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

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Archive for the ‘Media’ Category

Akshaya Tritiya – What you are going to do?

Posted by Muthu on May 4, 2011

In the current (May’11) issue of ‘Gokulam Kadhir’, my article on money required for providing the freebies, subsidies and promises made to the people of Tamilnadu by the both ruling and opposition parties has appeared. The issue has hit the stands on Sunday.

The journalist who worked on this article called me yesterday and said that the editorial board of ‘Dina Thanthi’ group (which publishes ‘Gokulam Kadhir’) was happy with the way the article has come out. It seems that there are already words of appreciation from many quarters including political parties!

If it has come out well, it is because of the good ground work done by the above journalist before coming and meeting me.

Arriving at data points like how many women become pregnant in a year in Tamilnadu, how many would get married in a given year, how many cattle are required were pretty interesting. I wouldn’t say these are very accurate but a good guesstimate.

It’s not that I look good; still my photo appeared on the above story is quite scary. Keep it out of the reach of children.

In my last 3 years of contributions to media (print or visual and latest is digital), my implicit understanding is something like this; I contribute to the media as it provides me a platform to share my thoughts and also help me get visibility. As a professional, getting visibility definitely helps. It’s a fair deal.

However ‘Moneylife’ surprised me by being more than fair. I’ve received a cheque from them for the contributions made last month. This is the first time I’m getting paid for writing!

Akshaya Tritiya is going to be there in next few days. Are you getting ready to buy gold? I understand that you may end up doing what you want to do. So I’m not writing anything with a hope that it may change your mind but just to share my thoughts with you.

The concept of buying gold on Akshaya Tritiya is only around one and half decades old. Some clever jewellers who understand our emotions pertaining to auspicious days and gold has invented this and even they would not have expected it to be such a super hit.

People are telling me that Rs.17,000/- per sovereign is nothing when compared to Rs.70,000/- per sovereign it is going to reach in next few years!

I’ve written recently about long term cyclical nature of gold. It keeps rising for long and then keeps on falling for long.

Timing is always difficult and tricky in any investments.

The perception for bullishness is that as dollar gets weakened, gold would get further strengthened and would become the global currency.

In my opinion, this idea is far fetched.

There are countries which have already started trading in currencies other than dollar. So other currencies may replace dollar, if dollar gets weakened a lot.

The GDP of the world is fast expanding. Especially BRICS & parts of Africa are expected to grow strongly in the decades to come.

If dollar fails, there may be short term panic resulting in appreciation of gold but I do not see gold becoming medium of exchange.

There is not enough gold in this earth which can be circulated as coins for it match to the global GDP and its growth. The entire gold available in the world can be put into a 67 feet cube.

 As Buffett says, this gold does not produce anything, has no intrinsic value, does not generate any income and has zero utility.

He also points out that this 67 feet cube of gold can buy all farmlands in U.S.A, 10 companies the size of Exxon Mobil and still leave $1trillion of cash (which is roughlyIndia’s GDP!). But gold cannot produce what these can produce. Given an option, would you want to own all farmlands or companies like Exxon or simply sit on top of the 67 feet cube and keep fondling it!

Some more pointers from Warren Buffett on gold from what he shared with Shefali Anand of Wall Street Journal:

Investors who buy gold are counting on them becoming more attractive to other people in the future. That’s a whole different game, compared to investing.

When you buy gold, you’re betting on the price of the asset not on the productivity of the asset.

You can’t get excited because other people are excited. So, every now and then, there’s a craze to buy something even at very high, irrational prices. Then all of a sudden, the music stops, and the investment comes crashing down.

It is better to invest in productive assets like equities and farmlands.

Inflation is a very cruel tax because it lowers the worth of paper money.

If an investor wants to beat the inflation and to maintain the purchasing power, it is better to invest in good businesses and companies (equities) which keep growing. “

As per some bullish predictions, even if gold would appreciate 5 times from now, my opinion remains the same. Gold is a speculative asset because it is a pure price play with no productive or intrinsic value. Gold has no other value than what we attribute to it.

That is why even in equities, we advice investing, which is a growth and productive play and not trading or speculation which is a pure price play. We neither understand speculation nor intend to.

Some one told me about a gentleman who is supposed to be earning Rs.50 lakhs per month through a MLM scheme.  Even if these claims are true, I’m least attracted because this is not a productive or a growth way but mere transfer of money to one’s pocket from those who are at the bottom of the chain.

I’m not greedy about wealth and am fine with what comes through fair means.

We’ve always been advising investors to hold not more than 10% of their assets in gold. This is for diversification, a hedge against inflation and as something which would come handy at the times of global catastrophe.

If you’ve any immediate social need like marriage in the family, then buy gold. Price is immaterial because anyhow you would be needing gold.

If the social occasion is not in the near future or if you want to invest (as I said not more than 10% of your total assets), then I would suggest you to not to buy at one go but invest regularly through SIPs in gold funds. Please refer to my previous articles on advantages of investing in gold funds through SIP route.

I’ve a personal conviction that an investor would do well if he invests regularly and for long term in Indian equities. I do not share the same conviction with gold. I’m unable to have any visibility on long term price movement of gold, say for next 10 years. So please be open to the possibility that even in long term, despite averaging cost, you might end up in having a lower value.

If some of you feel that you understand gold market well and can enter it, make good gains and come out before, if and when burst happens, then try your luck.

Who knows? If some of these bullish predictions are true, you may end up even in a making a big kill!

But just be aware that what you are doing is very risky.

For an average investor, investing regularly and not committing more than 10% of one’s assets, would help him. If there is long term bullishness, he too stands to gain. If there is a burst, he would be able to minimize the losses due to averaging out of cost and appropriate asset allocation. 

Happy Akshaya Tritiya.

Posted in Gold, Media, Muthu's Musings | 1 Comment »

Appearing on Live talk show – Jaya TV- 12th April 2011

Posted by Muthu on April 11, 2011

I’m pleased to inform you that Jaya TV has been kind enough to invite  me  for their live talk show- Dial Jaya TV- tomorrow- 12th April 2011 (Tuesday) between 12.00 noon and 12.30p.m.

As always, those of you who are able to watch the program may kindly feel free to share your feedback.

Posted in Media | 1 Comment »

Gold Savings and Cancer Cure

Posted by Muthu on February 13, 2011

My contribution has appeared in the Q&A of current issue (dated 20.02.11) of Nanayam Vikatan which has hit the stands today. Thank you NV!

For those of us who feel 30% taxation in India is high can take consolation from the following data provided by Nanayam Vikatan.

In Sweden, the income tax rate is 59.17%. Likewise income tax rate for few other countries are as follows: Denmark- 59%, Netherland- 52%, Finland-51.5%, Austria-50%, Belguim-50%, Canada-48.25%, Israel- 46% and our unfriendly neighbour China- 45%.

Of course in western countries higher tax rates are matched by better social security. The only security we’ve is the guy standing outside the apartment with a blue uniform and a stick, paid out of the monthly maintenance fee collected from us!  

We’ve written in the past about poor performance of companies under Reliance Anil Ambani group. Some clients asked us last week about Reliance mutual fund coming under this group.

Mutual funds do not own either your money or the securities. They are with the custodians, supervised by trustees. Mutual funds only manage the assets for a fee. As long as the performance of a fund is good, there is no reason to move the money out.

I do not see a need to link the performance of the group companies while evaluating a mutual fund scheme.

For example, LIC appears very sound and profitable. But many of their mutual fund schemes are performing poorly and we do not recommend schemes of LIC mutual fund to our clients.

All mutual fund houses run under a premise that not all the investors would demand money at the same time. Something similar to your bank. If all the depositors demand money from the bank at the same time, a bank would cease to exist.

At the time of financial calamities, every banker dreads this scenario known as ‘bank run’.

If you recollect there was a beginning of a bank run with a leading private bank in 2008. Timely intervention by RBI and the finance minister saved the day for the bank.

In case of a fund house, the usual settlement period is T+3 days. This is for a normal redemption. Assuming all investors demand money at the same time, it would take a while to liquidate all the securities and pay the money. In such cases regulator may intervene, merge the fund house with another or take any other action which is in the best interests of investors. Only the regulator knows what it would do depending upon the situation. I can only guess.

However I can quote one example. In late 2008, due to global financial crisis, there was a huge redemption pressure on FMPs (Fixed Maturity Plans). There was an asset- liability mismatch due to the tenure of the security and immediate pressure on redemption. RBI opened a liquidity window to all mutual fund houses to meet the redemption pressure. The crisis was effectively managed with the help of RBI.

FMPs were subsequently restructured removing the redemption option before the tenure of the investments.

All I can tell you that mutual fund industry is well regulated in India. Protection of investors’ interest is of paramount importance to the regulator. As you are aware, value of mutual fund investments are subject to market risks. This is something inherent for all mutual fund investments. However given the regulatory structure, I do not see any fund house disappearing with the investors’ money. There is no need for fear on this front.

We never write about individual funds. We want to make an exemption and write about two unique offerings commencing this week which are not there in the industry so far.

First is the Gold Savings Fund offered by Reliance. Now investors can buy, hold and sell 24 carats gold without the hassles of storing it in the physical format. There is also no need for demat account and pay brokerage for each transaction. This fund holds the Gold ETF in demat form and issue an account statement for the same. This is similar to your other mutual fund investments where the fund house holds the securities in demat form and issue an account statement for the same.

Another example is like holding the money in bank and getting the bank statement. The money is safely held by bank and you can obtain one more statement if you loose or misplace the existing one.

Buying physical gold from banks or jewellers involves significant mark up price and wastages are also significant in many cases at the time of reselling it. Storage cost and risk of theft is also high.

You can be sure of the purity here and there is no entry load. There is also no exit load if the units are held for more than a year.

For gold owned through mutual funds, there is no wealth tax irrespective of the amount.

It is further tax efficient as holding of more than a year is considered as long term and the taxation is like that of a debt product.

One can invest as a low as even Rs.100/- every month in gold.

We would advise you to start saving gold through SIP mode for social occasions like daughter’s marriage etc.

We generally do not advice to hold more than 10% of one’s asset as Gold. Gold is a good inflation hedge. It does not provide superior returns like equity or real estate in the long run.

Like any other commodity, gold also goes through bull and bear cycles. The current bull cycle started in 1999. The last bear cycle lasted between 1980 to 1999.

Whenever there is war or any global financial crisis, gold becomes the most sought after commodity. However in the long run, gold has proven to match only inflation. So at best gold protects your capital from inflation. Also in a county like India, gold has lot of social value.

I do not know how the global financial situation would pan out in the next few years. The price movement of gold is likely to be correlated to this scenario.

However all I can suggest, for all your social needs, buy gold through SIP instead of buying it at one go. Likewise, invest up to 10% of your total assets in gold through SIP.

As far as investing lump sum is concerned, only invest smaller amounts. Given that gold has had a more than a decade of bull run, it is safe to be cautious and opt SIP route.

The next one is the debt fund for cancer cure, a social initiative by HDFC.

This is a 3 year debt fund rated AAA (so) by CRISIL. This is a capital protection oriented income scheme.

To support the social cause, there is no investment and advisory fee charged by the AMC. I understand that there is no expense ratio at all and the entire income is fully passed through.

There would be annual dividend. The investor has the option of donating 50% or 100% of the dividend income.

The dividend donation beneficiary is Indian Cancer Society (ICS).

Section 80G benefit is available for the donations made through dividend.

Minimum application amount is Rs.1 Lakh and in multiples of Rs.1000/- thereafter.

Assuming you opt for 50% dividend donation, you would still end up earning better than your savings bank account and would also receive the capital back at the end of 3 years.

We would be glad if each of you can invest atleast Rs.1 lakh in this scheme.  By this

1)    You would be donating a decent sum every year for 3 years towards cancer prevention and eradication

2)    You would also get a return superior to your SB A/C after donating 50% of your dividend income

3)    Your capital also would be back in your hands after 3 years.

Hats off to HDFC and Mr. Deepak Parekh for this initiative.

You now have option of SIP in gold and philanthropy for cancer cure.

You may choose either or both or neither!

Posted in Giving, Gold, Media, Mutual Funds | Leave a Comment »

Charlie Munger’s investment rules

Posted by Muthu on February 3, 2011

My interview has appeared in an article in the current issue (February’11- page No. 12 & 13) of Gokulam Kadhir that has hit the stands yesterday.

My wife was amused to see my photo along with that of world leaders. Well this is the only place where I can share space with them! Otherwise I’ve to take a cue from parrot astrologers and build an album with the help of technology. Wouldn’t it be nice if I’ve a photo in office reflecting a serious discussion with President Obama?

The current market scenario all the more convinces me the efficacy of investing in equities through SIP.

When market touched 21000 points during Diwali, people were predicting that it would touch 25000 points by this month or next. Now the same people have singing the tune that it would go below 15000. Well forecasters, the market may prove you again wrong.

Interestingly couple of days ago the central statistical organization has upped our GDP growth rate for the current year.

I’m glad that I’m not in the unenviable and meaningless job of predicting the markets daily. I would prefer many other jobs over the same.

Having long term perspective definitely helps to ignore short term noises completely.

I don’t tell something which I myself don’t follow or believe in. I’m glad that this conviction helps in our clients mapping their investments to their long term goals.

Short term interest rates are very attractive. People who do not have need for liquidity for a year or more may consider investing in Fixed Maturity Plans (FMPs). However please note that unlike their previous avatar, FMPs now do not offer any exit option before the date of redemption, should not provide indicative yield and proposed portfolio. If you are fine with this, given the tax advantage, then FMPs are worth considering for investments of 1 to 2 year period.

About investing in gold, we’ve written in the past and explained to our clients in person, what our views are. There is no change to that.

One mutual fund house is bringing in from this month the concept of investing in gold. I’m not talking about gold ETFs but an open ended fund. The NAV would track the price of the gold. One may go for either lumpsum or SIP in gold. The investor would have all the benefits of owning gold minus wastages and charges that come with physical possession.

Unlike ETF, here you would not need a demat account and associated charges (broking, DP and transaction charges) for owning gold in e-form. Like your other mutual fund investments, the fund house would keep it in demat form and would issue an account statement from time to time.

If the effort by this fund house draws good response, other fund houses may also come with a similar product sooner or later.

Charlie Munger is not new to you. You may know him from our previous postings. He is the vice-chairman of Berkshire Hathaway, the investment vehicle of Warren Buffett.

Here are Munger’s investment rules.

1)     Measure risk- All investments evaluations should begin by measuring risk, especially reputational.

2)     Be independent– Only in fairy tales are emperors told they’re naked.

3)     Prepare ahead – The only way to win is to work, work, work and hope to have a few insights.

4)     Have intellectual humility – Acknowledging what you don’t know is the dawning of wisdom.

5)     Analyze rigorously – Use effective checklists to minimize errors and omissions.

6)     Allocate assets wisely – Proper allocation of capital is an investor’s no.1 job.

7)     Have patience – Resist the natural human bias to act.

8)     Be decisive – When proper circumstances present themselves, act with decisiveness and conviction.

9)     Be ready for change – Accept unremovable complexity.

10) Stay focused – Keep it simple and remember what you set out to do.

Posted in General, Media, Wealth | Leave a Comment »

Do you know?

Posted by Muthu on January 6, 2011

I’m going to share today some of the interesting stats and facts I read recently in personal finance magazines and portals along with my inputs.

I’m thankful to ‘Nanayam Vikatan’ team for continuing to provide opportunity since 2008. My contribution has appeared in the Q&A section of the current  issue as well.

We are entering into a decade of high growth.

As mentioned earlier, our GDP is expected to multiply by 4 times and reach $5 trillion in 2020.

The savings during this entire decade is estimated to be around $10 trillion.

There are lot of predictions that Sensex is expected to cross one lakh mark before the end of the decade. Extrapolating the 19% annualized returns of Sensex for the last 30 years, this definitely looks possible.

The market capitalization of Sensex stocks in the year 2001 is Rs.7 lakhs crores. Now it is around Rs.73 lakhs crores.

At 19% annualized returns, if you’ve invested Rs.1 lakh in Sensex in 1980, it is worth around Rs.1.85 crores now. A return of 185 times in 30 years.

In the past, over a long term, many good mutual funds have beaten the returns of Sensex or their respective indices by a comfortable margin.

If you’ve invested Rs.1 Lakh in 1995 in one of the funds in our recommended list, it is worth around Rs.29  lakhs now. A return of 29 times in 16 years. An annualized return of 23.48%. 

We would be investing $1 trillion in infrastructure during next 5 years.

This is expected to take the economic growth rate to double digits.

When people talk to me about real estate, they talk about the growth in value of a particular piece of property.

No two pieces of properties are the same.

When you look at an asset class, you need to look at the overall performance as a category (like Sensex) and not few areas which have greatly appreciated in value.

Though the real estate sector lacks any reliable and broadly accepted indices like financial assets, some studies peg the annualized return of real estate as an asset class around 12%.

If you look at a particular piece of property instead of real estate as a whole, then we need to look at individual stocks instead of Index or indices.

I can give you 3 examples.

In 1980, if you’ve invested Rs.10,000 in shares of Wipro, it’s current worth is, hold your breath, Rs.465 crores. A return of 4.65 lakhs times in 30 years! Mind boggling. An annualized return of 43%.

In early 1992, if you’ve invested Rs.9500 in 100 shares of Infosys, it’s worth now is around Rs.4 crores.  A return of 4210 times in 18 years. An annualized return of 55%.

In late 2000, if you’ve invested Rs.3.82 lakhs in shares of Axis Bank, it’s worth now is around Rs.1.5 crores.  A return of 392 times in 10 years. An annualized return of 45%.

Who would have made this kind of money is not the one who is looking at stock price or NAV everyday but the one who reviews the performance once in 5 years. Buffett often says to look at not less than 5 year averages. We advice equity investments for a period not less than 10 years.

We can give many more examples of individual stocks like this.

But the right way of looking at equity asset class is not individual stocks, but index or indices.

The same way, when you look at real estate, it should not be individual piece of property, but the overall asset class.

Don’t get me wrong. Real estate should be part of one’s portfolio.

What surprises me is people’s obsession with real estate and gold and their blind belief that they are risk free and never goes down in value.

In Japan, where land is very scarce, I understand that the real estate price have crashed by more than 70% in last 20 years. Sadly even at current prices, real estate is a dream for many Japanese people.

A middle class person cannot imagine owning a home in Chennai today. This is a very unhealthy sign.

Indians are good at savings but very poor in investing.

There are more than 1 crore savings bank accounts which are dormant and have unclaimed balances. This is because I’m amazed to see people having as many as 12 to 15 bank accounts.

You don’t need more than 2 or 3 savings bank accounts– one for family expenses, one for investments and the remaining one for miscellaneous transactions.

In a fast growing economy, if you channelize your saving more into financial assets instead of physical assets, you help yourself and the economy. Otherwise, instead of you making money, foreign investors alone would get the opportunity to make money.

In 1994, there were only 0.8 phone connections per 100 people. Today it is 60 per 100 people.

Whereas in 1993, the total assets under management of mutual funds were Rs.47,000 crores. Now in the beginning of 2011, it is Rs.6.75 lakhs crores.

Considering the fact in 1993, the equity corpus and retail money was dominant in mutual fund industry, now short term debt corpus and institutional money is dominant. This indicates retail investor never participated in the excellent returns offered by the markets during the last 2 decades.

8 million investors out of 300 million+ potential investors is a pathetic number.

All over the world, mutual fund industry’s corpus are in multiples of bank deposits. Whereas in India, some report indicates, the corpus is around 6% of the bank deposits.

Even in EPF (Employee Provident Fund), the central provident fund commissioner has mentioned that 90% of people close the account within 2 years of leaving an employment. I can only wonder as to why with even a risk free product like PF, people do not want to think long term.

Somehow Indians are not used to long term in financial assets and that explains many lost and wasted opportunities.  

At the end of current decade, close to 70% of our population would be working population. A phenomenal number and would be the largest in the world.

In the current working population, only 10% work in the organized sector and the remaining 90% works in unorganized sector. Hopefully this number also would go up in the next one decade so that more employees get some welfare benefits too.

To summarize, I can tell you is that people who have missed the bus in the last decade have opportunity to make up in the current decade.

Invest in financial assets, invest for long term and in the interest of your own wealth, don’t keep regularly looking at what your investments are doing. That is your advisor’s job. You focus on your job or business or profession.

When I was investing for short term, I never made any money. Infact I lost heavily.

Whatever little I’ve today is the result of shift in focus.

I wish that in your own interest you develop a long term perspective.

Disclaimer:  Wherever mutual funds have been mentioned in the above article, please note that mutual fund investments are subject to market risks. Past performance may or may not be repeated in future. Please read the scheme related documents carefully before investing.

Posted in Economy, General, Media, Wealth | 5 Comments »