Financial Discipline for all.

Millions of people fall prey to financial frauds;millions suffer from financial imbalance
despite earning good money;even billioners have committed suicide due to financial
problems- The root cause of all this is failure in handling their money in an informed manner.
People from all walks of life face this problem of financial indiscipline.In the following
articles,we detail the basics one must follow while handling their money in order to stay safe
and have peace of mind. Some are concepts, while others are practical tips.
 The story of Adolf Merckle
 Principle 1.Finding money !
 Principle 2.Time value of money
 Principle 3. Compounding
 Principle 4. Interest rates.
 Principle 5: Cash reserves and idle cash.
 Principle 6: Never stretch beyond your limits.
 Principle 7. Don’t try ‘Get rich quick’ schemes.
 Principle 8. Inflation
 Principle 9. You are not safe with fixed deposits alone.
 Principle 10. Have a Monthly budget
 Principle 11. Utilize credit cards wisely.
 Principle 12. Lending money to friends and relatives.
 Principle 13. Signing surety for friends.
 Principle 14: Multiple streams of income.
 Principle 15. Do not spend recklessly
 Principle 16. Avoid financial litigations
 Principle 17. Pay your taxes.
 Principle 18. Safeguard your documents.
 Principle 19. Insurance is a must.
 Principle 20. Know your net worth
 Principle 21. Think of retirement when you’re young!
 Principle 22. Diversify your investments.
 Principle 23. Valuation is the key to right investments.
 Principle 24. Gold – A must in your portfolio

The story of Adolf Merckle

by J Victor on July 30th, 2010

Adolf Merckle was one of Germany’s richest business man. He developed his grandfather’s
chemical wholesale company into Germany’s largest pharmaceutical wholesaler, Phoenix
Pharmahandel . He was educated as a lawyer,  but spent most of his time investing. He lived
in Germany with his wife and four children.
In 2006, he was the world’s 44th richest man. Merckle’s group of companies employed
100,000 workers and had an annual turnover of 30 billion euros (around 39.9 billion U.S.
dollars).
All this turned upside down after his business empire was plunged into difficulties due to the
financial crisis. Merckle hit the headlines in 2008 when he suffered massive losses on
investments he had made on movements of the share price in Volkswagen, Europe’s largest
car company.
On Jan 06,2009 German news agency DPA reported that –  Merckle, 74, threw himself under
a train at his hometown of Blaubeuren, a small town near southern Germany city of Ulm, and
a railway worker found his body by the side of the track.
Before his death, he had been negotiating with banks for a bridging loan of 400 million euros
(around 547 million U.S. dollars) to save his empire, which includes the pharmaceutical
company ratiopharm and drugs maker Phoenix. That figure shows the depth of financial crisis
he had.
The picture above shows the place where his body was found. What a tragic end to the life of
one of the world’s richest man.
…MERCKLE ISN’T ALONE

Here’s more -
In Jan 2009 , The national suicide preventing hotline in US reports that, calls have soared by
as much as 60 per cent over the past year – many of the  calls were from people who have
lost their home, or their job, or who still have a job but can’t meet the cost of living.
A 45-year-old businessman in Los Angeles murdered five members of his family before
turning the gun on himself, saying in a suicide note that he had done so because of his
troubling financial situation.
Karthik Rajaram, 45, who had made almost £900,000 on the London stock market, shot his
wife, three children and mother-in-law in the head before shooting himself at the family
home near Los Angeles.He did this after seeing his family’s fortune wiped out by the stock
market collapse.
A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from
the modest house she called home for 38 years.
In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from
her husband sends a note to the mortgage company warning: “By the time you foreclose on
my house, I’ll be dead. Then, Carlene Balderrama,  shot herself to death, leaving an insurance
policy and the suicide note on a table.
WE INDIANS AREN’T BEHIND..
Thousands commit suicide unable to bear the pressure and crisis, that mismanaged
investments create.
Internet and newspapers report about people falling prey to financial frauds like ‘get-rich-
quick’ schemes and money chains, eventually losing every penny they had earned.
Did you know that a small state like Kerala spends more than Rs 40 crores a day on lottery
tickets alone?According to Tehelka.com’s reporter Shantanu Guha Ray , Illegal lottery
tickets account for atleast 60 per cent —Roughly Rs 7,200 crore — of the Rs 13,000 crore
gambled every year on lottery tickets in India. All sections of the society are involved in this.
I know doctors, HR consultants, engineers, stock market investors, Government
officials,housewives and students who regularly put money in lottery tickets. Anyway, lottery
tickets ( if you’re lucky to get an original one   ) at-least gives you a chance to win.
There is another section of people who gets involved in money chains – where wealth gained
by participants entering the scheme earlier, is the wealth actually lost by those coming later.
In-spite of hearing about many schemes in which people have lost their wealth, India
continues to be a happy hunting ground for such fraudulent operators. The root cause of all
this can be brought under one head-Greed for money and  financial illiteracy.
This is exactly the reason why we will first discuss about the basic principles of money
management . People spend lakhs to get a  doctor’s degree or a MBA from the most
prestigious of  institutes. They spend a lot to pursue their hobbies such as music and
 salsa.  But when it comes to managing their money , they hardly make any effort to learn  at-
least the basics , forget about gaining specialized knowledge !
The next chapter will take you through the basic principles of money management. These
principles are important to everyone out there– housewives, businessmen,musicians, students,
professionals , priests , social workers.. anyone who deals with money directly or indirectly.

How do you find money to invest ?

Author: Jins Victor
Finding Money:
Irrespective of how much you earn, you need to set aside some part of your income to kick
start the investment process. It is easy to find money when you earn a lot, but what do you do
when you earn less?
The only way you create savings when you earn less is to set aside a target savings every
month and then, live with rest of the money.
So we are only reversing the age old formula here:
Instead of thinking We do this
  Income – Expenses = Savings    Income – Savings = Expenses

Why does it work?

That’s because, the savings part is executed like a forced discipline. If you seriously want to
save a fixed 10% or 20% of your take home salary each month, you need adopt the above
said approach to savings. This simple but effective trick was suggested by Robert Kiyosaki in
his famous book ‘Rich Dad Poor Dad’.
So that’s the basic trick to find money!
But, that’s not all. You can also find money from many other sources. For example, Instead
of going for parties and shopping, you can set aside extra payments like bonuses,
commissions and so forth into your savings Fund.
So try to make it a habit to set aside a fixed sum as savings and live with rest. If you do that,
you have a great chance to succeed.
I earn more, but still I fail to save …
That’s a very common scenario.  The reasons could be – either your expenses are not
controlled or you might have already got into the EMI trap by buying expensive gadgets.
Since a solution to finding more savings from your income would depend on what kind of
financial traps you’ve fallen for, what we can do is to suggest some tips which might be
beneficial for you.
 Spend less: Sit back and analyse your spending habits and look where you spend more
unnecessarily. Once you have identified certain areas of high spending, try to find ways to cut
back.
 Prepare a budget: decide how much you’d be spending on various items every month
and try to stick on to that budget. There are lot of mobile apps that would help you track your
monthly income and expenses.
 Pay off high interest bearing loans: If you have a lot of EMI’s to pay, it naturally
reduces your capacity to save more. It also shows that you’re living on high levels of debt
which is not a right thing to do. If you have loans, first look for ways to pre-pay it as soon as
possible.
 Keep control on your credit card spending: credit card is a kind of double edged
sword. If you don’t spend wisely, you may end up spending more. Credit card companies slap
huge interest for outstanding dues and delayed payments.
 Avoid buying on EMIs: Almost all the things are available on EMIs. The terms of the
EMI scheme may look rosy at the moment of buying because at that point you are already in
a self-gratifying mode and you will not want to do the math and find out how much you end
up paying.
 No late payments: Any bills – like electricity /  telephone /  internet / credit card has a
deadline within which you are supposed to pay the dues. Unnecessarily delaying such
payments results in payment of fines. Such expenditures can be avoided if you can get
organized on your bill payments. Make a list of monthly payments and the deadline within
which you are supposed to pay. Credit cards over dues need particular mention here. Credit
card companies slap huge interest and fines for delayed payments.
 Say no to impulse buying: Do not buy anything on impulse. Before laying your hands
on any fancy thing which is up for sale, think if it’s really needed.
 Shop smart: Most of the big brands will be available at throw away prices once
there’s an off season sale or sales promotion drive. For example if you want to buy an
expensive watch, wait for the company to announce some discount offers. All the big brands
announce discount offers at least twice a year.
 Compare prices: try to compare prices in different sites like amazon and flipkart. Also
check out the same thing at the local shopping mall. Put some effort and get the thing you
want at the best possible price.
 Keep distance from high rolling friends: If they are the problem, better avoid it! High
rolling friendship circles often create pressures within us to keep up with them in all aspects.
This may hinder your route to save money. To keep up with them , it may become necessary
for you to spend high ( for example latest electronic items or cars , parties, expensive dresses
etc ) which otherwise may not be required !
So that’s some tips to find money to invest.
Key ideas :
 Finding money is a matter of making it a priority.
 Pay yourself first and learn to live off with what is left. You will always have money
with you. It may be difficult at first. But gradually, you will see your fund growing and that
would encourage you to stick to it until you reach your goal of finding enough money.
 Bonuses and extra pays you get are opportunities to buy the latest iphone but a
prudent option would be to create a savings out of it.
 You can save a lot of money if you control your expenses and automating your
monthly dues.
 What is Time value of money?
Author: Jins Victor
“Time value of money” is one of the central concepts in finance.  Every financial decision
involves the application of this concept directly or indirectly. For example, if a bank lends
you Rs 10,000 for 6 months, you will have to repay Rs 10,000 + interest at the end of 6
months. What you paid to the bank as interest is actually the time value of Rs 10,000 for 6
months. Now, let’s assume that you gave Rs 10,000 as fixed deposit to the bank for 6 months.
The bank, at the end of 6 months will pay back Rs 10,000 + an interest as a compensation for
allowing them to use your money for 6 months. Hence, Time value of money is the
compensation that one receives for foregoing the use of money for a given period of time or
the compensation one will have to suffer in future for spending money now. The calculation
of time value involves simple mathematics and it’s easy to calculate.
Time value of money.
The principle is – Rs 100 today is more valuable than Rs 100 a year from now. The reasons
for this is quite simple to understand –
 Since the cost of living goes up, your money will buy less goods and services in the
future. So your money has more value today.
 If you have that money today, you can invest and earn returns. When you receive the
money at a future date instead of receiving it today, you lose the interest or profit you would
have made, had this money been invested somewhere.
 You prefer to have money today since the future is uncertain.
 You have saved money by sacrificing present needs; hence in future you need to be
compensated for this.
Many sides of time value of money.
The concept of time value of money comes into play in many scenarios:
 One, when you are eligible to receive some money now, but the actual receipt is
delayed. In this case, you need to be compensated for the time delay – A calculation called
future value or (FV)
 Second, you will become eligible for receiving some money in future (say Rs 5 lakh)
but the value of  5 lakhs in future will not be the same as it is today ( it would be less). Hence,
you need to calculate the present value of money (PV) to be received in future for actual
comparison. This calculation is also called discounting.
 Third, you have some money right now but instead of spending it, you decide to save
it for the future. In this case, you need to know the value of money which will be received in
future – here you need to calculate the future value of money that may accumulate. But order
to understand the actual value of money to be received in future; you will have to discount it
to the present. So, the calculation involves both finding FV and also the PV. Such an exercise
becomes necessary because, there will be difference between the return expected and the rate
of inflation.
 Frequency factor of returns.
One more interesting factor in calculation of time value of money is that depending upon
your assumption as to the frequency of interest payment in a year, the end result will change.
For example- you have Rs 1 lakh right now. You want to know the future value if the amount
is put into a investment that returns 8% per annum. The answer will be 1, 08,000 lakhs.
However, if you assume that the interest rate is paid every 6 months, then the end amount
will differ because, at the end of 6 months you receive an interest of Rs 4000 which will also
start earning interest for the balance 6 months.
 At the end of 6 months you get Rs 1.04 lakhs.
 From the 7th month Rs 1.04 lakhs starts earning interest and you get Rs 4160 as
interest for the last 6 months. Total for the year works out to Rs 1, 08,160.
The frequency of interest can be any interval of time, even on a daily basis.
Example:
Lets’ assume that you are 25 years old. You have Rs.2500 with you now. You can either put
it in bank FD or buy yourself a new dress. Now, let me further assume that you opt for
buying new dress. The reality is that you are spending far more than Rs 2500. How? Let’s try
to calculate the real cost of not investing that money.
FV    =    pmt (1+i)n
FV    =   Future Value
Pmt  =  Payment
I        =  Rate of return you expect to earn
N      =  Number of years

How to solve the equation?

N = Number of years invested – The money you’ve spend on a dress is lost forever. That
means, that Rs 2500 could have compounded in the bank for at least 35 years.  How did we
get that ’35′ figure? We assumed that you’ll retire at 60 and since you are 25 now, there’s 35
years left. Let’s substitute 35 for “n” in the equation.
I= Rate of return expected – The ‘I’ in the formula stands for the expected rate of return.
Since  bank fixed deposits would pay around 8% per annum and   stock markets have
returned an average of 15 %- 17% ,  Let’s assume you would earn somewhere in between –
an average of 10% rate of return. So, we’ll assume ’I’ as 10%.
PMT – is the value of the single amount you want to invest (in this case, Rs 2500).
Now substituting the figures, our   formula would be: FV = 2500 (1+.10)35.
Enter 1.10 into your calculator (this is the sum of 1+.10). Raise this to the 35th power. The
result is 28.1024. Multiply the 28.1024 by the pmt of Rs 2500. The result (Rs 70,256) is the
true cost of spending the Rs 2500 today. Now go back and think how much you have already
missed in future wealth.
That was easy, I guess.
Now, let’s take you one more step ahead.
 One important point you would have noticed here is that, you are going to get Rs 70,256 after
35 years. Remember what we said in our first paragraph – the time value principle says that –
Rs 100 today is more valuable than Rs 100 a year from now. Applying the logic here, let’s
find out how much Rs 70,256 is worth now.
For that, we will have to find out the present value of Rs 70,256 which will be received 35
years later. Assuming that the average inflation rate in India Is around 8% per annum, the
present value of Rs 70,256 discounted at 8% would work out to Rs 4752.
Now, after realizing the actual cost of spending Rs 2500,   would you prefer to buy a dress for
Rs 2500 today or Rs 4752 in the future? The answer is entirely personal.
Once you understand this vital concept, you would realize that all those bits and pieces of
money you spend unnecessarily are costing you thousands in future wealth. This is why time
value of money is considered as the central concept in finance.
Key ideas:
 Time value of money is basically the compensation for postponement of consumption
of money.
 Time value of money can be different for different people because each has a different
desired compensation for postponing the consumption of money.

Compounding
Author: Jins Victor
Compounding is another basic principle in finance.
Two cases to illustrate what compounding is :
 Case  1 : A 25 year old who invests Rs 50,000 every year for 10 years will earn 8.77
lakhs , if he manages to get a return of 10% every year. And , then if he leaves that
investment there until he’s retires at the age of 60 , he would accumulate around Rs 95 lakhs .
 Case 2 :  A 35 year old guy starts doing this and invests Rs 50,000 regularly till he
retires.  But he will manage to accumulate only Rs 54.1 lakhs which is around Rs 41 lakhs
less in comparison to the first scenario.
 What made the difference is the time factor.
5 simple points spell out from this story:
 If you start late, you’ll manage to get a corpus which is 43% less.
 Why? Because, in case 1 ,  Rs 5 lakhs ( Rs 50000 x 10 years ) was allowed to
compound for a longer period of time.
 As the fund grows, the impact of compounding is greater. In case 1 , he accumulates
50,000 for ten years, stops at 35 and then, his 8.77 lakhs (5 lakhs + Interest) is allowed to
compound for 25 years till he’s 60. Whereas in case 2 , he starts at at 35 and invests Rs
50,000 for the next 25 years, accumulates 12.5 lakhs (50,000 x 25) only to get 54.1 lakhs at
60.
 Now let’s assume that inn case 1 , he  had allowed the fund to compound for only 20
years i.e.  Till he turned 55. At 10% return every year, he would have accumulated an amount
 of around Rs 59 lakhs. By choosing to let his investment run for last 5 years, he accumulates
Rs 45 lakhs more.
 Essentially, compounding is the idea that you can make money on the money you’ve
already earned.
Easily said ! isn’t it?
For the common man, it generally doesn’t work as i said. Because at 25, most of them
haven’t drawn a plan to invest 50,000 a year. Even if he has done it , emergency expenses
that creeps in becomes a hindrance in sticking on to the commitment.
So , what’s the way out ? The solution is to always remember to reinvest whatever you’ve got
and never break the investment chain you’ve started. Whether it is  interest or dividends
received on your investments. Over a period of time, such small amounts will add up to a tidy
sum.
Here’s more :
 Savings of Rs 2500/- per month with 10% return will be worth Rs. 56 lakhs after 30
years.
 Savings of Rs 5000/- per month with 10% return will be worth Rs. 1.91 crores after
35 years.

Note : The above are not typing errors ! 

Here is a comparative chart for you to understand.
Let’s assume that you invest Rs 10,000 annually. Your retirement age is 60. Let’s also
assume that the interest rate you get is 10%.
At the age of 60 you will have –
 49 lakhs -if you had started investing from age 20.
 30 lakhs -if you had started investing from age 25.
 18 lakhs – if you had started investing from age 30.
 11 lakhs – if you had started investing from age 35.
 Just 6 lakhs – If you start at 40. Take note of the impact.
That’s a huge difference, right ?  Now that you realized it late, what can you do? You can
start now, invest more and reach the target of 49 lakh at age 60. This would mean more hard
work and budgeting for you.   Let us see how much more you would need.
To get 49 lakhs at age 60 –
 Invest 10,000 annually – at age 20
 Invest 16,500 annually – at age 25
 Invest 27000 annually – at age 30
 Invest 45,000 annually- at age 35
 Invest 78,000 annually – at age 40!!
The above calculation is made assuming that the interest rate you get is 10 percent. But the
average interest rate of banks is less than that.
 I hope the picture is now clear for you. The more you delay, the more you need to invest.

What is interest ?
Author: Jins Victor
Interest.
Having got an introduction about investing and inflation, the next important financial concept
you need to know is interest.
 Interest, usually expressed in terms of a percentage, is the additional amount you pay
for using borrowed money or the return you get when you invest it with an institution like a
bank.
 It’s also the compensation you can demand if someone delays a payment that’s due to
you. So interest is an expense when you pay and it’s an income when you receive it.
Knowledge about interest is vital in making correct financial decisions. For example, your
friend borrows 2 lakhs from you for 6 months and returns it promptly. Is there any loss for
you? The answer is- Yes. Your 2 lakhs would have appreciated in value if you were to put it
in a bank. Assuming that the bank pays 10% per annum interest for money deposited with
them, you lost the opportunity to earn Rs 10,000. That’s the loss.
The point we like to stress here is that, for any delay in receipt of money, you lose the
opportunity to earn risk free interest. So, quantifying opportunity loss, which is vital to
making investing decisions, is done with the help of the concept of interest.
Interest rate also helps you compare investment alternatives – for example you are faced with
a decision to buy a piece of land for 10 lakhs which has the potential to appreciate to 15 lakhs
in 5 years time. Should you buy it? Would it be a good idea? May be not. Because, the same
10 lakhs, if you were to deposit in a bank fixed deposit that pays 10% would have returned
16.10 lakhs at the end of 5 years.
So, in any financial transaction where a delay in receipt of money is expected, interest rates
come into play. It would help you take correct financial decisions.
The relation between interest rates and inflation.
People borrow more when the interest rates are low. When people get more money at their
disposal, the demand for goods tend to rise and the economy starts to grow rapidly. Naturally,
as the demand increases, the prices of goods would go up and this leads to inflationary
conditions. So, the solution from the government’s part to curb inflation is to increase the
interest rates and restrict the flow of money into the economy. When the interest rates are
increased, the credit growth decreases or people borrow less and hence, would have less
money to spend. When the consumers spend less, the demand for goods decreases and the
economy starts to slow down and as a result, inflation decreases.
Hence, interest rates are closely linked to the inflation in the economy.
 Types of interest rates.
There are different types of interest rates prevailing in an economy. There are repo interest
rates and reverse repo interest rates which are reserve bank’s lending and borrowing rates
and there are interest rates like compound rates and floating rates which are terms used by
commercial banks or investors to calculate interest.
The repo rate and reverse repo rates are used for the purposes of controlling inflation as said
above. The repo rate is the rate at which the reserve bank allows the local banks to borrow
money from it whenever there is a shortage of funds. If the repo rates are low, commercial
banks get funds from the reserve bank at cheaper interest rates and can lend it to their
customers at lower rates. The end beneficiary of lower repo rates is the commercial banks and
the customers like you and me.
The reverse repo rate the opposite of repo rates. This is the rate at which the reserve bank
would take funds from the commercial banks. When the reverse repo rates are high, the
commercial banks would be happy to give money to the reserve bank as that they can get risk
free income.
Coming down to the rate to be applied for taking financial decisions, there are three types of
interest rates – simple interest, compound interest and diminishing interest rates.
Simple interest, as the name says, is the simplest way to calculate interest. For example the
simple interest for Rs 100,000 at 10 % per annum would be Rs 10,000.
Compound interest is a bit more complicated to calculate than simple interest. Here the
assumption is that interest generated further generates interest. For example the compound
interest for Rs 100,000 at 10 % per annum, compounded half yearly would be Rs 110,250.
That is, 10% of Rs 100,000 is calculated at the end of 6 months and that interest is added to
the principal amount for the next 6 months. The calculation is shown below:
Invested Amount 100,000/-
Rate of interest 10% annually
Interest for 6 months                  5,000/-
Total amount at the end of 6 months 100,000 + 5000 = 105,000.
Interest for the next 6 months 105,000 x 10% x 6/12= 5250
Total interest earned 5000 + 5250 = 10,250.

This may not look like a complicated calculation for you. That’s because, the frequency of
compounding was restricted to 6 months. As the frequency factor increases, compounding
becomes more and more complicated to calculate. For comparing investment alternatives or
opportunity loss, you can use simple interest or compound interest.
Diminishing interest rates are typically applied by banks when they lend money to you.
Under the diminishing interest rate method, the bank would fix a monthly installment that
would have an interest component and a principal component. After you pay the first month
installment, the interest for the second month is calculated after deducting the principal paid
for the first month.
If you bank has given you a loan on floating interest rate, it means that the interest rate e
can keep changing with the changes in the repo rates. The implication is that your repayment
 amount will keep fluctuating as the interest rates keep changing. The opposite of this is
called fixed interest rate, where the bank will not keep changing the interest rate whenever
there is a change in the basic interest rates of the economy. So if you avail a loan for a fixed
rate of interest, you can calculate the future money outflow accurately. Applying the same
principle, a deposit accepted by the bank by committing a fixed interest rate is hence, called a
fixed deposit.
A flat interest rate would mean that interest will be charged for the entire amount
irrespective of the amount paid. For example – if you have borrowed Rs 100,000 at 10% flat
interest rate for 5 years, it means that the interest for all the 5 years would remain the same –
Rs 10,000. So, effectively first year you will pay Rs 10,000 or 833.33 per month as interest.
Even if you pay Rs 20,000 towards principal for the year, the interest charged for the second
year will be constant at Rs 10,000.
Example 1- You are offered a loan for Rs.2 lakhs and your EMI works out to say, Rs. 18000
with 2 EMI’s payable in advance. Effectively, you are getting only Rs 164,000 in hand. But
since the interest rate is calculated as if the entire 2 lakhs is given to you, the rate of interest
you pay is actually very high. Is that all? No. The bank will also deduct a processing fee of 1
% of the ‘total amount’ ie. Rs 2000 for a 2 lakhs loan. So on net, you get Rs 162,000.
 Example 2. You are offered the same loan for reducing balance interest. You feel light
thinking of the fact that interest is charged only on the balance outstanding. But if you look
closer at the terms and conditions you may find that  – reducing balance can be on monthly
basis, half yearly basis or on Annual basis. If it’s on annual basis – your interest is calculated
on the amount outstanding at the ‘beginning’ of the year. So, you keep paying interest on a
higher amount even though your loan is decreasing every month. This pushes up the effective
rate of interest you pay. So, that’s another trap.  Always confirm whether the reducing
balance is on annual basis or half yearly basis.
 The best way to deal with these interest  traps is to stop comparing the interest rates and
instead, compare the EMI’s and compute the total amount going out of your pocket including
processing fee and pre-closure charges. This will give you the right picture of which loan is
actually right for you.
Interest income
 In the case of interest income – the principle to be learned is quite simple – The earlier you
get it, the better it is.
This principle will help you to compare different offers. For example – A bank offers 8% P.a
interest on FD , payable annually. NSC also offers 8% P.a but, payable half yearly. You get
another offer on FD which pays interest at 8% p.a – payable monthly. Which is better? The
one you get on monthly basis, of course!. Why? Because, the bank’s effective rate is 8% , the
NSC’s effective rate is 8.16% and the third option of FD gives you an effective annual
interest rate of 8.30% !
How? Let’s calculate with an example –
 Let’s assume that you have 2 lakhs with you.
 The bank would give you 8% – annually so, you receive an interest income of
Rs.16,000 at the end of one year.
 Suppose you deposited the same with NSC They would give you  8% -half yearly. So,
at the end of 6 months you get Rs 8,000 which can be again invested for 8% interest for 6
months which gives you an additional interest of Rs. 340. So, the total interest you receive is
now Rs 16,340. effective rate – 8.16%
 Similarly , when you work out 8% interest received on a monthly basis the effective
interest rate would work out to 8.30%
That’s the concept of interest and some of the practical scenarios where it’s applied. Interest
rates and its effect, impacts the financial decisions you make.
Key ideas:
 Interest helps you you compare investment alternatives.
 For any delay in receipt of money, you lose the opportunity to earn risk free interest.
 Interest rates are altered to control inflation.

Build an emergency Cash reserve.

Author: Jins Victor
Emergency Cash reserves are money kept aside for meeting unforeseen expenses.  We are
discussing the need to keep cash reserves because; this is one important idea which most of
us neglect. When you set aside some money from your earnings to meet unexpected
expenses, there are four advantages that automatically come with it:
 Financial safety.
 It allows you to take advantage of a surprise financial opportunity
 It creates a compulsory saving habit.
 Since funds are kept in liquid cash or gold, it earns interest or appreciates in value.
We recommend creating an emergency fund that equals to 4 or 5 months of living expenses;
however, you do not need to set aside this total amount in cash alone. It can be in short term
fixed deposit or Gold etc.
How much reserve?
That depends from person to person.
There are a number of factors that influences your decision on the quantum of emergency
fund that needs to be created. Factors such as age, occupation, health condition, monthly
EMIs, number of members in the family, other sources of income needs to be considered on a
one to one basis.
Age:
Depending upon how old you are, the emergency fund required keeps changing. As you grow
older, the possibility of medical emergencies is also high. Hence, if your age is on the higher
side (let’s say you’re 45 years old) you also need an emergency fund that’s higher than
someone who is just turning 30.
Nature of occupation:
The style of occupation/business you do is another factor that influences emergency fund
decisions. If you are doing a seasonal business or if your job has an uncertain future, you
need a higher emergency fund. People living on commission based income would also
require a high emergency fund.
Health condition:
More reserve funds may be required for a person whose health condition is questionable. The
amount of insurance cover he has should also be considered while assessing his future
requirement. Higher the insurance, lesser the need for reserve funds on these grounds. Again,
if you have your parents or grandparents living with you, you might need to plan accordingly.
Monthly commitments:
The volume of debt you have needs to be analyzed to get an idea about how much EMIs
you’ll have to pay a month. Typically, while creating reserve funds, an amount equal to 6
months EMIs should be kept aside so that in case of emergency, you don’t default in your
loan payments. A clear track record of loan re-payments is absolutely necessary for your
future financial needs.
Number of dependents:
If the numbers of members you need to support are more (say 7 members) naturally you need
a higher reserve than what would be required if you have only say, 3 members in your family.
Other sources of income:
You can count on your other sources of income, if any, while creating a reserve fund. One
time or casual income or credit card limits should not be considered in this group. However,
you can count on the income of your spouse or other family members staying with you in
case of emergency.
 Other possible expenses:
You may also want to consider other expenses like possible higher education fees for your
child who is about to enter college or a possible repair for your house. It all depends from
person to person.
How to keep reserve funds?
Hundred percent of your reserve funds need not be kept in liquid cash. A portion of it can be
kept in short term fixed deposits or debt funds and a certain portion in gold or easily
marketable securities.
Any cash lying idle over and above your emergency fund results in a lost investment
opportunity. You are not making your money work efficiently for you.
Thumb rule:
The thumb rule is – You should have enough reserves to meet all the expenses for 4 or 5
months plus some extra to meet unforeseen expenditure like medical expenses.
How to spot idle funds?
Any fund that remains in your bank account after setting aside your emergency funds is idle
funds. To locate whether if you are holding idle funds,
First estimate how much emergency fund you’ll require. (Typically 3-6 months expenses)
Now see how much you have in your bank account plus cash in hand.
 Deduct 3 or 6 months emergency fund. The balance is your idle fund.
This fund should be invested immediately. You can take up a systematic investment plan so
that an amount gets invested automatically every month; or you can open an online trading
account and invest in stocks or mutual funds at your convenience; you can opt to open FD
linked savings account so that any balance above a certain limit automatically earns interest
at a higher rate and so on.

Don’t over spend.

Author: Jins Victor
After all, you just have a life to live –why not spend and live it to the fullest? Sounds perfect
and positive, isn’t it? Unfortunately, if you are living your life like that, not everything is
positive and perfect. You will realize the perils of reckless spending when you face a
financial emergency. I have done it in my initial investing life, but soon realized that you
cannot discount uncertainties in life. A sudden drop in my monthly cash flows turned my life
into a nightmare. So, when I write this, I have my own experiences to back it up..
The principle is not very hard to follow – never take money from your savings or borrow
temporarily from your friend’s pocket to buy a little more luxury. Be it a slightly bigger
house that caught your wife’s imagination or the latest electronic gadgets.
Where is the problem?
The lifestyle you want to maintain depends on three factors:
 The circumstances in which you were born and bought up
 The kind of friends you have
 The place or community where you live.
Have you asked your parents about how they started their life? They din’t have a big car or
latest electronic gadgets. They probably didn’t live in the big apartment or villa they’re living
right now. They built everything brick by brick. It would have taken a lot of time, effort and
disciplined life to get to where they are now. That’s exactly the way you should also start off.
If you try to achieve all the life’s goodies in very short time, there’s every possibility that
you’ll borrow a lot of money assuming that you’ve the ability to re-pay everything in 5 or 10
years and chances are that you’ll get into debt trap should there be an unexpected fall in your
monthly income.
Another problem among youngsters is that spending habits are greatly influenced by their
friends and colleagues. Bank balance doesn’t matter, the car or home doesn’t matter – what
matters is the answer ‘yes’ to this question- Are you better off than your neighbor , friend ,
relative or colleague? If the answer is yes, you are confident, you feel happy. Or else – you
stretch beyond your limits to maintain yourself the standard of living that your friend has!
You will over borrow, over spend or do something to satisfy your ego. This category of
people falls into the trap of personal loan providers. Personal loans are easy to get. There is
less documentation and there are no restrictions on how you use the money. Since money
comes in quickly with minimum documentation, you won’t mind the higher rate of interest.
 Another reason for reckless spending is that these days, a lot of technologically advanced
gadgets and appliances are introduced into the market that drives everyone crazy. Financial
schemes are introduced by institutions which would seem like a very simple deal. These
schemes are advertised in such a way as to lure customers. Such facilities tempt us to spend
more. When you buy into such schemes, what you are actually doing is getting into the
finance trap. I am sure 99% of people reading this would have done this in some form or
other.

Say ‘no’ to get rich quick schemes.

Author: Jins Victor

How about getting some money quickly? Eh ? 

Think about it –
Why should someone pass you the trick to make big money?
How can someone create a 500% or 1000% return in a year?
If they really knew the trick, don’t you think that they would have worked for themselves ,
make a lot of money and try to be with the likes of Mr. Bill gates and co?
So the advice is straight- Get rich quick schemes don’t work. There is no need to try such a
scheme. Such schemes operating around the world are illegal. If you’re pressured by
someone close , politely reply to them that it is not possible to join and what they are trying to
spread is a fraud scheme. All scams that have happened in the past are known to have spread
through the link of near and dear ones. Such schemes are a loss for the country. They distract
people from doing productive work. Some countries have legally banned such schemes.
 Why do we get attracted to such schemes?
There are many reasons – we get attracted to such schemes because ,
 Human Nature : We ‘re greedy and lazy.  And as a result, we fall into such schemes.
 Convincing  evidences: The guy who introduced the scheme , convinced you about
the genuineness by showing some certificates or bank accounts.
 No start up costs : It costs very little to start, hence you’ll take the risk.  It is easy to
operate , hence you’ll think it’s worth it. You can join the race with a subscription and then it
works through word of mouth. So, you think there nothing much to lose. As more and more
people join on your behalf, you get rewarded, if you don’t get people to join, you’ll let go that
small amount.
 Financial illiteracy : These schemes are marketed aggressively and it’s generally
hard for an amateur to crack their arguments in favor of the schemes.
This is how a typical  scheme would operate:
A representative appears in front of you and would introduce the scheme with proofs of
money pouring into his bank account with little effort. He would say that he was working in a
 company and with the limited salary, he could not make both ends meet but now, after
making this ‘smart choice’ he has earned a lot of money and  self respect. He has achieved
what everyone of us dream- financial independence.
The scheme typically would be to buy some products or tour packages for a small fee. Then,
you’re supposed to pass on this message and bring in more people.As more and more people
join on your behalf, you become a team leader and starts getting a commission based on the
number of people that has joined the scheme.
The moment the company doesn’t get new recruits or agents, the office of the company
disappears. The promoters abscond with the huge amount of money they compiled through
subscriptions and the money of a wide group of people who joined last is lost.
Easy  money schemes around the world.
How it started –
These types of investment schemes are called ‘ponzi schemes’. The name is derived from the
name of Charles K Ponzi, who masterminded the first ever fraudulent investment scheme. 
He claimed that he could make 400% returns from arbitrage between Italy and US markets by
investing in postal reply coupons. Needless to say, the scheme was a fraud one and people
lost millions of dollars.
Read the detailed list of ponzi schemes from around the world at wikipedia page here.
How to spot a get-rich-quick scheme? 
 Such schemes offer to make you rich in a matter of months without any hard work! In
most of the cases, all these investors have to do is to bring in more and more investors.
Minimum effort , maximum results!
 In all probability the ‘corporate office’ of the company will be in a distant place from
your country. They will show you photographs of the overseas office and also the official
website and phone numbers.
 They will pressurize you to join quickly so that you will be on top of the many others
who will be joining the scheme soon. That way, you stand to benefit.
 If you are still not convinced, someone may actually appear in front of you who
would claim that he was working with a bank or some other organization but now, after
joining the scheme ,  has left his job-  thanks to the “financial security” and “financial
independence” the scheme has given.
 All the meetings of the company will be hosted in big venues with lavish dinner and
celebrations.
 Most of these schemes will be advertised as a ‘risk free’ investments, and some sort of
personal guarantee from the promoters would be given.
 Sometimes the whole game starts with a simple sms to your phone  declaring that you
have won millions in lucky draws conducted somewhere (?!!) by somebody (?!!) and in order
to claim your money, all you have to do is to put some money as ‘processing fee’ to a bank
account.
On searching the net, we have found countless illegal get rich schemes operating in India and
abroad. The Reserve bank of India has published long list of companies who are engaged in
ponzi schemes in India. The point is, It’s your hard earned money and you just cannot put it
into some illegal business expecting big profits. The onus of putting your money in right
investments is on you.  If you cannot understand this simple fact, nobody can help you.
Nobody can double your money in few months.
As the saying goes – “If It’s something too good to be true, it probably is” .

What is inflation?
Author: Jins Victor
Inflation.
In simple terms, inflation is a situation where there is a rise in the general level of prices of
goods and services. Or if you look from the other side, the value of your currency keeps
decreasing, and hence, you need more of it to buy the same quantity of goods. Inflation is not
totally avoidable in a country due to many reasons. Governments do their best to keep things
in control but still, there will be rise in the level of prices all over the world. In India, we
experience an average inflation level of 8% per annum. That is, the general level of price of
goods and services in India increases by 8% on an average.
Now, let’s take a simple example to show how you’d get hit by inflation-
The birthday bash.
Your wife just gave birth to a sweet baby girl. One year from now, you are supposed to
celebrate her first birthday. To make a budget, you enquire at an event management group
about the costs and they say it would cost one lakh right now but they cannot guarantee the
same price 1 year down the lane, because the cost of materials can go up. So you immediately
put this money in a deposit that would give you 8% return by the year end. At the end of year
1, you have 108,000 with you.
Now, one year has passed and you have to celebrate your baby’s birthday. Let’s assume that
the inflation during the year was at 10%. That means the general price levels of all products
have risen by 10% and hence your event manager is going to bill you a minimum of Rs
110,000 for a party instead of 100,000 earlier. So to arrange a party now, you have to incur an
additional expense of 2,000 from your pocket. Why? Because, the money you have, has lost
its value to the extent of 10,000 ( 10% of 1 lakh) and, you could manage to make a return of
only 8,000. If the price levels keep moving up at this rate, it would cost you more than 2.60
lakhs to host your daughter’s 10th birthday! Had you managed your money to get a return of
10%, you wouldn’t have to spend that additional 2000 from your pocket.
That’s inflation for you – try to understand this vital principle in order to manage your
money. So, if you are getting 8% on a 10 lakh Fixed Deposit and if the inflation rate is 8%,
do you think you have gained a penny?  – No. The return you earned is ‘0’. The interest
earned is taxable. So there is no real return from this investment. It has resulted in a loss.
French born Jean Bodin (1530-1596) was one of the first to find that prices increased due to
increased supply of money. Later , in 1752 , Economist David Hume confirms that money
supply and prices were directly related. In 1911, US Economist Irving Fischer develops the
mathematical formula to explain Inflation. 

How does inflation affect investments?

Fixed income instruments – Since fixed income investments are locked into a particular
interest rate, your earnings may not keep up should the inflation rate accelerate. The principal
you have invested also deteriorates in value if inflation rises steadily over a period of time.
For example -Lets assume that your tax rate is 20%. If you invest 2, 50,000 that gives you
10% return, you will get 25,000 as return from which you will have to pay 20% tax .
Amount invested 250,000
Maturity Amount 275,000
Interest earned before tax 25,000
Tax on interest 5000
Interest earned after tax 20000
Net amount in hand 270,000
Interest earned (20000/250000 ) x 100=8%
If inflation is 7%  The real return is (8-7 )= 1%

This implies that the value of money in your hand has increased only by 1% and not by 10%
or 8% although you were under the impression that you were earning 10% on your
investments. You have to be aware of this illusion.
Stock market investments- Inflation and stock markets are negatively co-related. When
inflation is high, it hinders economic growth of the country and such a scenario would
definitely affect stock prices negatively. So as inflation increases, stocks tend to perform
poorly.
Gold and silver investments –.The reverse would happen to gold and silver. Since stocks are
not attractive, investors would naturally resort to gold and silver which are safe havens. The
reason is that, as inflation begins to creep up, the purchasing power of paper currency loses it
value. Once paper currency has been invested into this precious metal, it will not lose its
value as a result of inflation. Hence, the prices of gold and silver would increase when there
is inflation.
Does that mean Investments in gold is  a protection against inflation? –
Yes, for the time being. We will show you how with an example-
Let’s assume that you have Rs 1000 in currency. Inflation is at 8 % and hence at the end of
the year, your 1000 is worth only 920. Instead, let’s assume that you bought gold. That move
will protect your currency from losing value. How? When inflation goes up, the demand for
safer havens such as gold will also increase (at least at the rate of inflation). Hence, if
inflation rate is 8%, the gold prices will also move up by 8% approximately.
In such a scenario, your 1000 invested in gold is now worth 1080 whereas if the money were
held in cash, it would have lost its value to 920. So when you invest in gold, you maintain the
 purchasing power at the same level. Heavy investments in gold can be considered as a
warning sign that inflation is coming. (Definitely, there are alternative theories that explain
why Gold investments may not be a safe bet in the long term)
  The government attempts to control inflation by altering the interest rates. Interest is another
vital concept, the knowledge if which, is absolutely necessary to take financial decisions and
comparisons. We talk about interest rates in the next post.
Inflation is an all round concept you cannot miss. The rate of inflation and the taxes you pay
on returns have to be accounted for while measuring returns.
Key Ideas:
 Inflation is a situation where there is a rise in the general level of prices of goods and
services.
 Inflation rate plays a key role in deciding returns from investments.

Don’t put all your money in fixed deposits

Author: Jins Victor
The fixed trap.
Most of us think that fixed deposits are a ‘risk free’ source of income. We are trained by our
parents to believe that. Right from our childhood, this is one simple investing rule  we learn –
If you have a lot of money as fixed deposit , you’re safe! This is the strategy that our grant
parents did , now our retired parents do the same and in future,  we too wish that we  want to
accumulate a lot of money and put it in bank FD – and be safe.
The reason for this is quite simple – irrespective of what happens in the economy, in the stock
markets or in the political environment country, your monthly income at a specific rate is
guaranteed. Even if the bank fails, the RBI would immediately step in and save all the
depositors and will make sure that you get your money back.
The truth, however is that, you earn money only if your investment can generate a post tax
income which is greater than the average combined rate of inflation and tax prevailing in the
country you are living. We will explain that:
Let’s take an example: 
Out Friend Mr X  invests 200,000 in fixed deposits for 8% interest and gets 16,000 as interest
at the end of year 1.
But effectively, he would get an amount lesser than 16,000.
That’s because of two factors: 1) Income Tax.   2)  Inflation.
Assuming that the bank deducts 10% as tax, Mr. A will get only 14,400.00 as interest.
Now, the second factor that reduces his income is Inflation. The average inflation rate in
India is around 8%.That means, his 214,400 is further reduced by 8% in value at the end of
year 1.
So Rs 214,400 gets effectively reduced to 198,518.By depositing money for 8% interest, he
dint actually earn anything. In fact he lost 1482 from his capital
Hence, if you have all your money in debt instruments like fixed deposits, you’re not safe.
Your principal amount would keep reducing in value over time , unless the inflation rate is
less. So, the point here is that, you have to look for investment opportunities where you can
generate an income that is higher than the combined rate of tax and inflation.
How to check:
Step 1. Multiply the money invest with the rate of interest offered.
Step 2. From the interest amount received in step 1, deduct the applicable tax.
Step 3. Find out the average rate of inflation prevailing in your country (search in Google, it’s
just a click away)
Step 4. Apply the rate to the amount received after step 2 and find the present value.
(how to find present value has been already explained in our earlier posts)
Now this post was not to discourage anyone from investing in debt. Debt investments have
advantages too. For example, for those who are very weak in risk tolerance, investing in fixed
deposits or debts like FDs may be the only way out. The second advantage is that the returns
are predictable. Whether it is 10% or 2%, you can calculate the returns in advance and plan
something accordingly. So it keeps that anxiety out the way. Third, fixed deposits /debts are
the only way to utilize funds lying idle for a very short time. Finally, at a very old age, when
you want to stop working or when your life doesn’t permit you to work anymore, the obvious
choice is to invest it in fixed deposits.

Prepare budgets.
Author: Jins Victor
What is a budget?
Budget is a careful allocation of your monthly income.  Based on a study of your income,
present expenses and future plans, a set of spending rules are identified. Then, you spend only
according to the pre-decided rules. The idea is to control expenses and make a surplus so that
your financial goals are achieved.
How to make a budget?
Budget is vital in keeping your finance in order. Before you begin to create your budget, it is
important to list out all your sources of income and expenses separately. Here’s a step by step
general guideline to make a good budget.
Step 1. Write down your sources of income
The first step is to write down all your sources of income. Apart from salary or business
income do have any other sources like rent or agricultural income? Have fixed deposits?
Remember to include all such sources of income.
Step 2. Set aside a sum for income tax.
You cannot start dividing your money straight away. The first and foremost thing to
understand is that whatever income you earn, you are liable to pay tax to the government.
That’s mandatory everywhere. Some of you may get income only after deduction tax.
Depending upon your expected tax liability, you are supposed to set aside an amount to meet
the tax commitments.Your tax consultant can tell you how much money you’veto set aside as
tax liability.
Step 3. Make a list of fixed commitments.
Once you have computed your total income after tax, the next step is to find out your monthly
fixed commitments. Fixed commitments include your monthly rent, school fees for children,
EMIs, SIPs etc… These are expenses that stay the same every month and you cannot bring it
down by adopting any cost cutting measures. First deduct the total of fixed commitments
from the amount you computed in step 2.
Now, what’s the balance left?
For example, you have a monthly income of 50,000 from which you have to pay a tax of 10%
which is 5,000. You find that your monthly fixed commitments work out to 28,000. So,
17,000 (45,000 – 28,000) is the balance left with you. This is the amount which is absolutely
in your control. You can save it or spend it!
Step 4. Variable commitments
Step 2 minus step 3 gives you a clear idea about how much you can spend on variable
expenses. Variable expenses are those on which you have absolute control. Expenses on
Items such as entertainment, eating out, gifts etc are variable. It depends on how effectively
you control it. It is in this category of expenses that you make all the adjustments.
For example, if you have decided to subscribe for one more Systematic investment plan, you
need to cut down and find money from your variable expenses part.
How to track your budget?
Total your monthly income and monthly fixed expense and monthly variable expenses and
see if your income is more than your expenses. If yes, you might be doing well ( still, you
need to check if something more can be saved from your expenses ). The surplus can be used
to pre-pay your loan commitments as soon as possible.
However, If your expenses are higher than income, that’s an alert sign. In this case, you’ll
have to control your expenses. If you have some surplus cash left, try to pre-close your loans
to the maximum extent possible so that your fixed expenses part can be reduced to that
extent. That step may be a bit difficult to do since it involves cash outflow. But, you can
definitely control your variable expenses part.
A budget once drawn will not remain fixed for ever. It may have to be re-drawn when your
income or fixed expenses part changes.
A Good financial budget planning should include provision for emergency funds. Provision
for emergency funds can be set aside as a ‘fixed commitment’ every month because it is very
important to have some money in the bank in case you need it for something unexpected such
as a medical treatment.
Just in case you had to spend a little more than your budget this month, make sure you cut
back your expenses in the following month and compensate for the overspending.
Instead of writing budgets on paper, it will be more convenient to use a spreadsheet like excel
where you can easily add or subtract or mike any corrections.  Corrections are possible
without much fuss and you can also easily plot a variety of different graphs to clearly see
things visually.
What are said above are very simple steps. We all do budgeting to a certain extent through
mental calculations, although unsystematically. If you are not budgeting you will never know
how your income vaporized.

Be wary about credit cards.

Author: Jins Victor
Credit cards.
Technically speaking, a credit card is an unsecured loan that carries a very high rate of
interest.  It is issued based on your income. The concept behind it is very simple – you can
purchase goods or dine in a restaurant without making immediate payment. The bank would
make the payment for you and will allow a credit period of 30 or 40 days to clear it back to
the bank. As long as you utilize this credit facility very cleverly, there’s no problem. In fact,
it’s like getting a temporary loan without any interest. If you can pay the amount due on it
within the credit period mentioned, it’s free money.  But that’s where the benefit ends.
What are the traps?
The first trap is that it will tempt you to shop more. Most of the credit card bills will also
contain a list of offers that’s too tempting. For example my latest credit card statement has a
shopping broacher attached to it in which I am offered an interest fee facility to buy a smart
phone at a particular rate mentioned in the broacher.  I can pay back in six equal installments.
It’s natural for youngster’s to get tempted on such offers.
The second trap is that the credit card statement will exhibit an amount called ‘minimum
due’ which if paid at the right time, will keep you out from the list of credit card defaulters.
Hence, after overspending, just in case you could not pay back the amount, you can still
survive by paying just the minimum due which would be around 5% of the amount
outstanding! For example if your dues are 35,000 your minimum due would be around 1,750
only. You may get an impression that this amount consists of interest and some portion of
principal but, actually, this amount would consist of interest and other charges only.  That’s
effectively 60% interest per annum. That’s why it’s such a killer.
Trap three– it gives you the facility to withdraw cash from any ATM counter. The moment
you do that, you’re billed 1.5% or 2% of the amount withdrawn as ‘processing fee’ and the
interest is charged on the amount withdrawn plus the processing fee. For example if you
withdraw 10,000 you will have to pay back 10,150 with interest on it till repayment. There is
no interest free credit period for cash withdrawals. It’s only for purchases.
Trap four– You will be tempted to do a lot of online shopping. There are hundreds and
thousands of online shopping websites now. Online purchases require your credit card
number to be disclosed. If such datas are not transmitted through a secured system, it may
reach fraudsters who will miss-utilize your credit facilities. Finally you’ll end up responsible
 for the dues they make. Online purchases can be made only through trusted websites which
has visa approval.
Trap five – If you have overdues on credit cards, that is, if you fail to make at least the
minimum due on the card, that going to cost you even higher. Once a credit default is made,
you will be slapped a fine of 250 or 500 plus a higher rate of interest. From there on your
liability will skyrocket if not cleared immediately.
Trap six – insurance that comes ‘free’ with credit cards- An insurance scheme will also
accompany most of the credit card offers. Telephonic marketers are employed by the banks to
trap in customers with credit cards to subscribe to insurance schemes that would take monthly
premiums from your credit limit allowed. The deal would look like a simple procedure, but
that’s not what credit cards are meant for. Credit cards should be used strictly for your
personal shopping purposes, within limits thereby utilizing the free credit limit that’s given to
you.
Credit cards are like boomerangs. If you know to handle it, it will give you results. If used
recklessly, it might just come back and hit your face.
The thumb rules are simple –
 First know when the credit cycle starts. (Say 1st of every month)
 Then know your credit period (say 30 or 50 days).
 Utilize those thirty days interest free. That is, do all the shopping in the first week
itself. If you purchase something on 25th, all you have is 5 more days left to clear off your
debts without interest.
 Always keep track of your credit limit and make sure you never cross that limit. Once
you cross the limit, you free credit period ends there and the money becomes payable
immediately.

Be wary about credit cards.

Author: Jins Victor
Credit cards.
Technically speaking, a credit card is an unsecured loan that carries a very high rate of
interest.  It is issued based on your income. The concept behind it is very simple – you can
purchase goods or dine in a restaurant without making immediate payment. The bank would
make the payment for you and will allow a credit period of 30 or 40 days to clear it back to
the bank. As long as you utilize this credit facility very cleverly, there’s no problem. In fact,
it’s like getting a temporary loan without any interest. If you can pay the amount due on it
within the credit period mentioned, it’s free money.  But that’s where the benefit ends.
What are the traps?
The first trap is that it will tempt you to shop more. Most of the credit card bills will also
contain a list of offers that’s too tempting. For example my latest credit card statement has a
shopping broacher attached to it in which I am offered an interest fee facility to buy a smart
 phone at a particular rate mentioned in the broacher.  I can pay back in six equal installments.
It’s natural for youngster’s to get tempted on such offers.
The second trap is that the credit card statement will exhibit an amount called ‘minimum
due’ which if paid at the right time, will keep you out from the list of credit card defaulters.
Hence, after overspending, just in case you could not pay back the amount, you can still
survive by paying just the minimum due which would be around 5% of the amount
outstanding! For example if your dues are 35,000 your minimum due would be around 1,750
only. You may get an impression that this amount consists of interest and some portion of
principal but, actually, this amount would consist of interest and other charges only.  That’s
effectively 60% interest per annum. That’s why it’s such a killer.
Trap three– it gives you the facility to withdraw cash from any ATM counter. The moment
you do that, you’re billed 1.5% or 2% of the amount withdrawn as ‘processing fee’ and the
interest is charged on the amount withdrawn plus the processing fee. For example if you
withdraw 10,000 you will have to pay back 10,150 with interest on it till repayment. There is
no interest free credit period for cash withdrawals. It’s only for purchases.
Trap four– You will be tempted to do a lot of online shopping. There are hundreds and
thousands of online shopping websites now. Online purchases require your credit card
number to be disclosed. If such datas are not transmitted through a secured system, it may
reach fraudsters who will miss-utilize your credit facilities. Finally you’ll end up responsible
for the dues they make. Online purchases can be made only through trusted websites which
has visa approval.
Trap five – If you have overdues on credit cards, that is, if you fail to make at least the
minimum due on the card, that going to cost you even higher. Once a credit default is made,
you will be slapped a fine of 250 or 500 plus a higher rate of interest. From there on your
liability will skyrocket if not cleared immediately.
Trap six – insurance that comes ‘free’ with credit cards- An insurance scheme will also
accompany most of the credit card offers. Telephonic marketers are employed by the banks to
trap in customers with credit cards to subscribe to insurance schemes that would take monthly
premiums from your credit limit allowed. The deal would look like a simple procedure, but
that’s not what credit cards are meant for. Credit cards should be used strictly for your
personal shopping purposes, within limits thereby utilizing the free credit limit that’s given to
you.
Credit cards are like boomerangs. If you know to handle it, it will give you results. If used
recklessly, it might just come back and hit your face.
The thumb rules are simple –
 First know when the credit cycle starts. (Say 1st of every month)
 Then know your credit period (say 30 or 50 days).
 Utilize those thirty days interest free. That is, do all the shopping in the first week
itself. If you purchase something on 25th, all you have is 5 more days left to clear off your
debts without interest.
 Always keep track of your credit limit and make sure you never cross that limit. Once
you cross the limit, you free credit period ends there and the money becomes payable
immediately.

Don’t lend money to every friend / relative.

Author: Jins Victor
Friendship and money : It’s almost like oil and water..
It’s difficult to watch your friends or relatives struggling financially. If you’re well off and
good at heart, you might want to reach out and help them. There’s nothing wrong to lend a
helping hand. In fact, we are supposed to help them in whatever way we can. That’s helping –
quite different from lending. When you help them with an amount, you don’t expect it back.
It could be a small amount. It’s ok if you don’t get it back.
But lending is different. You lend money when your friend or relative officially asks for some
money, stating a purpose and with a repayment term loosely said ‘I will return it as soon as
possible’.
What happens in such situations is that you will be held up in a dilemma-
It would be difficult to say ‘no’ given the depth of relationship between you guys. It would
also be difficult to ask for a written agreement. If you are good in finance, you will also have
a calculation of the interest income  that will be lost in the process. Since the repayment terms
says ‘as soon as possible’ and not a definite date, practically it could prolong for an indefinite
time and you may feel very awkward to remind him about your money. If you don’t help
him, you might just lose that relation also. It’s actually a trap. If you have lend money like
that, you have only two solutions left –
 Politely ask back the money indirectly.
 Write it off!
Lot of people have fallen in such traps and have lost their money. Remember, it is your hard
earned money. Whether you decide to lend  money or not is up to you. Here are some tips
that might help you take a decision –
 Ask your friend why he needs so much of money? If he cannot give a genuine answer
immediately, he’s hiding something from you.
 Watch what he is answering! if he needs fund for a medical emergency, consider
helping him. But if he needs funds to pay off another person from whom he has borrowed
money or to settle some financial deals which you find is not proper, you need to think twice.
 Search about how he has dealt with money in the past. Is he a reckless spender? Is he
constantly in a debt trap? What has he done with his salary so far? Does he party all night and
lives a lavish life ? If you are not comfortable with his life style and attitude, stay off. Politely
say that you can’t lend him money.
 If he asks for a huge sum which you cannot afford, say no immediately. Also if he’s
asking funds because he knows that you’ve got a loan from elsewhere, do not lend.
 Remind him about the money, just before the due date. Politely say that you’ll need
the funds very soon. In case he couldn’t make the payment on that day, ask him when you
can expect the payment. Let him say a date. Also make him explain the reasons why he
couldn’t give you the payment as promised.
 Based on what he has explained, set another date and time and tell him that he cannot
miss the date this time. Always keep your cool and never let show any frustration. Keep a
broad smile on your face while asking back your money. There should not  be any mistake
from your part.
 Still if things go worse, visit his home. Indirectly tell his parents / siblings / spouse
that there’s some money deal between you and him. That would automatically create pressure
on him.
 If you really want your money back, keep pressing indirectly but at the same time
never utter a rough word or show a frustrated expression. Once he gives your money back,
it’s possible that you guys may not be friends any more. Carefully think if this situation is
going to have any negative impact – at work place or between other friends.
Experts warn that loans given to friends or relatives can lead to strained relationships. With
the following words, we sum up our advice about lending money to friends / relatives:
 If you can afford to lose a friend, go after your money;
 If you can afford to lose your money, lend as much as you can ;
 If you cannot lose both, try to strike the golden mean!”

Don’t sign guarantees for loans taken by friends and relatives.

Author: Jins Victor
This is even more dangerous than what we discussed in the last post– Lending money to
friends. On the face of it, you might think it’s ok to stand as a personal guarantor.
Who is a surety?
When you stand surety for someone, you are promising the lender that in case of a default
from the borrower, you will take up the responsibility to pay off his debts. Sureties are also
known by other names such as ‘co-applicants’ ‘co-signer’ ‘co-borrower’ ‘guarantor’ etc.
Whatever be the name, the effect is the same.
Whether to sign a surety or not is not a simple decision to take. Because once you sign it –
 You completely become responsible for your friend’s debt.
 Your credit records are immediately updated with this information.
In case your friend defaults, you will also be liable for other expenses like legal expenses,
recovery expenses, court fees etc..
Your name will be added to the list of liability holders for credit score purposes. Hence you
credit score will be low and when you need a loan for your purpose, it might be difficult to
get one since the bank will count the first loan as your liability.
Why do we end up signing surety for others?
 The act of signing a surety is taken very casually by youngsters without thinking
about the consequences. They think that it’s ‘just a signature’ help for a friend.
 It could be your dearest friend who’d be asking for this help and it would be difficult
for you to say no.
 You might have previously made him guarantor for your loan. Hence, now it’s time to
reciprocate.
 May be your friends are taking advantage of your friendly character.
The only two questions that needs to be answered before signing a surety are –
 Do you know the borrower very well? Can he /she be trusted? do you know their
financial background – if the answer is yes and if they are from financially sound
background, go to the second question or else stop here.
 Can you pay off the loan In case the borrower defaults in his payments? If the answer
is ‘yes’ go ahead. Or else stay away.
So we sum up our discussion here. The basic rules are-
 If it’s your family members (your brother or sister) consider taking the risk.
 If it’s for your friends and cousins – think twice.
 If it’s for business partners – consult a financial expert like a chartered accountant.
And ,
 If it’s for your boyfriend or girlfriend or girlfriend’s best friend –  you are inviting
trouble!!

Alternative streams of income.

Author: Jins Victor
Why is it necessary?
No job is secured these days. A lay off or cut down in employee strength can be expected
anytime. Hence, if you rely on one income source alone, what would you do if there is a
temporary stoppage of work?  When you have different sources to earn money at the same
time, you have multiple sources if income. By doing that you are making your financial
future more secure.
We need multiple sources of income because, if you look around you’ll see that the cost of
living keeps increasing every year. Prices at the grocery stores, fuel costs, cost of medical
treatments, everything is becoming costly and hence, you have to think of adding new ways
to earn money. Should one source dry, the other one will save you.
But not all of us need to think on these lines. People who belong to high income class need
not think seriously about having a second source of income. Whether you need to try a
different source of income depends on your financial position.
What could be that second source of income?
Anything! You can start a small business or open a shop. It depends on what kind of skills
you have. For example – If you have excellent command over language, why not try content
writing? That something you can do from the comfort of your home. How about starting a
 blog and sharing some ideas? Know to play a musical instrument? Why not start a music
class at home?
How to get started?
First, look at where the opportunities are. The opportunities are going to be different for
everyone, depending on your skills, network of friends, business connections and most
importantly, what you find interesting to do.
For example, if you know how to cook, may be you can think of the following options-
 Write a book on cooking.
 Open a coffee shop
 Take cooking classes
 Do television shows
 Write about recipes in magazines
 Compete in reality shows like ‘master chef’
 Open up a large catering unit
 Arrange birthday  parties
 Open a web site and sell recipes
 Write a blog on food and nutrition.
 Specialize on one item like cakes or oil less cooking.
 Make a collection of traditional recipes country wise or culture wise.
 Sell homemade sweets.
 Run your own eating joints in big malls
 Run a franchise of big brands like KFC or Domino’s.
 Be a food and nutrition consultant.
 Take up sub contracts of large food chains.
So, basically you have to sit and think ways to build a source of income. The options are
many. It’s for each one of you to decide based on your skills and confidence.

Don’t over spend.

Author: Jins Victor
After all, you just have a life to live –why not spend and live it to the fullest? Sounds perfect
and positive, isn’t it? Unfortunately, if you are living your life like that, not everything is
positive and perfect. You will realize the perils of reckless spending when you face a
financial emergency. I have done it in my initial investing life, but soon realized that you
cannot discount uncertainties in life. A sudden drop in my monthly cash flows turned my life
into a nightmare. So, when I write this, I have my own experiences to back it up..
The principle is not very hard to follow – never take money from your savings or borrow
temporarily from your friend’s pocket to buy a little more luxury. Be it a slightly bigger
house that caught your wife’s imagination or the latest electronic gadgets.
Where is the problem?
The lifestyle you want to maintain depends on three factors:
 The circumstances in which you were born and bought up
 The kind of friends you have
 The place or community where you live.
Have you asked your parents about how they started their life? They din’t have a big car or
latest electronic gadgets. They probably didn’t live in the big apartment or villa they’re living
right now. They built everything brick by brick. It would have taken a lot of time, effort and
disciplined life to get to where they are now. That’s exactly the way you should also start off.
If you try to achieve all the life’s goodies in very short time, there’s every possibility that
you’ll borrow a lot of money assuming that you’ve the ability to re-pay everything in 5 or 10
years and chances are that you’ll get into debt trap should there be an unexpected fall in your
monthly income.
Another problem among youngsters is that spending habits are greatly influenced by their
friends and colleagues. Bank balance doesn’t matter, the car or home doesn’t matter – what
matters is the answer ‘yes’ to this question- Are you better off than your neighbor , friend ,
relative or colleague? If the answer is yes, you are confident, you feel happy. Or else – you
stretch beyond your limits to maintain yourself the standard of living that your friend has!
You will over borrow, over spend or do something to satisfy your ego. This category of
people falls into the trap of personal loan providers. Personal loans are easy to get. There is
less documentation and there are no restrictions on how you use the money. Since money
comes in quickly with minimum documentation, you won’t mind the higher rate of interest.
Another reason for reckless spending is that these days, a lot of technologically advanced
gadgets and appliances are introduced into the market that drives everyone crazy. Financial
schemes are introduced by institutions which would seem like a very simple deal. These
schemes are advertised in such a way as to lure customers. Such facilities tempt us to spend
more. When you buy into such schemes, what you are actually doing is getting into the
finance trap. I am sure 99% of people reading this would have done this in some form or
other.

Don’t get involved in financial litigations

Author: Jins Victor
Litigation is a time taking and painful experience. 
Be it against banks and financial institutions or against individuals – litigation is a painful
experience. The problem with these litigations is that in 99% of the cases, the matter may
drag on for years and years. So it’s always wise to give a careful thought before embarking
on any type of financial litigation.
Litigation involving lending institutions.
But the same cannot be said when a lending institution moves against you. Lending
institutions secure their funds through solid agreement that runs into pages. The borrower, at
the time of availing the loan, would have signed each page without even bothering to read
what’s written. In the case of mortgage loans, there is an ACT in India called the SARFAESI
Act which helps lending institutions to act fast against you. In the case of vehicle loans and
personal loans, institutions would take actions to recover their funds by seizing the vehicle or
by filing complaints at the economic offences court.
SARFAESI ACT- Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002,  popularly called The SARFAESI Act, grants  special powers to
lenders  to take the assets pledged without first going to court. Once the provisions of the Act
is applied , it gives juts 60 days for the borrower to repay his debts. If he doesn’t pay within
that time, the bank will proceed to seize the asset pledged. Alternatively, the borrower can
file an appeal in the court for extension of time. The court normally allows a time of 6
months in addition to 60 days.
So, what’s important is to find out who’s actually on the wrong side. Mere reasons are not
enough; you should also have the documentary evidence to prove your point.
If you are on the wrong side..
If you are on the wrong side, clear your debts the earliest. There is no point in starting a
litigation since anyway, you’ll be finally asked to pay back the amount with all incidental
expenses like legal fee, penalties, interest and fines. Finally it may add up to an
unmanageable amount. The best option in such cases is to reach an out of court settlement.
Such settlements may be advantageous to both the parties.
For example – you availed a loan, say a car loan, from a bank but unfortunately your business
is in troubled waters and you have made some defaults in paying monthly installments. Now,
in such cases, the bank has a separate recovery team who would liaise with you for pending
payments including penalties. The best way to come out of such troubles is to ask for a ‘full
and final settlement’. Ie, the agent handling the recoverywould give you a flat discount on
the capital outstanding (and not on the total dues including bank charges and penalties). You
can either sell off your car and pay it off, or find some alternative sources and finish off the
debt.
The advantage is –
You get a ‘one time settlement’ offer which includes a welcome discount.
Your asset is free of debt.
Your name is removed from the credit defaulters list.
The bank will not take any legal action against you.
It Saves a lot of time.
Save a lot of other expenses like attorney’s fee.
Preserves your reputation and goodwill.
Finally … Peace of mind – not only for you, but for your entire family.
The disadvantage is – 
Your credit history will be reported to CIBIL and the one time settlement discount given ,
payment defaults etc will be shown there .
In Future , financial institutions may not lend money to you.
On the other side..
Now let’s think about the opposite situation.  You have to get money from somebody. In
most cases that would be an individual or firm to whom you’ve given credit. You may have
some form of written agreement with you to prove your point. The best option is to try for an
out of court settlement since, if you go for a litigation against the party, it’s going to take
years and years to get a decree. The court generally doesn’t consider the economic effect of
delay in justice. Hence, they do not consider the effect of inflation or interest rates.
For example, if you sue a person to get back 2 lakhs, it may take 4 or 5 years for the court
procedures to settle and get back those 2 lakhs. Isn’t it better to try for a settlement of 1.75
lakhs immediately? The effect would almost be the same.
You can also try to bring in a mediator like a politician or a bureaucrat and find a solution to
the matter.
Financial litigations may take a lot of time to settle. If you are on the wrong side, today or
tomorrow, you will have to pay back the amount or your assets will be lost. If you’re right,
still it’s better to reach an out of court settlement or else your funds will be stuck for a long
time.  The Hence always try to avoid such situations.

Do pay your tax and file returns regularly.

Author: Jins Victor
When it comes to income tax, people are a bit reluctant to disclose their actual income and
pay tax. After all, why should you pay a portion of what you have earned working so hard,
Isn’t it?
It’s important to understand the logic of tax collection in the right spirit. The government
collects tax from all those who have income above a certain limit in order to run the whole
show. It’s collected for the welfare of each one of us. It’s the taxpayer’s money that’s used to
maintain roads, build new bridges,  highways, railways, bus terminals, airports,   provide
health care and education to the poor, build stadiums , maintain drainage systems , provide
street lights and traffic signals, waste disposal,  protect the environment etc..
Not only that, the equipments for defence forces, expenses for disaster relief, maintenance of
historic monuments, and running systems like elections, judiciary, and treasury requires a lot
of funds. Once source for the government is the tax that we pay.
The government can impose tax through several methods directly and indirectly. We do pay
taxes indirectly through sales tax and service tax that’s imposed on us when we buy goods
and services. When it comes to income tax, there is no mechanism like sales tax and service
tax where tax is automatically collected at every transaction point. Instead, we are supposed
to make a list of our net income from various sources and work out the total tax liability and
voluntarily disclose it to the government. Of course, the government does ensure that a
portion of your tax liability is deducted from the source itself.
So it’s basically for the betterment of the country, for our security and well being. More tax is
collected from people that earn more.  All of us are directly or indirectly benefited from this.
Hence, it’s our responsibility to pay taxes.
 Having a tax clearance has lot of advantages. Here’s a list of points that came into my mind
in no particular order:
The income tax return is considered as a valid income proof not only in India but also
globally. If you are looking for higher education or employment overseas, your present tax
status may add more credibility to your application. So it is a standard proof that you have
income and that you have paid your taxes due to the government.
If you are not paying income tax, it would be difficult to get a loan sanctioned in your name.
But if you have all the tax papers, it immediately creates an impression that you are a
responsible citizen and that you’ll not make default in repayments. Having proof that you
have disclosed your income and has paid tax speeds up your loan application process.
The PAN or permanent account number card is a valid proof for your signature and date of
birth. This card is required for all monetary transactions above a certain limit. It’s also
required to buy a car, to open bank accounts, to subscribe to mutual funds and to invest in
stocks.
Income tax law imposes severe penalties and fines for those who are not proper in disclosing
and filing tax. So, to be on the safer side, it’s always better to disclose your income and pay
the tax that’s due from you to the government so that you can be proud that you did your bit
for the development and prosperity of your country.
Before filing returns.
The income tax Act contains various provisions that may help you to reduce your tax bill. It
may not be possible for everyone to understand the language of law and hence, it’s prudent to
consult a tax practitioner who will guide you on the matter. By properly planning your tax,
you can reduce your tax liability to the minimum. By planning we mean an early planning of
tax – not at the fag end of the deadline. Tax planning is done by legitimately using tax
exemptions, rebates, reliefs and deductions to your advantage. To utilize the provisions of
deductions, you may be required to invest money in certain instruments like tax saver bonds
or life insurance premiums or may be required to donate to eligible schemes of the
government. All this cannot be done just before the deadline. There is a time limit for making
such investments and payments. Following steps should give a brief idea about how to plan
your tax:
 First,  list down all your sources of income. Possible sources can be – employment,
business, profession, gains from selling assets like land or shares, winnings from speculation,
interest, dividends, rent, commissions and brokerage.
 Estimate the total income for the year from each source.
 Add up everything and you get your expected total income.
If you have incurred loss from any source, make sure that you’ve deducted it from the total.
You need to pay tax only for the net amount.
 Calculate the probable tax liability.
 See if you can make any investments or donations that are allowed as deductions.
Such investments would reduce your tax liability. Keep minimizing your projected tax by
utilizing all those provisions. You may require the services of a tax consultant for this.
 Keep your tax bill at the minimum. If you’ve done that, you’ve planned your tax bill very
well.

Document your assets and liabilities

Author: Jins Victor
How many of us are systematic in document filing and protection?
All of us must identify and protect key documents in such a way that it’s easy to retrieve
when needed without any confusion. For that, first you need to classify your documents and
keep it in separate files at one place. You need to have a space in your shelf to keep all these
– at the same time, make sure it not within easy reach of children.
Now, let’s have a check at what are those important documents.
1. Financial documents like bank records, loan records, investments.
2. Documents of assets you bought like warranty cards.
3. Documents related to your health & education
4. Personal documents.
5. A summary of all these in written form- in a diary.
Financial documents : These include documents –
 Connected with bank  – pass book, statements, locker allotment letter, locker keys,
ATM cards, passwords, cheque books etc
 Loan documents – sanction letter, copies of documents pledged at the bank, a
certificate from the bank listing the original documents with them, EMI chart, periodic loan
statements etc.
It’s important to print quarterly statement of your account and check the charges debited. You
must check whether the bank is properly carrying out your auto debit instructions. You must
also have an idea about the type of account you are maintaining with the bank-whether it’s a
zero balance account or whether it requires a minimum balance to be kept. As far as
passwords of your net banking and Debit cards are concerned, you have to make sure that the
card number is written and kept your diary and a single but complicated password is required
to be memorized.
If you have availed loan from any bank, a copy of the loan application form submitted to the
bank is the first document you have to keep. 99% of us don’t have this vital record. If you
couldn’t do this because of circumstances – take a picture of the application form on your
mobile phone. Keep a list of documents submitted to the bank. When your loan gets
sanctioned, your sanction letter will contain the list of documents submitted by you as per
bank records.  This check list becomes extremely useful years later, when you pay off all the
liabilities and ask the documents back. Keep a certified photo copy of property documents
that’s pledged with the bank. Generally the title deed, prior deed, land tax receipt, building
tax receipt, location and possession certificate would be with the bank.
Apart from that, keep the original of the Loan sanction letter and EMI chart. Ask for periodic
loan repayment statement- this will help you to check whether the bank is charging your loan
 account with any extra charges. If you have insured your loan- documents related to
insurance. In case you pre pay the loan – you would have given post dated cheques or an auto
debit instruction through ECS. In both the cases, make sure that you demand the balance
cheques or cancel the auto debit instruction with your bank.
After finishing off your obligations with the bank, there are two more important documents to
be obtained and filed-
 Loan closure letter and
 a full repayment track.
Years later, when you apply for your next loan this letter may become handy.
Documents of other assets: these include documents of –
 Assets in hand- land documents, bills of gold/ silver  purchased, bills of other
expensive assets that have resale value ( like cars) warranty cards of expensive electronic
equipments, general insurance policies taken to protect such assets etc..
 Mutual fund statements, shares
Land and building is usually the most valuable assets people own. The original title deed
along with related documents such as possession certificate, location certificate, building and
land tax receipts etc should be kept in a separate file. Keep a video record of the entire
property.
In the case of shares and mutual funds, keep clear record of mutual funds, shares, insurance
etc you hold. You may also have money invested in your spouse’s or children’s name.
A clear list (with bills) of gold and diamonds especially if it is kept in the bank locker is to be
maintained.
As far as other assets like phones, mobile phones, calculators, fans & air conditioners,
televisions, music systems, computers, furniture, oven, refrigerator, washing machines & dish
washers, grinders, watches etc..the most important document is the warranty card with the
dealer’s stamp on it and the bill. These bills and warranty cards are easy to get misplaced if
you don’t put it in a separate file. Assuming that you have the above mentioned assets with
you – you must have at least 15-20 warranty cards and bills with you,  if you have filed it in
one place.
The importance of these documents arises when the equipment you bought doesn’t deliver
the performance that was expected within the warranty period.
Documents related to health & education: These include documents such as-
 Health insurance, medical reports, hospital OP cards, educational certificates etc..
Personal documents: These include documents such as –
 ID proofs, passport, driving license, PAN card, Power of attorneys, employment
cards, life insurance policies, birth certificates etc..
Although we were talking about protecting financial documents, there are other categories of
documents which are equally important -This would include identity cards, licenses, PAN
card, passport, voter’s ID, employment card etc..
 The above records of the entire family can be preserved in one file.
 This collection can also include few passport size photographs.
 Hospital registration cards of your family
 Phone numbers of your doctor and the hospital where you do regular check up.
 Other documents like your baby’s stem cell protection certificates, x-rays etc..Every
document that’s got to do with your family’s health should be in one file.
 Your education certificates – right from 12th to your professional degree to additional
certifications and diplomas – including a copy of the syllabus covered needs to be preserved.
Summary in written form.
Although everything is in place, you still need to write down the details in a dairy and keep it
for ready reference. For example -All your bank accounts numbers – bank and branch
address, details about the nominee, Credit card numbers, Details about all the insurance
policies you hold- this should also include certain type of polices that comes free with certain
financial products. If you can Keep track of all your investment commitments in a diary or
planner, it would help you to be systematic in yearly payments.

Buy insurance immediately

Author: Jins Victor
Insurance:
One interesting fact about insurance in India is that it’s never bought for the right reasons.
Some consider it as an investment; others buy insurance because of tax benefits that’s offered
by the Indian income tax Act , some people buy it just to get rid of that advisor who keeps
politely appearing every morning  ‘n some buy it because it’s difficult to say ‘no’ to that
known guy who could be you relative/banker/friend/ acquaintance.
Indians were a bit reluctant to buy insurance in the past. However, the scenario is changing
and young people out there realize that it is a must for everyone – simply because it provides
security and safety. It doesn’t come free; you have to pay for being safe.  The amount you
pay is called premium.
Insurance can only compensate for the financial loss that occurs due to death of an earning
member or serious health issues that requires huge money out flow or loss /theft/damage of
expensive assets. Some insurance companies sell policies like ‘child policy’, ‘marriage
endowment policy’ etc. These are nothing but life insurance polices in different name and
form.
Types of insurance:
Insurance falls into three categories and we are listing it out in the order of importance-
  
Health insurance is to protect your wealth. The cost of hospitalization and medical treatments
are going high every day with advancement in medical sciences. A health policy gives the
financial support required for availing medical treatments.
Life insurance keeps a family safe from the sudden fall in finances just in case something
inevitable happens to the earning member of that family.
The last one, is to protect all your assets and belongings against damage, repairs etc.
Insurance companies have also come up with innovative products like stock market linked
policies. Such policies combine the risk and benefits of stock investments along with
insurance protection. But these instruments should be opted after very careful analysis. It is
always better to stick to traditional or simple insurance schemes which you can understand.
Selecting the policy that’s right for you.
Selecting a policy is not a simple task. A financial planner would be the right person to
advice you on this. We advice so because, before taking insurance, a lot of factors have to be
taken into consideration. For example – while opting for life cover, one should carefully
estimate his present liabilities, the standard of living that he would like to maintain for his
family in his absence etc.. So, it’s no simple task to work out the right mix of life, medical
and general insurance for a person.
Some practical tips:
If you have already opted for insurance, that’s a very positive step you’ve taken
Apart from opting for insurance, there are three more important steps to do from the practical
point of view.
 All the policy documents must be kept in a file, with a summary written on top of it.
 It should also contain the agent’s number, local office contact number and the 24 hr
helpline number of the insurance company.
 The summary can also contain a description of the steps to be taken in case of an
emergency.
 Finally, you have to teach your nominees about how to make a claim from an
insurance company.
These steps are very important because, when something happens to you, your family would
already be in very tensed and vulnerable situation and that may not be the right time for your
loved ones to go clueless on where the documents are kept and how to go about with the
claims. It’s no easy process to make a claim. There are several documents to be produced,
especially in the case of death claims. It’s more complicated if it’s an early death claim
(claim within 3 months). So knowing all this would avoid a lot of stress at that time.

Do assess your net worth

Author: Jins Victor
Net worth: 
Net worth is simply, your assets (less) liabilities.
Net worth Assets  –  liabilities.
Assets You own them. You can sell them anytime and take cash.
Liabilities You owe them. Money flows out until these are settled.

 
Assets.
Look around. You have lot of assets with you. Some of them are very large assets like land
and others are personal ones like a gold coin or a ring.
The assets you have can be classified into moveable assets and immovable assets. Immovable
assets are those which cannot be ‘moved’ from where it is exists – for example the villa or the
apartment you own.
Moveable assets are those assets which you can take along with you where ever you go. All
the assets apart from the villa or flat you own would fall in this category. For example – gold,
shares, mutual funds, insurance, fixed deposits, refundable deposits like rent deposit, cash,
vehicles, furniture, electronics, art works, antiques, musical instruments, coin & stamp
collections, jewellery, books etc..amounts you’ve lend to your friends /relatives .. All these
are your assets.
Some of you (for example – poets or authors) might also posses certain assets which exist
only in value – for example copy rights and patents. These are also assets. These assets are
called ‘intangible’ assets- ie, assets which cannot be seen or touched, at the same time it has a
value which can be realized if sold.
Liabilities.
The liabilities you owe include home loans, vehicle loans, business loans, personal loans,
credit card dues, unpaid taxes, any other amount borrowed from your friends / relatives,  plus,
students who have just got a job may have student loans pending.
Measuring assets and liabilities.
Having known what your assets and liabilities are, the next question is how to express these
assets and liabilities in monetary terms. Here are some pointers:
Can be valued at the fair market value. Fair market value is the price
that a willing, rational, and knowledgeable buyer would pay. Fair
market value is recommended for immovable assets because, people
Land and Building tend to attach a lot of sentimental value to such assets and hence put a
price tag which might be on the higher side. Fair value concept keeps
this mistake in check.fair value of immovable assets can be measured
by availing the services of a registered property valuer.
Shares Use the current market value.
Silver and Gold Use the current market value.
Mutual funds Use the current NAV
Furnishings and An itemized price tag need not be made. It’s enough if you can put a
electronics consolidated value for all.
Fixed deposits and
Use the current value and not the value at maturity
bonds
Add up only the surrender value of insurance (and not the maturity
Insurance
value).
Amounts receivable
from friends and Add amounts only on actual receipt.
relatives
Artworks, coin These can be highly subjective.To include the value of such assets, you
collections, musical will have to value them by professionals or have a good idea about how
instruments and much someone would pay for them in today’s market.- add up
antiques everything and you will  get the value of what you own.
Patents and copy These are also are highly subjective . The value of intangibles  should
rights be decided by professionals

 
As far as liabilities are concerned, it’s fairly simple to calculate the amount. Most of the
amount you owe would be in the form of credit card dues or loans and hence, the right idea is
to take out the loan statements and then check the actual outstanding liabilities. Remember to
add a margin of two or three percent to it because, most of the loans when closed pre-
maturely would attract pre-closure fee. For other liabilities like amount borrowed from
friends and relatives, consider the actual amount outstanding. (Unlike banks, your friends are
not going to punish you for being prompt) That’s the liabilities part.
How to calculate your net worth.
Make a list of assets first. On the left side,  list the names or categories of assets and on the
right side,  write down the value of each asset determined by you. After listing all the assets,
add up the figures – that’s the total of assets for you. Mark the total as ‘A’. Deal with
liabilities in the same manner. Mark the total of liabilities as ‘B’. A (minus) B is your net
worth.
Net worth must be reviewed every year.
Your net worth will keep changing even if you don’t do anything to change it. That’s
because, the value of assets and liabilities keep changing. For example- one year from now,
the value of land, building, gold etc in all probability, would have increased. The value of
shares and mutual funds can go either way, the realizable value of assets like vehicles,
furniture, electronics etc…will come down due to usage , wear & tear and technological
changes. If you have paid your EMIs regularly, your liabilities will also reduce in a year. So,
It’s important to check your net worth and track the changes periodically.
Is there an ideal net worth?
There is no ideal net worth figure that fits all. There is no need to investigate into such a topic
because the message is quite simple-
If you are having a negative net worth, you financial condition is not healthy. You need to
think of ways to better your position.
Having a positive net worth is always preferable than a negative net worth.  It’s a healthy
sign.
Higher the net worth, the better it is.
Formula from ‘the millionaire next door’. 
If you are still interested in some benchmarks, Thomas Stanley and William Danko, in their
book ‘the millionaire next door’, suggests a general formula:
Net worth = Age x  Pre-tax Income /10
So according to this formula, if you are 30 years old and if your annual  income is Rs
2,50,000, your ideal net worth will be:
30 x 2,50,000/10= Rs 7,50,000
As you grow older, your required net worth will also go up.  It’s Simple and very effective. It
keeps giving you higher targets as you grow older. In other words, it’s ok to have some loans
or liabilities when you’re young, since, you have the advantage of age on your side.
Our Suggestions.
Don’t panic if you discover that your net worth is negative. If your net worth negative, It
means that – right now, if you sell all your assets, it will not be enough to settle all
your liabilities. Take it as a message that you have to find ways to re-organize your financial
position.
Negative net worth is not a case to worry because, as long as you keep paying your EMIs on
time, you are making your liabilities smaller. If your assets list has cash / gold/ land/flat etc..
the value of those will keep increasing. The net effect would be a faster growth towards
positive net worth. So with time, your net worth would gradually improve.
You can improve your net worth by closing your loans as soon as possible,  reducing your
cost of living ad by investing the surplus.
 Calculating net worth is a very useful task since you  get an instant list of what you own and
what you owe. Periodic check would motivate you to work hard and reduce your debts.
Improvement in your net worth would give you more confidence in life.
So that’s net worth for you. It gives a snapshot of your financial health.  This is the first
figure you require to plan your financial goals.

Do Plan about retirement when you’re young!

Author: Jins Victor
Retirement : 
All of us have to retire from doing regular jobs one day or other. Depending on our
business/profession, the age of retirement can vary. For example , for businessmen and self
employed professionals, retirement is by choice. For employees, there is an age fixed by the
organization, for sports men when their body doesn’t listen to their minds, for actors when
they are no longer accepted and for politicians when they die.
However, it’s not necessary that all of us would work till retirement age as said above. For
some of us, a compulsory retirement may be required due to health issues or any other
unforeseen circumstances. Irrespective of whatever job/profession you’re in , retirement
reduces (or stops) your monthly income. However, since expenses will only keep increasing,
your post retirement life is not secure unless you’ve financially planned ahead for it. Hence,
an ideal retirement is when you have made enough money to retire. This thought brings us to
two basic realities :
Two basic realities about retirement
Retirement is not when you cross a particular age or health condition. You can think of
retiring when your wealth crosses a certain limit.
 Retirement can happen unexpectedly. All your plans may turn upside down in a day. Hence,
it’s very important not to postpone your plans to make a retirement corpus.

 
Retirement doesn’t mean that your monthly income has come to a dead end. For example, my
cousin who retired as an RTO, now takes road safety classes and keeps his monthly income
alive. So, post retirement, some of you may have some income coming from sources like the
one mentioned above. It depends from person to person. It is after this stage that you rely
solely on funds that would generate a solid monthly income- like fixed deposits and RBI
bonds.
4 easy steps to make a retirement plan.
 Step 1. The first step in retirement planning is to know how many years are left to
retire.
 Step 2. This step is very personal. You have to estimate how long you’re going to
live! Nobody can estimate that correctly but, for the purpose of calculation, some sort of an
‘estimated remaining life’ has to be arrived at. From these figures, you should calculate the
 length of post retirement life you expect. Nobody can help you on this. This is an entirely
personal calculation.
 Step 3. The third step is to project your retirement needs. How will you estimate your
post retirement expenses at a young age? The first task is to assess your present life style.
Your post retirement life style you would like to maintain will not be much different from
your present one. The key to estimating expenses is to know the concept of inflation and then
know how to compute inflation adjusted expenses.
We will explain this with an example. We assume that you are 45 years old and hence 15
years away from retirement. Right now your monthly living expenses are Rs 10,000 and the
inflation rate is 8%. To know the equalent monthly expenses after 15 years, this is what
you’ll do-
Present expenses x (1+inflation %) N (number of years left)
How to apply the formula ?
 First, calculate 8/100 = 0.08
1+ 0.08 = 1.08
 Type 1.08 on your calculator , press the multiply sign and hit ‘=’ button 14 times.
You’ll get 3.17 as the answer. (If you are calculating for 20 years hit the ‘=’ button 19 times )
Multiply Rs 10,000 with 3.17 = Rs 31,721. This is the answer.
What does that mean?
This means that, today if your living cost is Rs 10,000 per month, then 15 years later you’ll
have to spend Rs 31,721 to maintain the same standard, assuming that the cost of living rises
8% every year.
You‘ll have to estimate your future expenses using the same logic. Generally in India, 8%
can be assumed to be the average inflation rate. The only difference you have to make in your
estimation is that certain expenses like traveling expenses tend to come down when you retire
(because you may not travel as frequently as you do today) and certain expenses like medical
expenses will go up (because as you grow older, your health deteriorates). Applying this
logic, you’ll have to estimate your reasonable future living costs.
Step 4. From the estimate, you will be in a position to find out how much fund you need in
fixed income generating instruments so that you can maintain your present standard of living
in future. If you require Rs 30,000 per month in future, then you need roughly 35 lakhs in FD
at 10.50% interest rate, 15 years hence.
Now that you know your goal, start investing in various assets !!
Right now-time is on your side.
The biggest mistake most of our parents did was that they failed or they kept postponing
about their retirement plans until it was very late. Right now- for all the working youngsters
out there – the advantage for you is that there is plenty of time to plan and accumulate wealth
for your retirement life. Earlier the start, lesser the effort. An early start will also give you a
lot of freedom to make risky choices like equities and mutual funds.
What’s the concept of Diversification in investments?
Author: Jins Victor
Diversification
Diversification is one of the central concepts in investments. The theory says that your money
should not be locked in any one asset. It should be split to buy different types of assets like
land, shares/mutual funds, gold, FD’s etc.
The reason?
 It’s quite simple – no asset class can keep delivering profits year after year consistently.
That’s because, every asset moves in a cyclical trend. There will be exceptional growth in
some years and then it will be followed by sluggishness. This phenomenon is true in almost
every asset class. So, if your investment is in a single asset, you make money only if that
asset increases in value and at the same time, you also miss the chance to participate in any
other asset boom. Hence, the risk you take is high. For example – what would happen if
you’ve put all your money into stocks and the stock market tumbles?
The way to reduce such risks is to diversify your money into various assets. In fact,
diversification is one of the cardinal rules of investments.
Two levels of diversification.
Diversification should be considered at two levels-
Level one Diversifying between major asset classes.
Level two Diversifying within the same asset class.

Level 1.
At the first level, your money should be diverted into various assets which are not correlated.
For example – if you have 60% of investments in stocks, then it’s not a good idea to park
your balance 40% in mutual funds or stock market related instruments since, when stock
markets crashes, such assets drop in value.  Instead, bonds or fixed deposits may be a good
option since these assets tend to perform well when there’s a market crash.
Level 2.
One more level of diversification is required-this time it’s within the asset class. For example
– if you have decided to diversify some amount into real estate, it is better to buy 2 plots at
two different places rather than locking up your funds in one huge property. Or if you are
planning to invest in stocks, its better buy a mix of large caps, mid caps and small caps  in
different sectors.
Over diversification is also risky.
You have to diversify and make sure that your funds are in different baskets. Fine. But that
does not mean that you should put your money into as many baskets as possible!! That results
in over diversification. An over diversified portfolio would be very hard to monitor. Periodic
monitoring of your investments and re-balancing of investments between various asset
 classes is necessary to keep your portfolio growing.  Hence, while diversifying your portfolio,
it is important to keep the number of asset classes at a manageable level.
How to allocate your money?
The basic idea of diversification is to have different kinds of investments. That means, you
should have some or all of the following assets in your kitty-
Stocks Fixed deposits. Real estate.
Cash Gold Bonds

Here’s an illustration:
Step 1:
The first step is to set aside some amount in cash so that you can meet any emergency. It’s
basically an emergency fund. How much would be required depends from person to person.
Let’s assume that you need 20% of your money as emergency fund. Out of this money 65%
can be kept in short term deposits ( for example 2 or 3 month fixed deposits) and the balance
35% in liquid cash.
Step 2:
As a next step, subtract your age from 90 and invest the resulting percentage in stocks. For
example if your age is 35, invest 55% (90-35) of the remaining fund in stocks.
Step 3:
The balance 45% can be invested in bonds, real estate or gold.
Step 4:
Now, within that 55% invested in stocks, you need to diversify further. You cannot invest all
your money into one stock or sector. You have to choose 4 or 5 independent sectors to invest.
For example, you can consider investing 10% in an industrial giant like Tata, 10% in Pharma
sector, 10% in banking, 10% information technology and 15% in mutual funds.
Step 5:
Since you are going to invest 10% in a particular sector, you need to make one last
diversification. Every sector consists of large caps, mid caps and small caps. Depending upon
the risk you’re willing to take, you need to split that 10% across various market caps. 70% in
large caps, 20% in mid caps and 10% in small caps would be a decent split.
Now, assuming that you are 35 years old, let’s have a look at your portfolio, if you had 30
lakhs to invest:
 You would have kept 6 lakhs as emergency fund, out of which 4 lakhs earn short term
interest and the balance earn interest at savings bank rate.
 Out of the balance 24 lakhs, 13 lakhs will be invested in equities.
 The remaining 11 lakhs in a mix of gold, fixed deposits or bonds (in all probability,
this should give an average annual return of 9 or 10 %.)
 Out of the 13 lakhs set aside for equities, 2 lakh moves to mutual funds and the
balance 11 lakhs across 4 different sectors at 2.75 lakhs each.
 Out of that 2.75 lakhs in one sector, 1.90 lakhs will be invested in large caps 0 .60 in
midcaps and the balance 0.25 in small caps.
Graphically, the overall plan would look like this:

 
That was a general example. The ratio of diversification depends on a person’s risk bearing
capacity, age, financial goals, amount of funds invested and many other personal factors.
There are also many other asset classes like arts and antiques which can be considered for
diversification provided you have good knowledge in it’s valuation.
It’s important for everyone to sit with an investment consultant and draw up a plan like this.

What is the concept of valuation in finance?

Author: Jins Victor
The concept of Value.
Every asset has a fair value which would be different from its market price. The market price
of any asset purely depends on the changes in demand and supply equation and need not
reflect the true value of the asset. Hence it becomes important for an investor to find out the
approximate fair value of an asset before investing in it.
One simple rule in investing is that an asset should be bought when it is available at a bargain
so that in future, when the asset gains in value, the profits you make is high. The question is,
 what’s the basic process to know an asset’s true or fair value? The answer lies in a process
called valuation.
To put it straight – valuation is an attempt to know what an asset is ‘really’ worth. All assets
like gold, land, villas and apartments, arts, antique pieces, shares, bonds, mutual funds or
even cars and electronic items have to be valued so that you have a reasonable estimate of
what you’re going to get for the money you pay.
In simple words , like many other things,  investments we make should also have a value for
money approach.
Is it a new concept?
Valuation is not a new concept. We do a lot of valuation in our daily lives.  Let’s take the
example of a couple who wants to buy a new villa. How would they know if the offer price of
the villa is right? The solution is to approach a registered property valuator who will visit the
site put the right price tag for it. Then, find out how much others have paid for similar
properties in that area. Buy it only if the price quoted approximately matches with the
valuator’s opinion. Lower the price, better the bargain.
Is it possible to value any asset?
Yes. It’s possible. It’s practical too. The level of knowledge required to value an asset
depends on the asset type and your knowledge about the particular asset.
All assets types are not easy to value. Some may require an expert’s help or opinion.
Different methods are used to value different assets – for example the method used to value a
property is entirely different from the method used to value mutual funds. Whatever be the
valuated figure, remember that it is still based on certain estimates and assumptions. Hence,
valuation itself is not fool proof. There will be an element of uncertainty in value estimates.
Why valuation is the core?
 Asset prices are prone to overvaluation as the demand for it increases.
 These overvaluations can continue for many years and one day, it will eventually
burst and cause the price to fall lower than its fair value. We have already witnessed this
scenario in stocks and real estate 2007-08.
 High demand is only one of the reasons for over valuation. Asset prices will be
inflated if there is excess money in the financial system, high speculative activity, reckless
lending by banks, low interest rates etc…
 Herd behavior or the tendency to follow what the crowd is doing is also another
reason why over valued assets are traded in the market.
 In a bull market (for any asset in general) investors ignore valuation and concentrate
on the trend of price movement. They chase prices and focus on the possibility of resale of
the asset. When they see the trend of rising prices, they buy those assets in hope of profiting
from the increase in value.
 It’s just like gambling at casinos. The game goes on and on and someone, at the end,
will lose all his money.
In stock and commodity markets , traders buy assets at a higher price hoping that it can be
sold to the next highest bidder. Their analysis may be based on technical factors like demand
 and supply or any other basis like trend or oscillators. Whatever it is , their actions are always
risky as long as it doesn’t confirm with the fundamental valuations. History tells us that every
time after a boom the prices have corrected back to its fundamental levels.
Hence, be it shares or mutual funds or property or currency- irrespective of the asset you
choose to invest, buying decisions should be based on valuation or else, you will end up
buying the assets at the wrong price.
General indications to know if an asset is overpriced.
General indications that an asset market has started getting overvalued is when-
 Everyone is interested in the asset. There’s so much of hype around it.
 There are many first-time investors entering the market.
 Everywhere you observe people talking about the same asset.
 There’s a lot of  stories circulating around like – the story of a taxi driver who made a
killing from the market or the story of an employee who resigned to take up investing as a
full time profession and made millions.
 There’s a lot of warning bells ringing around, but no one cares to listen and the asset
price keeps going north.
Key ideas: 
 Valuation is the key to investing in any asset.
 Valuation is based on assumptions and estimates.
 Since valuation is based on certain assumptions, projections and past data, investing
after finding the right value has a lot of risk attached to it. Imagine the risk of investing
without valuing the asset.

Principle 24. Gold – A must in your portfolio

by J Victor on August 22nd, 2012

Gold is the base of monetary systems around the world. It’s an asset that’s highly liquid,
accepted everywhere and considered equivalent to cash.  It’s also one of the lesser volatile
commodities traded internationally.
Gold is very effective in bringing solidity into your portfolio and reduces investment risk. In
terms of returns, it’s not a very effective tool to bring short term profits. Gold gains in value
over a period of time and hence, you will have to wait for some time (say 5-10 years or
sometimes more than that) to see the real effect of gains.

How to invest in gold?

Gold can be bought in different ways. You have 7 options –
You can buy-
 Gold jewellery
 Bullion bars from jewelers that are part of the world gold council
 Gold coins issued by various banks
 Gold exchange traded funds
 Equity based gold funds
 E-Gold
 Take positions in Gold futures and profit from the price movement.
The first three options are about buying gold physically. If you have bought Gold jewellery,
we are sorry to say that it’s not a right move from the investment point of view because, you
would have paid an additional of 5%-30% of it’s value as making charges depending upon
the design and some money on precious stones used in them. These stones are valueless and
do not appreciate unless it’s a piece of diamond. Making charges paid is also a waste of
money. Banks charge around 5% premium for coins sold through them. Bullion bars /coins
bought through WGC networked jewellers may be the better option here since; they generally
sell gold for a 2% or 3% premium. So if you want to hold gold physically, it would be better
to buy it from WGC networked jewellers since they are the cheapest option.
Now, physical holding of gold risky since it is prone to loss by theft / fire or such other
accidents. To protect from such losses, you will have to insure it and that will be an
additional annual cost to be incurred until you sell it off. The purity of gold sold by jewellers
is an issue that’s hard to crack. Again, it may be impractical to store it physically beyond a
certain limit and in the case of an emergency if you go to a jewellery to sell your gold, they
might not accept it straight away.
After reading the above paragraph, if you think that storing gold physically is not practical,
you have the last four options – Gold ETF, equity based gold funds, e-gold and futures
positions in gold.
Gold ETF is nothing but mutual fund schemes that invest only in gold. One unit would
roughly equal one gram of gold. These funds are managed by asset management houses. If
you don’t want investment houses to get involved, you can directly purchase e-gold launched
by the national spot exchange. In both the cases, you will be holding gold in electronic format
– just like investment in stocks.All you need is a demat account.
One more category of electronic gold is equity based gold funds. Equity based gold fund are
basically mutual fund schemes launched by asset management companies. They do not invest
directly in gold (when fund houses launch direct investment in gold, they are called gold
ETFs) instead, they invest in stocks of companies that are engaged in mining, extraction and
trading of gold.
The last option – taking positions in gold futures – is a risky game. All the negatives and
positives of derivative instruments are relevant here also. It’s would work if you can
reasonably predict the price movement of gold in the short term. It’s basically speculation (or
trading, if you want to call like that) and cannot be brought under the ‘investment’ category.
How much to invest?
As a general rule, around 10 % of your investment fund can be in gold.
Which is the best option?
The best option would be to hold gold in electronic form – through ETFs or through e-gold
route. In the first option, the additional amount you have to pay is the brokerage charges plus
annual fund management charges. In the second case, your annual holding cost is zero. In
both the cases, you don’t have to worry about the security of gold since it is held in electronic
form in your demat account and the rates quoted in the exchange is 99% at par with the
international gold prices.
By definition of the income tax department, gold a capital asset. Any gains from investment
in gold are treated as capital gains. In the case of ETFs, it is considered as a long term capital
asset after one year and in the case of e-gold and physical gold, it is treated as a long term
 capital asset only after 3 years. The relevance of this is that, long term capital gains are taxed
at special slab rates declared by the income tax department whereas, short term gains from
gold ( in the case of gold ETFs, gains made by buying and selling ETF between 1-12 months
and in the case of physical gold /e-gold, gains made by buying and selling it between 1-36
months) is taxed at normal tax rates.
So we think that the e-gold route would be the best. Gold ETF comes second.
What’s the risk of investing in gold?
Generally, gold is a safe investment. It beats inflation. The risk is that sometimes, especially
in boom periods, you’ll find the performance of gold to be slower than other asset classes like
equities and real estate. So, the real risk lies in the opportunity loss.
With this we sum up our  24th principle. Know that –
 Gold is an insurance against inflation.
 It’s a good investment, but not the best one since it’s a slow performer.
 It brings stability to your portfolio
 Jewellery is not a right form of investment as it’s cost  involves making charges and
the purity of gold sold by local merchants are always questionable.
 Physical gold are prone to theft or other losses. Gold kept in bank lockers are not safe
since, the lockers of most banks are not insured and the bank is not responsible for your
assets kept in lockers.
 It’s a capital asset and hence any gain on gold would be taxable.
 Paper gold or gold held in electronic form is the best way to invest in gold.
You may like these posts:
1. What is a portfolio? What’s portfolio management?
2. Principle 22. Diversify your investments.
3. Principle 23. Valuation is the key to right investments.