Wise Wealth Advisors

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

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Archive for the ‘Wisely Speaking’ Category

Wisely Speaking- 2

Posted by Muthu on October 19, 2011

I’ve contributed for the cover story on gold in the October’11 issue of ‘Gokulam Kadhir’. It is amusing to note that what I said and what I did not say; both have appeared as my contribution:-) Spoke to the journalist and suggested that differentiation be made between my inputs and that of his. 

There is propaganda going on that Gujarat is the best growing state in theIndia. No doubt that the state is doing well on economic indicators; but other better growth stories are simply not highlighted. 

Bihar is the fastest growing state in India at 14.5%. Next comes Tamilnadu at 11.74%.

If opposition wants to project development as an example without the baggage of religious intolerance; then Chhattisgarh fits the bill. It has been growing much better than Gujaratat at 11.57%. The state’s per capita income has increased by more than 50% the last 5 years. It along with Tamilnadu is ranked the best in PDS (Public Distribution System) with only 4% slippages. Raman Singh deserves lot more credit than Modi. The development in Chhattisgarh is an inclusive one and no segment of the population is kept out of the growth.

The most important things is Chhattisgarh has achieved the above despite strong Maoist insurgence.

As per the latest report the dollar millionaires (people who have investible surplus of around Rs.5 crore+, excluding primary residence) inIndiais around 1.5 lakhs. So roughly we can assume that there are 1.5 lakh households. The total number of households inIndiais 225 million. So 0.06% population of the country are only dollar millionaires.

There is another yardstick which is being increasingly used to define rich. These are households which own a primary residence and have a positive networth with investible surplus of $100,000 (around Rs.50 lakhs). By this criterion, we have 3 million households inIndia, 1.33% of population which can be classified as rich.

The interesting debate which was going on for the last few weeks is Rs.32/- per day as poverty line. Since I’ve already written a lot about fallacy of this poverty line, I don’t want to go through the same again. I’ve a suggestion for planning commission. Declare that anyone who owns a mobile phone connection is above poverty line.This means that more than 70% of the country is already above poverty line and in next few years there would not be any poor left in this country.

When Anna & team captured the imagination of the media on 24/7 basis; I wrote a satire on the same. Some wise counsel prevented me from publishing it as it would go against the ‘middle class’ mood. Sadly for this country, which tries to create a super human at every available opportunity; my thoughts are coming true.

Corruption like honesty can never be eliminated. Laws can be made and it can be kept in check. A most corruption nation like ours has tremendous scope of improvement; but definitely not on the lines suggested by Anna and his self righteous team. I read somewhere that saline water which normally costs around $1 is procured at $8 by Medicare in U.S.A. As a nation develops, corruption gets replaced by lobbying (i.e.) corruption becomes transparent and measurable:-) 

CLSA has mentioned that they expect equities in India to provide 14% annualized returns and real estate at 5%.

Talking about real estate, there are certain basic information one needs to be aware while looking at a flat. When a promoter offers a 2 BHK, 1000 square feet flat for sale @ say Rs.8000/- per sq.ft, you may end up actually occupying only 750 sq.ft.

What a promoter offers is a super built up area which includes common areas like lift, stairs, passages etc.

Built up area refer to the area you occupy including the walls.

Carpet area is the actual area you occupy in the flat. Carpet area means the area on which you can lay out a carpet, between wall to wall.

Roughly the carpet area is 75% of the super built area. The higher the proportion of carpet area; the better value for money you are getting. One of our clients who is promoting a project told me recently that the flats he would be offering would have 81% as carpet area.

Also many projects these days offers lot of amenities. Before you buy a flat, ask yourself whether you need these facilities. Because none of this comes free of cost and the monthly amount you need to pay for these would be a mini EMI.

I feel that going forward in metros and bigger cities, one bed room flat may become a norm.

For middle and upper middle class population, the price of a flat now is roughly ten times of their annual CTC. As a thumb rule, the price should not be more than 3 times of one’s annual income; a scenario which may be next to impossible in cities.

Considering the affordability, nuclear families, more migration into urban areas; one BHK would be a better investment both in terms of rental yield and easy saleability.

When we look at buying a stock, we look at its PE multiple; this means how many years of earnings (income) we are willing to pay today to acquire a share. Generally, higher the PE, the stock is considered expensive.

A similar comparison for a flat would be the rent. A Rs.1 crore flat in Adyar may fetch an annual rent of Rs.3 lakh today. This means the ‘Price to rent’ (PR multiple) is 33 times. As a thumb rule, any price which is more than 15 years rent is considered expensive.

In the above scenario, the rental yield works out to 3% per annum. A rental yield of 6% and above is considered as a good investment.

For people who are finding it difficult to service EMI due to higher interest rate, good news may come latest by March’12. RBI expects the inflation to settle around 7% by then. This is partly due to higher base effect. When inflation comes down, interest rate too would automatically come down.

Talking about interest rates; people who invest in MIPs need to remember that the suggested investment tenure is 5 years. The tenure is suggested keeping in mind the nature of interest cycle in our country. In 2008, when one of the MIP we suggested gave a negative return, a client was anxious even though he was very well made aware of the tenure of the product at the time of positioning it. The same fund has now given an annualized return of well above 15% during the last 3 years.

It is very easy to have conviction in good times and when results are immediate. To get good results, one needs to understand the nature of the investment and its tenure. Any mismatch in this is a sure recipe for disappointment.

In markets, patience, conviction and courage are supreme virtues than knowledge. As I always mention all information is not knowledge and all knowledge is not wisdom.

So when you invest in equity with a 10 year outlook, don’t keep looking at the monthly statement. Or rather look at the statement without emotionally reacting to the same. There is no point in measuring short term performance of a long term investment.  Neither the exaggerated return of the bull market nor the poor return of the bear market is an indicator of long term return.

If you ask me, the key to investing is discipline and patience.

People earn very poorly from markets because of emotional cycle of investing; buying at market highs and selling at market lows. This is because when markets are high, our confidence level is high and when markets are low, our fear is high.

Investing regularly and for long term acts as a hedge against this emotional cycle.

The monthly SIP book size of the industry is Rs.1300 crores with 6 million folios. Assuming an investor has atleast 2 folios, there should be around 3 million people in the country who should be investing regularly through SIPs. If this 3 million can have develop unwavering conviction and stay course for  next few years, the results itself would serve as a positive reinforcement that they are on the right path and bring more people (what is 3 million out of 300 million investible population?) into capital markets. A well developed and participative capital market is an essential ingredient for economic growth.

I heard a fund manager saying that as a country we save $2 billion a day and NRI remittances are $1 billion every week. Whereas the entire size of the equity funds in the country is only $40 billion; 20 days of our national savings??! I don’t know how he arrived at the above saving number. As our GDP is around $1.25 trillion, at 33% savings rate, we still save around $1.2 billion every day.

While we are saving more than a billion dollar a day, do you know what  U.S is doing? Busy borrowing more than $4 billion a day! 

When they say God bless the United States of America; they really mean it.

Posted in General, Media, Muthu's Musings, Wisely Speaking | 2 Comments »

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.

Posted in General, Muthu's Musings, Wisely Speaking | 3 Comments »