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Do You Have A Spending Policy?

Your life is bound by innumerable policies. Starting with insurance policies, you come across policies for everything in your life:

There is parking policy, ATM withdrawal policy, Lost Card policy, HR Policy, Travel Policy, Reimbursement Policy, BCRP, Staff Purchase Policy, ESOP, ESPP… Except your spending policy.

What is your spending policy? Is it ‘need based’ or ‘emotion based’? Do you just buy now and think of how to pay later? Do you spend only when you receive your bonuses? Do you embed your spending requirements in your family budget? Or do you simply have a policy of ‘having no policy’? Please remember, when I say ‘spending’ here it means spending on ‘discretionary’ things and not ‘necessities’.

It is important that you have a spending policy. I just went through today’s newspaper and found these sales and marketing enticements:

  • 24 Hours delivery challenge, get 3% cash back (if we fail to honour our commitment)
  • Free Installation, Free Stabiliser, Free Delivery (all worth Rs.5000/)
  • Free assured gift (up to Rs.4999/-)
  • Hurry! Stocks are limited
  • Credit Card EMI Shop and earn 5 times payback points
  • The great exchange offer
  • Get up to 40% off
  • Last 3 days to redeem your exchange coupon and get up to 25% extra discount
  • Lifetime warranty of 15 years
  • Easy Finance Options
  • Special offer on 3/6/9 EMIs
  • Easy Finance on Credit Cards
  • Same day delivery
  • 80% off on international prices
  • Nil Margin Sales
  • Pay Rs.599/- only and take home any electronics product at 0% interest
  • Free Gift coupons worth Rs.3000/- 0% interest in 8 easy EMIs

I have eliminated some of the common enticements of type ‘buy 1 and take 3’.

Best of the talents are working overtime to come up with newer and better ‘enticements’ and ‘traps’ to induce you to spend more and more. In fact, currently India’s growth is sustained by spending or consumption. Spending is good for the economy. It is also good for you if you are an investor. If you anticipate that spend on health care are likely to increase, don’t rush to buy health insurance. You buy shares of companies in health care industry. This can be replicated in other sectors of the economy.

Coming back to the subject of spending policy, we professionals more or less agree that ‘cash-only’ spending policy is the best one for you. You buy things you desire only when you have your own cash.

By the way, what is your most liked sales offer? I liked “Lifetime warranty for 15 years” just for the built-in contradiction.


Can You Be Your Own Banker?

How difficult or how easy it is for you to put a strong foundation to your financial future?  If you ask me, it is fairly simple and easy – and hence mostly ignored.  Can you become your own banker?  Yes, it is possible.  Let us analyse the reason why you wish to avail easy credits such as credit card borrowings and personal loans.  Mostly, it is to buy items such as a bike or a car or white goods.  You are aware that such loans are easy to obtain and difficult to service.  If you become your own banker, you can borrow from yourself (not difficult paper work!) and pay back at your own pace. Here are the steps through which you can set up your own mini bank:

a)      Start contributing small instalments in to an account, which you can achieve easily, say starting an SIP in a debt fund.

b)      If you contribute let us say Rs.5,000/- each month, in a year you will have Rs.60,000/- in the account and in 3 years Rs.180,000/- plus the growth.

c)      When you need to buy any of the things I mentioned above, borrow from your own bank (debt mutual fund portfolio) and repay with interest (continue the SIP).

If it is such a simple thing to do, why many don’t do it?  The answer lies in the simple economic behaviour which says that “you consider today’s needs more important than tomorrow’s needs”.  To fulfil such needs, you have to borrow if you do not have the necessary money today.  Saving today for tomorrow’s needs requires great sacrifice by you but it is worth doing.  If you develop this habit, you can easily run your own mini bank, you being the sole customer and this habit would become a very strong foundation for your financial future.

Can Life Insurance Industry Sustain This Onslaught?

What started as a slow drizzle has become a torrent now.  I am talking about the negative publicity life insurance industry is accumulating and the industry’s declining fortunes.

There used to be a time, not too long ago, in our country, when people talked of ‘investing’ they meant ‘buying insurance policy’.  Those were the golden days of saving.  When saving instruments such as PPF or NSC used to give double digit returns (inflation was also high but effects were not felt much because of low levels of urbanisation and low consumption of goods and services), a saving plan would take care of all the future needs such as children education, their marriage and one’s own retirement plan as well.  Salaried employees were happy earning double digit tax free returns in their provident fund account.  What was left after saving was ‘invested’ in ‘policies’.

When I meet clients who started saving in that era, I find them having a bunch of ‘policies’ of several varieties – endowment, money back, guaranteed returns policies and so on but no term plan.  The ones that came nearest to a term plan were double-cover or triple-cover policies or ‘return of premium’ policies.

Sometime afterwards, the industry was opened up and private life insurance providers sprang to life.  With the experience of best global practices and David’s attitude, a product, which is much maligned today, called ULIP was unleashed on unsuspecting masses by ‘consultants’ and ‘planners’ as opposed to ‘agents’.   New sales channels were opened up and competition was heralded.  Goliathans remained as agents and, with taglines that they know the country better, they did what they knew best – locust attack.  It was a ‘winner takes all’ war for few years to gain market share.  Sales ramped up quickly and people loaded themselves with the new age product called ULIP, a product that came in all metallic names, colours and hues.  Suddenly people had gold, silver, platinum and super and super plus plans with them. All types of savers were introduced to the culture of investing and risk taking (unknowingly of course). Equity investment entered Indian households masqueraded in book sized ULIP contracts.  Making money seemed sinfully simple.  Million Dollar Sales Producers, consultants, planners and few daring agents too laughed all their way to the bank.

Murphy’s Law struck the new age investors in the year 2008.  The sheen of ‘3-year investment product’ was lost all of sudden and for ever.  With the heralding of social networking and bloggers finding their feet firmly, the attack of the affected began in the right earnest.  Today, ULIP stands much maligned, reputation of many providers shattered and business shrinking. Many Million Dollar sales producers of ULIP era have suddenly become evangelists of basic insurance product called term insurance.  As far as ULIP and to some extent traditional ‘with profit’ insurance products are concerned, bad publicity, what started as a slow drizzle has become a torrent now.  Every ‘worth his salt’ blogger in the area of personal finance, every newspaper, magazine, personal finance magazines, financial planner have a word that says how bad it is to combine investment with insurance. Would the industry be able to withstand such a concerted onslaught when perceivedly even the regulator is not helping?  Only time will tell.

From a financial planner’s perspective and also according to the text book, a life insurer has two major jobs – to provide income protection for (a) lives that are likely to end sooner than expected and (b) lives that are likely to live longer than expected.  On these lines, the new trend of selling term insurances policies, both online and off-line, takes care of point (a) above.  Point (b) is a bigger objective to be met fully yet.  It will be a bigger role for insurance companies because New Pension System (NPS) stipulates that all pensions (annuities) for the monies collected under NPS subscription would be rolled out through life insurance companies.  This means all members of NPS would receive annuities from any of the life insurance providers.

Looking at the current scenario, we can estimate how neolithic the existing product regime is in the area of pension and annuities.  The existing situation also provides a window of opportunity for innovative product offerings.  Would the Davids and the Goliath rise to the occasion?

Budgeting Can Help You To Plan Your Tax

Are you the one to wake-up late and make your tax planning investments only after your employer starts sending reminders?  There are several advantages if you plan ahead, right now in the month of April.

a)      Family budget is a powerful tool available to you that helps you manage your money better.  It helps you plan your cash outflows accurately.  It also helps you to balance (i) your need to save and invest and (ii) your regular expenses and outflows.

b)      You can take your time and research the products well, ask right questions and be a well-informed buyer.  If you are of do-it-yourself type, today internet is a veritable host to myriad options.  However, be cautious about information overload and vested interests.

c)      If you chose to invest in those instruments with underlying volatile assets such as ELSS schemes, you can do rupee-cost averaging through Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).

d)     Have you noticed that some financial products are taken off the shelf usually on the last day of the financial year and such announcements are made usually in the month of January?  This marketing gimmick is adopted quite successfully by Life Insurance providers.  Such ‘last’ dates always create an urgency in the buyer to latch on to such products under the assumption that ‘if it is going off the shelf, then it must be good’.  This is not always true.  Even if the product is good, is it good for you?  Sales persons are trained to ‘be closing always’ and they have a vested interest in closing a deal as early as possible.  “Going off shelf” is usually a marketing gimmick to help sales persons.

e)      Most of the employers in Bangalore have mid-December or mid-January as the last months to provide them with ‘proof of investments’.  Many a times, your last minute effort is not good enough to get ‘proper’ proof of investment that is acceptable to your employer and thereby you are denied of the exemptions.  Seeking refund from income tax authorities, though is an option, is quite long draw out process.

f)       Your financial plan deserves all the help from you in allowing it to plan your financial affairs.  Help your financial plan and help yourself greatly.

As Napoleon Hill says, procrastination is the bad habit of putting of until the day after tomorrow what should have been done the day before yesterday. You will end up with either ill-fitting or costly financial product in your portfolio with last minute purchases.

Inflation is a major threat to retirees – An interview with


A Well written “Questions and answers about the crisis in Greece”

A nicely written and easy to understand FAQ on Greece default issue

A good take on “between the cup and the lip”


Budget 2011 – A financial planner’s wish list

Once Dr Manmohan Singh stopped being the finance minister, the expectation from the annual budget was never high, barring few not-so-dreamy ‘dream budgets’ Chidambaram presented. Pranab Da being the old war horse of the Indian politics, I can expect him to give you a drink of boiled mineral water in this budget as well.

That apart, my view is that some of the tax breaks provided to large number of investors has lost their relevance, they being the relics of socialistic era when Big Brother Govt would decide all aspects of our endeavour; what to eat, where to sleep, where to work, what to study and also where to save and invest. Look at the list of saving & investment options such as NSC, PPF, Life Insurance, and so on. All these are instruments created with the purpose of enabling the Govt. to borrow money from the public at subsidised rates (high cost to Govt. and artificially high rates of returns to the investors). When the economy began it’s journey towards being a market economy, the returns in the same instruments are not attractive any more. These tax breaks also induce the investors to be risk-averse. When our tax collection is so buoyant and new taxes (service tax) are being collected, why the Govt should provide tax breaks on savings and investments? This would vitiate the investment decision and tax payer would unnecessarily end up saving and investing sub optimally. Some of the instruments purchased in the initial years of low-income would not serve the purpose when the investor moves ahead. Because of lock-ins and contractual obligations investor would have to continue to invest sub-optimally, like it or not.

Let us take the case of Life Insurance premium. In our country no one buys only life cover. Under the garb of life cover, insurance companies collect huge money towards participating (traditional) and Unit Linked Plans. This leads to a mis-allocation of scarce investible surpluses both ways; investors in traditional plans may actually move ahead in their risk appetite but cannot redirect the investments. At the same time, investors in ULIPs may actually would not like to invest there because of high costs. These mis-allocations happen because of tax planning instruments.

Even when our economy had the moorings of socialism and later also, our govt. is not in a position to provide any meaningful social welfare to the billion plus population. The least it can do is to reduce the cost of health care. This can be easily achieved by providing good tax break on cost of health insurance. You just look at the niggardly limits set for this and then you will realise the fallacy of the system. It provides a limit of Rs.1 Lakh on mis-allocation of savings and investments but limits the exemption on health insurance costs to just Rs.15,000/- for an assessee. When the cost of quality health care is increasing exponentially, this limit actually induces the people to buy low-limit covers which may not be sufficient when the actual need arises.

These are couple of examples how the financial decisions can be mis-directed because of tax benefits and the litany can go on and on. The best option for the Govt. would be to give tax benefits only on expenses and not on savings and investments. Let people decide what is good for them. When we know whom to elect as our rulers, can’t we decide where and how to save and invest?

With distributors cold, AMCs turn to banks to sell units – a totally biased view

One more effort by the mutual fund industry to stave off loss of business. Look at the report published in ‘The Economic Times’ on 19/06/2010.

But this report makes biased and unsubstantiated accusation against independent financial advisors (referred to in the report as ‘independent fund distributors’ a term that is not in common use) that they indulge in portfolio churning. Nothing is more far away from truth than this. It is commonly known fact the independent financial advisors (IFAs) assiduously nurture the long term relationship with the clients unlike institutional advisors/distributors where the employees come and go and principal-agent relationship might sour (Post offices stop selling mutual funds – It is very difficult to imagine how a long term needs of the customer is looked after under these circumstances.

I have nothing against AMC tying up with the banks to distribute mutual funds but the reason given by the author of this article smacks bias. Are there any fact published by either the regulator, or the trade body or the AMC as to how many IFAs indulged in such practices and what remedial measure were taken, if any? At the same time has the regulator/trade body captured and published the data comparing various distribution channels and the stickiness? Ask any AMC and they will tell you in private how large financial institutional channels indulge in frequent churning.

Banks handle all the transactions in their office where as it is an IFA who delivers the advise and the services at the door steps of the investor. With reducing upfront commissions and customer’s unwillingness to pay for the services it is no more economically viable to distribute mutual funds for an IFA. When the regulator is moving towards a regime where all the upfront payout to the distributors are going to stopped how can banking channel expect a payout of 0.5% to 1% as indicated in the report?

My experience says that it is some of the well known high profile wealth managers who indulge in churning the portfolio to generate revenues. A sizeable number of our clients are the ones who were fed up with such relationships and have come to us. It is no secret that some of the institutions either coerce or induce investors to buy in to unwanted schemes.

It will be a huge task for the banking sector to train their personnel and get them the certification required to distribute mutual funds. If they succeed in this, IFAs would welcome this exercise as it will be good for the industry as a whole. However, I wonder, if the banking channel was not successful when 2.25% commission was payable, would they be now?

You must ask questions

Dear Reader

At Procyon Financial Planners, of late, we are seeing a distinct and welcome change in the attitude of the investors. It appears, all of a sudden, that there is a surge of interest amongst the investors about financial planning.  Invariably, investors are keen to know about qualification and experience of financial planners, number of clients they serve and so on.

Since the time we began our financial planning practice in Bengaluru (then Bangalore) in 2006, we are providing information to our clients and investors about the need for financial planning. So much so that some of our clients started complaining that we were much focused on financial planning! This change of questioning attitude augurs well for investors in general and young earners in particular.

Some times, we receive funny queries that are actually very long winding and seem to have been directly influenced by the literature available on the net in developed countries. I do not see anything wrong in this and in fact welcome this information seeking process before hiring your financial planner. At the same time, may I remind the general investor that India is almost three decades behind in adopting financial planning principles in the area of personal finance and very much at the lower end of the learning curve? You will find that a Certified Financial Planner in India can boast of only 4 year’s experience because it is only in 2005 the first batch of CFPs obtained their certification.  It is only now in circa 2009 that one of regulator has fleetingly mentioned that advisors should adopt financial planning process. Funnily, the same regulator has forgotten to define what he means by ‘financial planning’.  Investor seems to be ahead of both the financial planning profession and finacial regulation.  No wonder this is happening because we live in the age of seemless flow of information.

Investors must also keep it in mind that in India there are regulations pertaining to selling financial products but not enough about financial planning services. One regulator, with a recent regulatory intervention has in one stroke converted a class of product sellers to financial advisors. Does it serve any one’s interest that a product seller has to work as financial advisor with rudimentary regulatory frame work, without any specialised training and such necessities?  Dé·jà vu all over again? 

That aside, I urge investors in India to exercise the same diligence and questioning attitude when buying financial products as well. I am raising this particular issue here because I see a huge gap between the way an investor,

(a) queries a financial planner about the costs, services, past experience and so on, and

(b) goes through the process of buying a financial product.

Is it because the questions one should ask when it comes to hiring a financial planner are well documented in the World Wide Web and questions one should ask when buying a financial product are not so well documented?

If you apply the same principle of ‘question your financial planners thoroughly before hiring’ when you buy a financial product as well, you may probably not end up facing the huge gap between what is said and what is delivered.

This issue is particularly relevant if the reader understands the fact that there are millions of financial product sellers in India where as the number of financial planners are a miniscule part of that number.

It would be interesting to know how you as investor failed by not asking right questions or benefitted by asking the right questions when buying a financial product.