Personal Finance 2.01

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Ajay Shah has uploaded this article by John Echeverri-Gent on the Politics of market microstructure [pdf] about the reforms of the Indian equity market. It is forthcoming in a book: India’s Economic Transition: The Politics of Reform, edited by Rahul Mukherji, Oxford, 2007.

Some excerpts out of the 30 odd pages:

• He examines the politics of equity market microstructure in India. It argues that officials in the Ministry of Finance generated much of the impetus for reform. Three factors motivated these officials to become agents of change. First, their experience made them acutely aware that public sector resources were inadequate to meet India’s developmental needs. Second, as the 1990s progressed they were increasingly aware of the global best practices that developedin the wake of technological change. Finally, the legal infrastructure that regulated Indian equity markets provided them tremendous authority over the exchanges. Under the Securities Contracts (Regulation Act) 1956, the Ministry of Finance enjoyed the power to grant or withdraw recognition to any stock exchange. It also had the power to direct the exchanges to make or amend their rules, supersede the governing body of any exchange, and suspend the business of an exchange.

• By 2001, reforms brought India up to par with the global standards for virtually every aspect of its equity market microstructure. The ‘open outcry’system that restricted trading to the floors of stock exchanges in India’s metropolises was replaced by screen-based, electronic order-book systems that instantaneously linked traders across the country through the world’s first satellite trading system. Virtually all trading took place on a dematerialized basis through a central depository. The deeply flawed account period settlement system was replaced by a T+2 rolling settlement that is one of the most efficient systems in the world, and badla or carry-forward trading gave way to a rapidly developing derivatives market. As a consequence of these changes, the total value of transactions in securities has grown dramatically over the last ten years from Rs 1.7 billion in 1994–5 to Rs 50.8 billion in 2003–4.

• All this is not to suggest that no problems remain. The micromarket structure of the primary market (despite its revival since 2003–4, in part because of the introduction of a screen-based book-building system) is still in need of reform. The share of household savings invested in securities is small and has declined since the early 1990s. The mutual fund industry remains underdeveloped, and the regulatory capacity of SEBI needs enhancement.

• Nonetheless, the transformation of Indian equity markets is a remarkably successful chapter in the story of India’s economic reform.Three factors help to explain this success. First, technological change in the form of electronic trading systems and the development of new financialproducts created substantial opportunity costs to maintaining the status quo. Second, in the context of India’s balance of payments crisis in 1991, officials in the Ministry of Finance were motivated by their growing awareness of global best practices to use their authority to modernize India’s capital market. Finally,India’s politicians and reformers in the Ministry of Finance had a relatively low ‘political cost-benefit ratio’ for reforming equity markets.

Go read the entire article here

Financial Literacy Series, India, Stocks

Heard of this yaksha question: What is the greatest mystery on earth? Yudhisthir answers, “Every one has to die. But no one thinks that for himself. This is the greatest mystery.”

That, I feel, is the paradox that makes people avoid life insurance!

That also makes agents take the wrong line of selling Insurance as a tax saving and/or Investment product (ULIP).

So what should we do?

Start with calculating your Human Life Value (HLV). A very simple way of looking at it is as follows. Imagine a monthly income of Rs 10000 and the net income provided to the family is Rs 8000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 96000. The amount of money which will earn Rs 96000 pa at 8% interest rate is Rs 12,00,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.

The future income growth, yr income generating assets, liabilities, spouse income, children’s education, etc are also to be factored in.

Right now u can go to this Page to calculate yr HLV from Bajaj Allianz. Another link is from Metlife Insurance

Insurance

Mutual fund industry is the only category where celebrity endorsement is not
allowed whereas even insurance companies use celebrities to promote their
products

Thank God to whoever is responsible for that. Why should a celebrity tell you about investing when you don’t have the kind of money he is making?

Isn’t it more worthwhile to look at your own realities, dream up your goals, and build a Investment strategy as a fallout of the above reality and goals?

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying!!

Btw, remember Home trade? Had the biggest endorsement stars: Sachin, ShahRukh and Hrithik Roshan!!!

Financial Literacy Series

This news can make you feel that it should have been started in your time. The Government is thinking of starting a course on Investing in the schools in Std. XI/XII.

For me the first principle of investing is “better late than never”. But actually it is to “start early”. And when it comes to making money by investing, time is on the side of the youngsters. Investing and the stock market will play a vital role in the future, irrespective of what the youngsters choose to do with their life.

Whether they want to build a career in business, be a freelance artist, or whatever, knowing about managing their own money will give them freedom and choices in life that they wouldn’t otherwise have.

Actually investing is no rocket science that it is made out to be. Agreed that it is a bit complex, but the important aptitude too have is to “spot trends” and to “break away from patterns and convention”. And our youngsters excel in that.Moreover, you don’t need to be a car mechanic to learn driving. Operating a car and servicing them may need an effort to understand the mechanics of the car. But you need to understand the functions of the steering, gear, clutch and accelerator only to learn driving. Like investing, it may appear daunting for the newbie. But leave him on the steering for a week and there he goes.

The ideas behind investing are really very basic. And you don’t need to know everything before you start putting some money. For the teenager, the biggest enemy is `inertia ; the tendency to do nothing’, says Bamford. To combat this, take a few steps to learn about investing, and then take a few steps to actually do it! “These can be the most profitable steps you’ve ever taken.” Janet Bamford in Street Wise from Bloomberg Press (www.bloomberg.com). “The great thing about investing is that you can start slowly, bit by bit, and get more deeply involved as you learn more.”Critics might argue that teaching teenagers the nuances of financial markets is putting too much pressure too soon.

But being protective of our children may hinder their growth. Throwing the baby into the swimming pool and letting him learn swimming might seem heartless. But it actually helps the child.Ultimately it is important for all of us to take responsibility for one self.

Managing your money is critical in the game of life. And instead of learning theory of history, civics, etc, investing will be one practical aspect of our education. And maybe it will help the youngsters to face the “fear” of stock market and the “greed” that it brings along, and make them better investors than us.

Bring on the course fast, GOI.

Financial Literacy Series, India

This is the fifth in the series of Financial literacy series. Previous ones here: 1, 2, 3 and 4.

Your age plays an important role in your investment decisions. How? We covered the Stage I investors in the last post. Here we take a look at the financial status, needs and choice of investment for the Stage II investors. I mean the people who are in the age bracket of 30-45

If you are in this stage, you might be a young professional or employee or businessman

Overview

• May be married with or without kids
• Probably in debts - (for e.g. home loan, vehicle loan, personal loan)
• Earn a moderate income
• Has a high expenditure
• Not much of accumulated wealth 
• Need tax planning

Your Financial Status

• High expenditure through installment repayments for house, car etc.
• Worried about protecting dependants in case of death or prolonged illness or disability 
• Need to save for children for their education, marriage etc.
• Need to support elderly parents 
• Need for planning a comfortable retirement phase
• Maximum Insurance Protection required due to 
  High debt, high expenditure phase –Family’s dependency on your income
• Low accumulated wealth 
• Need for planning retirement

Financial Needs : 

• Short & Intermediated term. Housing & insurance needs. 
• Consumer finance needs, children education and related expenses

Ability to Invest  :

·         Limited due to higher spending. Cash flow requirments are also limited. 

·         Financial planning needs are highest as this state is ideal for disciplining spending & saving regularly
Choice Of Investments : 

·         Medium to long term investments. Ability to take risks.

·         Fixed income, insurance & Equity products.

·         Long term insurance policies like disability income and death benefit protection i.e. a need for temporary (Term) or Whole Life Insurance products, and long-term disability products

Does it tell you something about your financial planning roadmap?

Financial Literacy Series