculating. For example, two complete strangers may make a contract on when I may die, one gaining and the other loosing depending upon when I die. You think this is sheer madness? It is. That’s why I suggested you to see the movie ‘Inside Job’.

I’ve been keenly interested and observing the markets for over 2 decades and that’s what made me to go and work in a stock broking firm for nearly 3 years in mid nineties.

From my experience, which includes fair share of mistakes, reading and observation, I’m able to understand and even appreciate the nature of market cycles. In investing, one cannot afford to learn everything only by experience. Our life span, more so investing life span is short, and compounding needs time to start showing results. As I repeatedly say, history and philosophy helps much better to approach markets than understanding alpha and beta.

Let me first talk about MIPs, which are hybrid debt oriented conservative products. Even some fund houses position this as a one year product. We’ve always positioned this as a 5 year product or barest minimum 3 year product (depending on certain situations), even when the previous one year returns were good. We said the same thing to people who invested in MIPs last year. It is not that I was aware then that RBI would be raising interest rates more than a dozen times and equities would be choppy. But what I’m aware is that interest rates are cyclical and if we recommend a product which would get influenced by this cycle; for one year, then there is a possibility that an investor can get caught in the phase of hardening rates.

Instead taking a 5 year view would ensure that the investment goes through a cycle and the product would be capable of delivering the returns it is capable of delivering:-)

Interest rates are generally linked to inflation. But I wouldn’t be surprised in the coming years even if there is a higher inflation and lower interest rate scenario inIndia.

It is amusing that even when it comes to inflation or interest rates, people always assume it would go only in the direction it is currently going.

In 2008, when inflation was 12% and interest rates were 11%, there were forecasts of 18% inflation and 20% interest rates!

Well if you don’t remember, inflation dropped to as low as -1.61% in 2009 and interest rates too dropped from 2008 levels.

Again it is not that I was able to foresee the rates in 2009; but I was very much aware of cyclical nature of these.

That is why we recommend equities also for a period of not less than 10 years. There are 3 year, 5 year periods (why in bull markets even one year period) equities have given excellent returns; but again markets being cyclical, either excellent or negative short term returns; both are not true indicators of possible long term returns. Again we tend to extrapolate the direction the market is going at a given time forever as if it is no longer cyclical. It has always been cyclical and would remain so forever.

Now the trend is to predict the returns from gold based on the performance of the last decade. By nature, gold goes through long cycle (unlike stock markets or interest rate which have shorter cycles) and if someone buys at an all time high, it may even take decades before getting the original price, without even adjusting for inflation.

In the world markets, gold touched the price it reached in 1980 only again in 2008; just 28 years to get back the capital:-)

If I’m correct, silver is yet to touch its all time high even after 3 decades of waiting. Commodity buffs can enlighten me further on this.

Some experts say that many commodities go through a 30 year cycle; 10 years+ of bull phase and 20 years+ of bear phase. In commodities, if you get caught in the peak of the cycle, there is every possibility that the recovery would be very long.

One of the successful trader / speculator, George Soros has sold off his gold positions this year.  

In equities, the best thing is to invest regularly irrespective of market cycles. In fact concept like SIPs are designed to make us invest in bear markets, which we otherwise would not do, but which is what actually gives us good returns. When the valuations are attractive, lump sum investments can be made. Likewise, it is advisable to avoid lump sum when valuations are high; not that you would loose but the time taken would be more for getting good returns.

What I’ve said above is applicable only for equity funds; to be little more precise, for non-thematic and non-sectoral equity funds and NOT for stocks. Stock picking is totally a different ball game and please do not apply whatever I write for equity funds into stock picking. The results can be terrible. Especially when you buy shares in a company in a euphoric market, that too when that company or sector is the fad of the market, it may even lead to permanent loss of capital. The cardinal principle in investing is not to do something which can lead to permanent loss of capital; which many direct stock pickers forget at the time of euphoria.

Again when I talk about equities capable of giving good returns in 10 years; I’m only talking about Indian markets. The sub-cycles happen differently based on the overall economic cycle. So what I say for India need not hold good for Greece. Each country’s structural cycle is different.India is in for a very strong structural growth over next 2 decades, of course with various sub-cycles in terms of inflation, interest rate and stock market movements. Each cycle may find a fresh top and bottom. If the long term perspective is correct, short term cycles are meaningless or can be take advantage off as it would provide us many opportunities too.

When you hold an investment for the tenure it is supposed to be held; good years would automatically take care of investments made in bad years too. Though it may sound paradoxical but for those bad years, the rewards would not be significant in the long run. Bad is good because ‘bad’ implies cheaper prices.

And if you think if you can enter and exit the cycles in timely manner and there by get extremely good returns at every phase of cycle – good luck. I don’t know how to do it and people who claim to do it also appear phony. They may promise so that they can get good business and do well for themselves.

Understanding the cycles and timing the cycles are completely different things. I don’t confuse the former with later; hope you too wouldn’t.

It would be better to link the fuel prices to markets with the exception of kerosene and domestic LPG.

This would end the constant blame game between ruling and opposition parties & central and state governments.

All the opposition parties ruling different states conveniently do not talk about the huge taxes they are levying on fuel.

Government can remove subsidy entirely on petrol and diesel. We forget the fact that we are the ones who pay for subsidy too.

The subsidized diesel prices are happily being exploited by automobile companies for producing diesel run sedans and SUVs. People who drive these definitely do not belong to the poorer section of the society requiring subsidy.

Talking about subsidy, there is no need for us to follow the flawed western model of bailing out private companies at the cost of tax payers’ money. Vijay Mallya can afford to live without us paying for his losses. Why we have to share the losses of his airlines business? The profits from the liquor business was never shared with us:-) I was not there during King Fisher calendar shoot:-)

As many economists have repeatedly pointed out; privatizing the profits and socializing the losses is the recipe for disaster. Companies which are efficient and prudent would have no motivation if their reckless counterparts are bailed out by public money. There has to be both positive and negative incentives for businesses.

Nearly 6000 children in India die every day due to hunger and these 2 million deaths every year of  future India deserves priority over saving flamboyant businessmen. If their business fail; they and their generations would still be well off and have a life style which even a hard working upper middle class Indian can never dream about.

Dr.Subbarao, governor of RBI in a recent speech has mentioned that there over 6 lakh inhabitations (metros, tier 1 to tier 6 cities, towns and villages) in the country and only thirty thousand  of them (just 5%) has reach to banking system. He has also further said that only 40% of the population has bank accounts and even this may be on higher side due to dormant accounts.

When it comes from horse’s mouth, we can definitely take it on the face value. What we see around is also validating the above data. The country’s largest bank, SBI itself has only around 14,000 branches. A prominent private sector player, HDFC Bank has only around 2000 branches.

In the draft guideline for new banking licenses, thrust is given for compulsorily operations in semi-urban and rural areas. If you think, banks predominantly operating in these areas would be sick, take a look at Tamilnadu based banks like Karur Vysya Bank, City Union Bank etc. A bank can reach out to these segments and still be commercially successful too. (Disclosure: I ‘m a shareholder of City Union Bank).

Interestingly being regional players: KVB & CUB has around 400 & 300 branches respectively. In Tamilnadu, KVB, CUB, LVB & TMB have made banking accessible for many. These are all private sector banks, have been around for generations and are being run both prudently and profitably.

If financial inclusion, with out compromising prudence or profitability is the aim; I think there is so much which can be learnt and emulated from the above by other ‘new age’ private sector banks.

Also I’ve accounts with both the ‘old’ and ‘new’ private sector banks (I’ve never had accounts with any PSU bank, except SBI for our family’s PPF accounts). In the ‘old’ ones; atleast till now there is no concept of ‘Relationship Manager’. Still they know each customer well. Around 12 years ago, I gave a bearer cheque for Rs.10,000/- to someone. As I never issue a bearer cheque, the teller got suspicious, went to the manager’s cabin and informed him. The manager immediately called me on my mobile (the call charges was very high those days) and asked me whether I’ve given that particular cheque or should he alert the police!

Even last year, I issued a cheque to someone and forgot to sign the same. When it came for clearance, I got a call from the bank requesting me to come and sign the cheque so that they can honour it. I can write many more instances with my 2 decades experience of banking with these ‘old’ banks.

In the ‘new’ ones; our accounts fall under ‘Privileged’ or ‘Priority’ or ‘Preferred’. So we always have a RM assigned to us. On an average, a RM changes atleast twice a year and he keep calling us pleading to help him in achieving his targets in selling financial products, gold etc. No one in the branch knows us personally. We are just another account number. Now it has mellowed down; till 2008, we used to get pre-approved loan letters and calls routinely.

I used to wonder why a bank wants to lend me without me asking for it and also without any supporting document whatsoever. Once I called up a bank’s call centre and asked them how they ascertain my credit risk since the loan is offered without any proof or collateral. The lady on the other end got terrified with my questions and brought her manager on the line.

He told me that since my cheques do not get dishonoured and I maintain a decent balance, they found me worthy of offering loan without asking for any proof or collateral or surety. I pointed out that the loan I was offered is many a times the balance I maintain with them and asked what recourse they have if I default on my loan and how my repaying capability is assumed on the flimsy ground of the average bank balance and not dishonouring the cheques. He did not know what to say and profusely apologized for offering me a loan:-)

If you want to experience prudence, just walk into a Shriram Chits office and ask for a loan. The level of verification they do, collaterals, surety… the way they appraise the credit risk, would put even a banker to shame. I’m saying this based on what borrowers from the above company has told me.

If you wan to know how reckless a bank can be, read the books written by Ravi Subramanian, a former banker. Who knows it better than an insider?!

As I repeatedly mention that we all belong to 25% India which is growing and doing well. We happen to be in this minority club and just imagine how more difficult life would be if we have been part of the majority club.

The strange paradox even if you belong to minority club is how much is enough. One recent report mentioned that only 0.4% of our country’s population has assets of $100,000 (Rs.50 lakhs) other than primary residence. In one such family I know, the head of the family has to go through prolonged hospital admission and an organ transplantation which cost more than Rs.25 lakhs. Due to his hospital confinement, his business suffered, the debts mounted as they no longer could be serviced. The story did not have a happy ending. He passed away, the entire networth got wiped out, the house was kept as co-lateral for the loans… Well, I do not want to write further what the family went through.

When a family member narrated these details; I was dumb struck as to how much is enough when such a calamity happens to a family, despite belonging to the top 0.4% of this country.

I was discussing about these kinds of huge expenses due to medical exigency with another advisor. He has keen insights on health insurance and told me that many companies do not renew the health insurance if the claim during the life time exceeds a particular percentage, say 200%. This means that if you have Rs.3 lakhs cover and is promptly paying the premium year after year; once you totally claim Rs.6 lakhs (in different years), the company would refuse to renew your health cover further. And as claim history and pre-existing condition needs to be disclosed and is also shared between companies; you may not get a new cover from any other company too.

I’m trying to understand this further and since I know many fellow advisors also reading our blog; request you to share your thoughts with me.

Whenever someone meets me for investment advice, I always ask whether they have adequate risk covers. If the risks are not covered, savings can get wiped out even by one single event.

I’ve to write a separate piece on people’s attitude towards risk. A guy who considers investing Rs.5000/- a month in SIP as risky does not consider not having a term cover as risky; when he has dependant parents, home maker wife and young kids!

The general perception is that risky things happen only to neighbours and not to us. We are also some one’s neighbour, isn’t it?