Khota Paisa

Why You Don’t Need A Demat Account?

Posted in General by khotapaisa on February 16, 2010

When I first started investing, I opened a demat account with my bank. I started investing online thru mutual funds. I was doing exactly what others around me were doing. But soon I was using the demat account as my current account. I would buy fund (though on ad-hoc basis) and feel good about the fact that I had saved. But I would end up redeeming units whenever I needed money. The reason for withdrawal could be anything from birthday expenses to jewellary to even plane tickets. Over a period, I realised that I was withdrawing just because it was too easy (just few clicks) for me to do so. The ease of investment prvided by online demat account also resulted in many unneccesary emotional buys as I would buy on impulse. The demat account was actually becoming an impediment to saving towards long-term goals like retirement, child education etc. I finally decided to stop using my online demat account. I moved to the good old way of investment (paper based) thru my financial advisor. This meant that for any buy or sell, I had to call the advisor. He would then come to get the signature, cheque etc and process the request. This added extra hassle & time to any transaction I did. Though I never felt the extra hassle  or time involved, it drastically reduced no. of buys & sells in my portfolio. Another added advantage was the absense of online status of investment (though recently, the advisor has started providing this service). For a lot of investors, a big reason to sell or churn the portfolio is the ups & downs the investor observes on daily basis. So the less the investor looks at the portfolio, the better for the investor.
Recently, I sold the last holding in my online demat account. I am demat-free now!

Mutual Funds – Going The Wrong Way

Posted in General by khotapaisa on February 14, 2010

A few days back, I read a news about these new mutual fund enabled ATMs called Super ATMs. It seems that SEBI is going ahead with this concept of super atm which would allow the investor to access mutual funds at the click of a button. What surprised me was the need to commoditize MFs. Why does the investor need to be able to buy/sell fund at the click of a button? First of all mutual funds, unlike stocks, are not tradable entities. Mutual funds are not designed to be bought/sold daily. Secondly, financial products (specially investment products) are complex products. They need to be understood well before being bought/sold. This means that funds, like any investemt product, MUST NOT be bought or sold without advice or knowledge. Infact, the more easy you make it for the investor to buy/sell funds, they more likely they are to churn or tap into the portfolio. Having said that, I am not against use of technology/automation to make life easy. But the question is how easy? A more prudent step would have been to spend the money on investor education. Another significant step would be to make it mandatory for fund houses to regularly release fund paramaters like standard deviation, churn ratio, sharpe ratio etc. This would be a big step towards pushing product information towards the ingestor as against the current pull-based mechanism where the investor has to put effort to get these information. There are so many issues with the mutual fund industry and the last thing it needs is the so-called Super ATMs.

Funds – Going The Online Way

Posted in General by khotapaisa on November 22, 2009

SEBI recently issued a circular stating thet funds will be allowed to be transacted electronically. This will allow the fund distributors to sell/redeem funds electronically. This is going to compliment the existing paperwork route available. So, how does it effect the common investor? Well, I guess it doesn’t add much value to the investor for the following reasons.

– Investors can buy/redeem fund online even now using services of various fund distributors like ICICI, ShareKhan etc. So for these investors, it doesn’t make much difference.

– Investors who go thru the paperwork (filling up the form & giving it to agent etc), would not see much value add for moving towards online transaction, specially those who don’t have existing demat account.

– Funds, unlike stocks, are not traded. They don’t need quick order execution and timing. So, the advanatges of transacting online (timing, hassle-free trading etc) don’t hold good for funds.

– Most of the investments in funds are done offline via distributors who also provide recommendation. This is in contrast to stocks which are traded based on tips & trends and are time-critical.

Having said that, the move to allow online fund transaction is not without merit. The biggest advantage of this move is the exposure of funds to a larger audience. With online fund transaction, brokers will also be able to sell/redeem funds. Since the people who invest in stocks are many times more than those who invest in funds, there is a large untapped audience for funds. This audience will now be reachable via stock brokers.
Overall the move, though not of much value to investors, will significantly help in broadening the investor base of funds. What needs to be seen is how the funds are received by traders (read the common stock investors)?

The Risk With Mutual Funds

Posted in General by khotapaisa on November 9, 2009

Unlike common perception, mutual funds are not the silver-bullet of personal finance. They carry some inherent risks which are not apparent. I would try to list out some risks that mutual funds carry. It would help to keep it in mind during fund selection.

1. Herd Effect – Fund managers are like cattle herd. If one starts running in a direction, all will eventually follow. This is not unique to Indian fund managers. It happens everywhere. So, why are we charged annual fee (known as expense ratio) for managing our money? It makes sense to pay someone managing your money actively, in other words acting in your interest. But why should I pay someone to follow the herd? The herd metality of the fund manager also makes the fund less efficient and flexible making it more prone to market volatilities.

2. Size Matters – We tend to invest in funds which are large, assuming that large fund tend to be more stable. In contrast, large funds don’t always operate in the interest of retail investors as most of the investment of large funds comes from corporates (that too in large chunks). Let us say a big company invests a large amount of money in fund X. After sometime, they want to withdraw it. Since the amount is significant, the fund manager may have to sell investments which have long term horizon. This has adverse effect on the return for the remaining fund investors.
Another problem with size is that the large investors (corportaes) tend to influence the buying decisions of the fund manager. So, if Company X decides to put 500Cr in fund M, they fund manager will be expected to enforce his/her exposure to the shares of Company X. In simple words, I put money in your fund, you buy my shares.
Studies in U.S.A have shown that in mature markets, small to mid-sized fund outperform large fund on regular basis.

3. Fund Performance – The goal of a fund manager whould be to add value to the investor’s money. It means that the fund manager should allocate assets and manage them with long term horizon. Short-term volatilities should not influence his/her portfolio. But that is exactly what doesn’t happen. Most of the equity funds overhaul their portfolio more than once (many times) a year. The managers also take the short term fund performance as the one and only performance indicator. This is adverse effect for long term investors (real investors).

Are You A Rich Person?

Posted in General by khotapaisa on November 1, 2009

Not so long ago, there was a maid servant who used to work in our house. One day while talking to my wife, she told that she had saved a certain amount over the last 10 or 15 years she had been working as maid. This money was saved totally out of her own earnings. As his husband was earning, she would save as much as she could from her earnings. When my wife told me about it, we realised that she actually had more money than we had at that time. To put it into perspective, my monthly earning was half of her total savings. How is it possible? How can the employer be poorer than the servant? How can a income-rich person not be networth-rich? Well, this is exactly the two types of rich we see. An income-rich person is one who has a good income (not necessarily fat bank balance…like me) while a networth-rich person is one who has a healthy saving. I was an income-rich person but I never saved. I would buy anything I wanted or needed. I always had the latest mobile, the latest camera etc etc. While I never felt short of money (except one period I must say), I never saved money. As a result here I was with less money in bank than my maid-servant. I had wasted all these years in buying things. Things which are worth penny the moment you pay for them…a mobile costing 10,000/- has a resale value of around 2,000/-. In effect I paid 10,000/- for an item that was worth 2,000/-. No wonder that the financially-literate maid had more money than the financially-illiterate sahab.
So, how do you figure out if you are on the way to become rich? I did some calculations and figured out a thumb-rule. Take your current annual salary/earnings(in lacs) and multiply it by no. of years in job. Then divide it by 10.  If your networth (in lacs) is  more than the score you get, you are on the right track. I don’t score good on this scale though. How do you score?

(Is It) A Reason To Buy Home!

Posted in General by khotapaisa on October 5, 2009

Consider this conversation.
A – “The XYZ Builder has dropped the rate for Exotic Apartments by 450/- per sq-ft. Did you know that?”
B – “Really! I didn’t know. Le’st go and see the flat then. Tell the boss that we will be back in an hour.”
A & B go to ‘see’ the flat at the Exotic Apartments and are back in an hour as promised to boss. B is very happy as he booked a flat over there by writing a cheque of 50,000/- to the builder. Congratulatons fly around with the never-missing emphasis that it really was a great deal. 
A scene like this was common just a year or so ago, albeit without the price cut. But I saw this scene few days ago. Believe me, even in this (near) recessionary period there are buyers ready to buy house like this. Now, there are two types of buying -Need-based & Trigger-based. The need-based buying serves the buyer and involves a lot of deliberation & price haggling. While the trigger-based buying serves the seller and is mostly detrimental to the buyer.
When do you buy something? Well, you buy when two basic criterea are met. One you need it and two you find the value for money. In our daily lives, we often haggle with shopkeepers, vegetable vendors and others over few rupess. But when it comes to buying a big ticket item like house, we often find ourselves writing cheques just because the house price came down(from a more non-sensical peak to a less non-sensical peak). But just because price has fallen doesn’t mean that it is value for money.
Credit is now becoming so common that one is expected to own a house by the time he/she is 30 or so. Afterall, how come you are the only one who doesn’t have a house at the age of 30? Note that this it is the same generation that has to surrender the house to the bank because after layoff it is not possible to pay an EMI of 30,000/-. Everything is fast…you buy a house after 2 years in job…you are laid off after 3 more years…you surrender the house to bank after layoff (and no job even after 3 months)…back to square one. Remember when your father first bought his house? Well, we certainly are in a different time today, but we surely need to be as much (if not more) careful about our money as our fathers.

The Impact of Home Loan

Posted in General by khotapaisa on September 14, 2009

Yesterday I saw a movie “Fun With Dick & Jane” on TV. The movie is about a V.P. of a big company. He has a big house, a luxury car and every other thing that defines luxury. One day he goes to office only to be told that the company has collapsed. He comes back home(rather happy) thinking that he will now have some free time before he starts in his new job. Months pass without job and he reaches a stage when he has no money and no job. All his savings are gone now. His stocks (read ESOPs) are worth penny. He now decides, along with his wife, to slowly start selling all big-ticket items in the house. This starts with his BMW being traded for a cheaper car. Then the large flat-screen TV is goes out followed by other household appliances. After few months, there is no worthwhile item left in house to trade for. The movie continued thereon but I realized that this is a very possible scenario for many of us. From the industry I come, it is even more plausible. Imagine someone earning 90,000/- per month. He has a home loan EMI of 40,000/- in addition to a 7,000/- car loan EMI. His overall monthly expenses are around 35,000/-. Now if this person looses job, he will need 82,000/- per month to take care of his basic needs. Even if he cuts back on his household expenses, he will still need anywhere around 75-80,000/- per month just to survive. Assuming that he has 2 lacs in emergency fund and another 5 lacs in stocks etc, he will run out of money in about 9 months. In fact most of the people who take home loan early during their career, are usually left with no money as they put their savings as down payment. Fortunately in India, we have a safety net called family. We can get much needed money from our parents, brothers etc. But how would someone be able to fund a 75,000/- per month expense?
On the other hand, if he had not taken a big home, his monthly requirement would have been around 45-50,000/- (including rent of 10,000/-). This would mean that he had about 15 months to look for job.  He also has the option of going for a lower rent to sustain longer. It shows that buying a house early in your career may not necessaroly be a great idea. You should buy house only when you can afford to pay a significant amount as down payment. This invariably means that you wait for 10 years or more in job before planning to buy a home.

Should You Invest In Gold Now?

Posted in General by khotapaisa on September 10, 2009

Looking at the kind of return gold has been giving, I was feeling tempted to invest more in gold. I still feel that gold would go higher and even at this stage it would be profitable in short term to invest in gold. But knowing that my current exposure to gold was sufficient, I managed not to invest in gold any further. Since this investment won’t be towards any of my goals, it would be only be serving my temptation to make few easy bucks. And this is exactly the risk taking attitude that a common investor should avoid.

That said, you can still start investing in gold if (and only if) you plan to invest a small amount for a long time. Rememer that Gold is a passive investment. Hence you souldn’t invest in it to maximise your portfolio return. Gold is a good hedge against inflation. It is the best hedge against disaster. It means that when you invest in gold, don’t do it for returns. Invest and forget. It also offers a good diversification as it has a negative correlation to equity. When equity goes up, it goes down and vice-versa.

Few Useful Financial Tools @ InvestmentYogi

Posted in General by khotapaisa on September 5, 2009

Here are few useful tools from InvestmentYogi.com. Please try these and let me know your feedback.

Retirement Calculator

Insurance Calculator

They have few more tools like these which I will be posting later.

Guest Post @ InvestmentYogi

Posted in General by khotapaisa on August 30, 2009

My guest post was posted on InvestmentYogi earlier. You can read the post here (opens in a new window). It is not available on this blog. I will be ocassionally writing as guest at InvestmentYogi. They are one of the few startups working in the financial planning segment in India. I wish them all the best in their endevour to the educate and help the people manage their money.