Personal Finance 2.01

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This is the fourth in the series of Financial literacy series. Previous ones here: 1, 2, 3.

Age of an investor, family situation and health are important determinants of financial goals. Also financial goals and plans depend on the income, expenditures & cash flow requirements of an individual.

For the purpose of ideal financial planning, investors can be segmented according to certain stage in their life cycle

Stage I : Ages: 20 to 30 (Unmarried, Young Professionals)
Stage II : Ages 30-45 (Married, With or Without Kids)
Stage III : Ages 45-55 (Pre Retirement)
Stage IV : Ages >55 (Retirement)

Let’s start with the first stage: Life Cycle Stage I : Ages: 20 to 30 (Unmarried, Young Professionals)

• Continuing higher education or just started working
• May or may not own home
• May or may not have dependents

Financial Needs Are Immediate & Short Term

• May still have some support from parents
• May be saving towards future family needs - say buying home
• May be paying off education loans
• Likes to spend money

Ability to Invest :

• Limited due to higher spending

Choice Of Investments :

• Liquid plans & short term investments.
• Some exposure to equity and pension products,
• Term Insurance plan

The second stage comes in another post!

Asset Allocation, Financial Literacy Series

I kicked off a series on financial literacy by setting a backgrounder and something on financial systems .

The term `financial market’ refers to the means through which buyers and sellers are brought together to transact the financial products. The Major Functions Performed by the Financial Markets
o Price Discovery
o Liquidity
o Lower Transaction Costs

Price Discovery
Financial markets provide a centralized place for trading in financial products. This `place’ need not be physical. It may be virtual such as the online trading system of the National Stock Exchange. This feature enables the prospective buyers and sellers to discover the going price and take appropriate decisions.

Liquidity
Financial markets also provide a mechanism for the investors to sell their financial assets. For example, if an investor wishes to sell his shares, the equity markets offer an easy exit.

Lower Transaction Costs
Financial markets save a market player the cost of locating counterparty to his transactions. The counterparty can be readily found by going to the appropriate market.

We will discuss Financial Market Segments in the next post. Crossposted on the website’s Learning Centre and Ranjan’s Blog

Financial Literacy Series

How do you get in touch with an Advisor when you need one? Depend on your friendly neighbourhood guy who is more of a family friend? 

I have realised that my friendly neighbourhood finance advisor does not have the knowledge of all financial products and at best he gets work done in his/her area of insurance, mutual funds, stocks or some other financial product. And the knowledgeable financial planner are too hard to find. Media tells me to take my own decisions based on my own risk appetite and financial goals. So the ball is back in my court.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from.  

Internet enables information sharing in a powerful manner and is a medium where we can help each other in matters of personal finance. That brings me to the thing I have done!!

Take a look at this one. This is to be launched in August but I’m giving you a preview!!

Suggestions are welcome.

Financial Advisors Directory: We invite professional and net savvy advisors to register and provide the information needs. This one is a first in India to the best of my knowledge…..

Personal Finance

Squidoo is the world’s most popular site for people who want to build a page about their passions. Highlight books, blogs, vids, online shops, or just spread the word about stuff you love.

So that’s what I did today. Made a lens about Personal Finance. Go, take a look.

And Seth Godin is the man behind this amazing squidoo!! It’s fast, free, and supereasy. So if you have something to talk about, why don’t you build a lens for yourself too. It also makes sense for the SEO guys to have your blog/site talked about at a high PageRank site. Go, help yourself.

Personal Finance

I have been busy working on the financial literacy programme for me and you. If you have come here without looking at this backgrounder post, It will be my request that you take a look at the introduction post too.

Before we discuss in detail the various instruments available in the financial market and their role and significance in personal financial planning, it would be helpful to have a brief overview of the financial system in India.

The Financial System Consists of
o Financial Market Segments,
o Players in the Financial Markets
o Financial Instruments

The financial system basically facilitates transfer of funds from the cash surplus economic units to those who need it, and does it in the most efficient manner.

There are three major types of economic units.
a. Households where personal finance is involved.
b. Business entities which resort to Financial management and we can refer it as business finance
c. Government where we come across fiscal and monetary policies.

Usually, the business entities and governments are fund deficit units and require funds to finance their capital and operational expenditure. The householders as a group are net savers and channelise their savings to the other units through the mechanism of the financial markets.

So you and me are surplus economic units and the government and business use our money and make us look like beggars!!

This fund transfer from the surplus units to deficit units may be done in one of the two ways – directly or through financial intermediaries such as banks or insurance companies.

In case of direct transfer, the deficit units sell financial claims on themselves, which are purchased by the surplus units. An example is the debentures issued by a company. These debentures are sold at a price. These represent financial claims on the issuing company in the form of a promise to pay periodic interest and principal repayment. This method is more cost efficient as no intermediary costs are involved here.

However, deficit and surplus units may not be in a position to access each other directly. E.g. the households are interested in a wide array of assets, and evaluate investment vehicles based on their return, risk characteristics as well as tax treatment.

The corporate houses want to get the best possible price and keep the cost of funds as low as possible. Financial intermediaries (FI) such as banks and insurance companies help bring these two together. They pool funds from the investors, invest money on a large scale.

They are able to diversify their asset base that is rather difficult for individual investors. These intermediaries also gain expertise in the course of their business that enables them to give a better deal to the investors. , FI are able to reap the benefits of Economies of Scale, Lower Transaction Costs, and Reduction in Information Costs due to their intimate knowledge of finance.

The Government simply passes taxation legislation (bullies us) and gets load of money from us to fill its coffer and serve the social needs!

Financial markets can be over the counter (OTC) or organized. In case of an OTC market, the buyer and seller directly meet each other, may negotiate the price and strike the deal.

In case of organized markets (say securities exchanges or Stock markets), buyers and sellers give their price quotes and the exchange facilitates matching of buy and sell orders based on compatibility of price quotes. In fact, the same instrument may be traded either way. For example, if an investor buys units of a mutual fund directly from the fund, it is OTC. However, units of certain mutual funds are also listed and traded on the securities exchange.

Financial Literacy Series, Personal Finance

I scored 19/20 in the Investment IQ test by MoneyControl !! I would have scored less than 10 some months ago before I started this blog.

Use this tool to evaluate whether you should manage your investments yourself or whether you should approach/ use a professional manager.

This evaluation will consider your temperament, aptitude and technical knowledge. It should take you between 5 and 8 minutes to answer the 20 questions.

Scores on temperament(5), aptitude(5) and technical knowledge(10) are taken. The qualifying score( 15) is a Moneycontrol recommended benchmark and it refers to the minimum you need to score if you want to manage your money independently.

As I said, I wouldn’t have scored 19 if I was not doing this blog. In fact I was very miserable with all this personal finance. But I have learnt that finance is not rocket science and I owe it to my family that I manage our finances better.

Maybe you score less than 15. But does it mean you should start finding a professional manager? Or should you try and build your financial literacy (backgrounder) levels. Choice is obviously yours!!

Investing, Personal Finance, Planning

Since June 18(Phi day) – or 6.18 as math junkies know it — perfectly represents the Fibonacci number or the golden ratio, it is a good time to take alook at what this is all about.
 

Even though the Fibonacci numbers are named after Leonardo of Pisa, known as Fibonacci, they had been described earlier in India

Fibonacci techniques can identify market turns and senior analysts use charts and explanations to educate you on Fibonacci Retracements, Fibonacci Extensions, Fibonacci Circles, Fibonacci Fans and Fibonacci Time.

I found a site which can teach you how to apply Fibonacci math to real-world trading. Click Here

Did you read The Da Vinci Code? Does math, history, science or technology really get you going? Or in case you are just curious about Fibonacci, head on to this page or to this Wikipedia page

Fibonacci sequences appear in biological settings such as branching in trees, the spiral of shells, the curve of waves.

Interesting, no!!

Financial Literacy Series, Stocks

 Found this sensible piece in a group by Vivek Karwa. Thanks Vivek for permitting me to quote you here on my blog.
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I hope everyone of you know that all kinds of activities pick up in a Bull Market. This happens since each person starts thinking that Money Making in Stock Market is a child’s play! And thus people fall to any extent to earn the fast buck. India has been witnessing a Bull run past 3-4 yrs and such activities are bound to happen.

You may not believe that there were around 35 Analysts (I call them Budding Analysts) sending at least 25 recommendations each on my yahoo messenger daily a year back. They started thinking that what ever they recommend goes up hence they have mastered stock picking. Then came the May crash.

I now have just three people on messenger sending calls! And none of them is from the May list. They lost their money, became analysts and then lost peoples money!

In a Bull market , some of the activities which increase are:-

1.. Boom in stock brokers and sub-brokers offices since more and more people want to trade.
2.. People luring others to trade and invest in various financial products including Mutual Funds to earn higher commissions.
3.. Fund houses coming up with NFO’s every next day.
4.. Sharp increase in Analysts/Advisors
5.. And why to miss our topic. Boom in Technical Analysis Software Sellers!!

I would like to caution every one on this!!

Before buying any software and spending Lakhs on it think once:-

1. Do people start earning money just because of buying a software? If yes then why cant each one of us buy and make big money.

2. Do people owning software Never Loose Money? They only make??

3. If your main activity of earning money is a different profession then can u utilize the software to its full value?

4. Does it not make sense to subscribe for calls for a portion of the money and concentrate on your main acivity? (Iam not trying to promote myself here or seeking subscription - but there’s sense in my words)

So think twice before investing in softwares, may be the same money can be utilized in a better manner.

Rgds

Vivek Karwa
Mob: +91-98405-40575

Investing, Stocks

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

Asset Allocation, Budgeting, ETF, Financial Literacy Series, Index Funds, India, Insurance, Investing, Mutual Funds, Personal Finance, Planning, Stocks

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Asset Allocation, Budgeting, ETF, Index Funds, Insurance, Investing, Mutual Funds, Personal Finance, Planning