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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Wisely Speaking- 1

Posted by Muthu on September 17, 2011

Good to write after a while. As mentioned, would ensure that I write to you not less than twice a month and may be not more than 4 times a month. 

When I cover not necessarily one issue or topic, I may at times choose the subject standardly as ‘Wisely Speaking’. The title is just in sync with the name of our organization and please do not conclude or believe that what is said is necessarily wise. I never have such illusions myself.

Recently SEBI in a circular has provided advisors option of charging ‘transaction charges’ on mutual fund purchases made through them. Since SEBI has also provided advisors the option of charging or not charging the above; we’ve decided NOT to charge this. This would ensure that the entire amount you invest would continue to work for you. The only charge on your mutual fund investments would be what the fund houses have been charging as expense ratio annually (usually around 2%, lesser for debt oriented schemes). As you are aware, this expense is not directly debited to your account but is adjusted in daily NAV (to illustrate, 2% / 365 days). So the returns you see is in your statement in any given day is post this expenses.

Also all the past performance details provided for the funds are post these expenses. For example, when I say an equity fund has given annualized returns of 25% in the last 10 years; please do note that the returns mentioned are after adjusting for expenses.

We are awaiting modalities for communicating this to fund houses and registrars so that you are not debited any ‘transaction charge’ in any of your folios.

My contribution has appeared in the Q&A of current issue of Nanayam Vikatan.

With limited data, one has to answer these questions. So the answer also will have limitations. Unless one can get relevant details about an individual, the answer would be generic.

I can tell you that generic advice is at best a pointer. Individual life situation is unique and it is better to consult a good advisor before taking a decision.

Some time ago, one senior citizen came and met me. He was distressed. He has a small flat, living with his wife, no pension, having a small corpus in FD. Since he found it difficult to make his ends meet, he started reading personal finance news papers and magazines. Since all these talk about the power of equity, he thought the best thing to do was to invest a portion of his corpus in equity.

He approached a popular stock broking firm and asked them to invest his money in stocks. The dealer traded and invested in couple of stocks and in less than a year, he has lost more than 40% of the capital.

Whom to blame? Newspapers, magazines, TV channels, websites, blogs (including this one) do not address any individual’s life situation. Some may try to be informative and educative. Some others may mislead and mis-sell as well. The caveat is always ‘buyer beware’.

In this case, no body mis-sold anything to him. He invited the trouble on himself. The stock broker has no interest or incentive to find out some one’s life situation and whether he can afford the risk. It is perfectly legal for him to accept the money, when someone ask him to trade and invest on his behalf. As we all know, the earnings of the broker is purely dependant on number of transactions; so he needs to keep churning the portfolio for his livelihood. This is a structural flaw and I don’t see any solution for the same. I could only empathize with the elderly gentleman.

With increasing medical cost, decreased corpus and income; the day to day living has become a challenge and source of constant worry for him.

There is so much information available at click of the button today. Information is not knowledge. Knowledge is not wisdom. Infact I’m finding out from my interactions with people that information overload gives a sense of ‘knowledge illusion’ resulting in pathetic management of one’s finances.

Anybody would tell you the need of life insurance, medical insurance and personal accident insurance. There is no doubt that these are essential for anyone to face the unpleasant surprises life can spring upon.

But firstly one needs to understand what is insurance. Insurance is nothing but transfer of risk at a nominal cost. Instead of bearing the risk ourselves, we are transferring it to the insurance company for a price.

A client of us was surprised when his employer asked him to pay Rs.16,000/- for a Rs.1 lakh cover for group medical insurance for one of his parent, who is a senior citizen. In my opinion, it is crazy to pay 16% of the cover as premium. Since I know his family situation, I suggested few alternatives. If nothing works, I told him the only option was to bear the risk.

What I mean by bearing risk? For example, if I need Rs.5 lakh cover and cannot get it or find it expensive; I need to a corpus of Rs.5 lakh through FD as a medical reserve. Ofcourse, even if I have a cover, any expenses over and above the cover has to be borne by me.

The whole life insurance industry would tell you that based on HLV (Human Life Value) methodology, everyone in this world need life insurance. As you are aware, we are totally against combining insurance and investment. Even talking about pure life cover (term insurance), I don’t agree with the industry’s view that everyone needs it.

Let us take an example. If some one has an own house, has no liabilities and have good corpus or assets which would yield income to sustain the life style and meet the financial goals of his dependents in his absence, then the insure cover is not a must for him. He may take it if he feels that the wealth available to the family need to be more than what it is already in his absence.

Though I do not know the financial details of celebrities; I just wonder when I keep hearing the huge insurance cover they are taking.

I also keep hearing from many the increase in tenure of their home loans even into their retirement age, principal barely reducing and most of the EMI going towards interest and the letters they are receiving recommending partial repayment of loan.

Though personally I prefer not to have any loan; I do realize that it is not always possible for all. However I would still suggest not to go for any loan other than home loan especially for buying your first home. The EMI should not be more than 30% of the combined post tax family income. Since the interest is charged on diminishing balance, the interest outgo would be huge in the initial years.

While going in for a loan, do not assume excellent salary hike year after year for 20 years. At some point, the salary may start stagnating except for a small yearly hike. Also what I commonly notice in double income families; it is assumed that the wife would always continue to work. I’m seeing that many a times when the woman of the house is forced to take a break even for few years from the career; the whole planning goes for a toss. Remember that you may be able to reduce your expenses, decrease the investments but never can avoid the liability.

For people who can afford to pay lump sum and buy a home, still it is better to go for a small loan while buying the house. Real estate sector being what it is; a banker’s due diligence is an added strength while buying a property. This loan can be closed in the short term and cost towards the same can be considered as ‘insurance’ against being cheated. Ofcourse, a banker’s due diligence is also not fool proof as we saw recently in Noida.

Some of you who wanted to invest lump sum in equities recently were disappointed when I discouraged you from doing so. Some others were wondering why I reduced the sum they wanted to invest. Because based on your life and financial situation, I felt that committing such sums may not be appropriate. No doubt that the opportunities are attractive for lump sum equity investments and our family is doing it and I’m also encouraging clients who can afford locking money for long term with out impacting their life or financial situation to do so.

Again no shirt fits all. Each one’s life situation and financial position is different and suggestions can be given only based on the same.

Even when some people after realizing what investing regularly for long term can do to their wealth; want to commit more sum than what I feel they should be doing, I discourage them and have the same reduced.

My intention is not to maximize our revenues but do what to my knowledge and judgment is good for the clients. If I can take care of this, I’m confident that our profession would be automatically taken care off. 

Recently had an opportunity to interact with a good fund manger in the industry. During the course of the discussion he mentioned that there are atleast 100 good companies whose market capitalization (the value of the company based on the stock price) is lesser even than the value of their land holdings. This means that an investor in any of this company gets a stake in the business almost free of cost. He did not provide any further details but I found the information interesting.

From what RBI has mentioned yesterday, looks like we are nearing or already peaked out on the interest rate cycle. Beyond a point, monetary tools cannot be effective in controlling inflation especially when the same is due to supply side constraints. Also demand for credit is moderating and growth is lesser than what it was expected to be. So if all goes well, we may be in for a last hike on home, car and personal loans. As banks find the deposit rates already expensive, they may not likely to go up any further.

There is lot more I feel like writing but see that this piece is exceeding in length. I would write again before end of this month.

3 Responses to “Wisely Speaking- 1”

  1. Usha said

    As always – packed with useful information and helpful tips. Please keep up the good work!


  2. amol said


    worth reading article.
    one request…please write more frequently…your articles are truly gem.

  3. Sujatha said

    Hi Muthu,

    It is worth a read…
    Yes , wondering why monthly once??

    Sujatha R

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