Monday 28 December 2015

Personal Finance Lesson from Hare & Tortoise story

We have all understood from the traditional Hare & Tortoise Story how 'Slow & Steady Wins the Race'!!

Well, this is true even for personal finance.



How may times you have heard a colleague or a friend or a relative boast of making 50-100% returns on a stock in 4 months? Now, the same friend or relative or colleague would not tell you what he lost on his other bets in his quest to earn some quick money. And, if you happen to speak to him a few months later about the experiences from his stock picking, he would definitely be far less enthusiastic.

This happens because the stock markets are the worst place to consistently make a quick buck.  (Notice the emphasis on 'Consistently') In fact, almost everyone trying to get rich quick in the stock market ultimately comes out brutally scratched & injured - and then blames the stock market!!

He is the proverbial Hare in the story - Excited & Active, Misplaced confidence in his abilities to beat the system consistently.

Compare the above behaviour with someone who follows the most boring & unimaginative but consistent strategy of investing regularly through a Systematic Investment Plan (SIP) over 10 - 15 or 20 years. Look at the following chart (Assumption: Rs. 3,000 invested per month):


This is the result achieved by the proverbial 'Tortoise' in the traditional story!!

Moral: The longer the race, the more startling the margin of victory for the Tortoise.

For useful insights into Personal Finance, visit the Learning Centre at www.deepamfinvest.com



Friday 25 December 2015

Learning this tool alone can save investors Lakhs!

A major reason that investors get misled into putting their hard earned money into wrong types of plans is their quest for:
High Returns - GUARANTEED

Big financial institutions - (Namely Banks & Insurance Companies) know this mindset of the average investor. They collude & offer you Guaranteed plans weaving such dreams in their sales pitch that it is easy for a gullible investor to fall prey to them.

Recently, a 41 year old businessman friend of mine was approached by his banker with following scheme from a large insurance company claiming a Return on Investment of 8% p.a. GUARANTEED, Tax-Free and FREE Insurance:

  • Invest Rs. 10 lakh per year for 10 years in a Guaranteed Insurance Plan.
  • You will get a Life Cover of Rs. 1 crore.
  • From Year 21 to Year 34, you will get a Guaranteed Payout of Rs. 5,06,380
  • At end of year 34, you will get a Guaranteed maturity of Rs. 3,94,62,300
As an incentive to buy this scheme, the banker also offered to reduce the interest rates on my friend's CC Limits!!

This friend, who is a successful business person & brilliant in his work, could not understand what the plan meant but was suspicious of the fact that if the plan was actually so good, why would the banker offer incentives for investing in the plan! He sought my advice.


The best approach in such cases it to use the XIRR calculation in MS Excel. XIRR gives the return % p.a, for a series of known cash flows.

Using the XIRR calculation in MS Excel, one can easily see that the actual return being guaranteed is only 5.47% p.a. (The actual yearly investment would be Rs. 10,30,900 for 1st year & Rs. 10,15,450 for year 2 to year 10)

On careful reading of the brochure given by the banker,it was clear that even this 5.47% p.a. was not guaranteed!!

It is strongly recommended to be familiar with XIRR Function to ward off such fraudulent bankers who are chasing their own bonuses rather than their clients' interest!

For a demo, click http://www.deepamfinvest.com/deepam-learning-centre/irr


Wednesday 1 July 2015

Absolute amounts can be misleading

A few years back, my client (around 51 years age) walked into my office along with his 26 year old daughter who had recently secured a job at a prestigious MNC. Both father & daughter were understandably very happy.

However, I learnt that there was another reason for their happiness! My client excitedly informed me that he has just finalised a long-term investment for his daughter which is probably the best investment he has ever come across. Before I could congratulate him, he pulled out a sheet of paper with the following matter hand-written on it:
  • Age: 26 years
  • Payment Term: 35 years
  • Annual Premium: Rs. 13,225
  • Life Insurance: Rs. 5,00,000
  • Cumulative amount at end of payment term: Rs. 23,45,000
  • Annual Pension: Rs. 1,77,165
His excitement about the plan came from the fact that an yearly investment of only Rs. 13,225 would give his daughter an assured pension of Rs. 1,77,000 throughout her life after she crosses 60 years age.

Seems lucrative right? 
An yearly investment of only Rs. 13,225 leading to an assured pension of Rs. 1,77,000 throughout life after crossing 60 years of age!!


If you should use the IRR calculation demonstrated in the video below for any such guaranteed returns proposal, you might be surprised to find that the annualised return of this “lucrative” plan is a measly 7.8% p.a.!

Often, the investors get swayed by the absolute amounts without understanding the time value of money. It is always advisable to use the IRR calculation for any such Guaranteed returns plan.


Monday 25 May 2015

What can 14% p.a. returns do!!

What can 14% returns do? 

Let us see...



In 1971, Govt’s Enemy Property Office had shares worth Rs. 29 Crores value, mostly belonging to people who left India during Indo Pak war of 1965. In the year 2015 i.e. 44 years later, the shares were valued at 10,000 Cr. 

That is approximately 345 times in 45 years!


Can you imagine what return per year it must have taken to grow by 345 times? 

Approximately 14%, that is all.  

Over 44 years that 14% made 29 Crs turn into 10,000 Crores !!  This was a static investment on which nothing was done,  This 14% p.a. returns is not counting the Dividends that would have been paid out on these shares. 

This is what equities can do over long periods of time, create real wealth. !! Holding for 20 or 30 years can create wealth; buying and selling every 1- 2 years will create lots of paper work and not wealth !!

Moral of the story: 

Invest for really long periods to create wealth


Source for the news on Enemy Property:
http://www.business-standard.com/article/markets/enemy-shares-to-be-dematerialised-115041700037_1.html

Wednesday 20 May 2015

Simplest Way to Create Wealth

To build wealth, most people try to take short-cuts and end up wasting their time or squandering what little wealth they have. Make no mistake, there are no real short-cuts unless you get lucky and win the lottery.

The foundation of building wealth starts with establishing the right mindset and following through on a few basic principles.

The first & most basic principle that anyone who wants to succeed in investing should understand is the Concept of Compounding..​​

Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”


Compounding of returns happens when both your initial investment amount and the accumulated returns grow together!! Therefore, Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. 

Thanks to compounding interest, it doesn’t really take much to build your wealth over time. The key to amassing a fortune is by constantly contributing to the overall pot as often as possible and allowing the money to work for you and grow itself. Remember that it doesn’t take much additional money to have a profound effect on one's wealth. Covet your cash and don’t let go it too easily. Before you make a frivolous purchase, consider the ramifications on your overall future wealth.


Look at the Compounded Returns Formula below:

If one looks at the equation carefully, one can observe that 'Time in Years' has the most impact on the accumulated amount. Yet, so many individuals focus on 'Principal' & 'Rate of Interest'.