MoneyVedam

Over a 10-15 years time, a working adult typically purchases a variety of policies from his insurance agent. However buying too many insurance policies at different points in one's life for a short term objective (eg.tax saving for 80c) without having a long term goal would only leave you with a mixed portfolio of policies with different premium paying terms, different maturity amounts, maturing at different times. Also most people do not realize that even after putting together all their policies they are under-covered with respect to their life - this is simply because they were not sold the right policies in the first place (most insurance agents sell endowment and moneyback policies as they are earn high commissions on them). The classic conflict.. The objective of insurance is to provide compensation for loss and no more than that. Whereas the objective of investment is to provide the best returns commensurate with risks undertaken. As you could see these two products are ...

Most people start buying insurance policy as a means to buy life cover, as small savings and to avail tax benefits. Some others buy children policy, joint-life policy and health insurance. Those who have a home loan would get a home loan cover for the outstanding loan amount. These days getting a health cover is more prevalant. Pension plans and annuities too have gained popularity in recent times. Infact a good majority of the 400 million Indian urbanites have bought some form of insurance or the other (apart from the mandatory motor insurance). So, why do we buy insurance? There is widespread belief among us that the sum assured in a policy means premiums paid are returned with assurance. In a way it is ingrained in our minds that insurance is some form of a "capital-protected" investment compared to other financial products such as mutual funds or equities. And given how religiously the Indian middle class pays their premiums over the last 30 years, insurers have been ...

In India, the medical and hospitalization costs have spiraled thru the roof in the last decade. While access to medicines and hospitals have become more prevalent, their costs have soared to unaffordable levels. The opening up of the insurance sector to private insurers in 1999 by IRDA (Insurance Regulatory and Development Authority) paved the way for more people to be covered by health insurance policies popularly known as "Mediclaim". The coverage could be obtained either through corporate group health insurance policies or by an individual directly purchasing a health insurance policy. Similarly with the unprecedented growth of the pharmaceutical industry in the country, a wide range of medicines is made available locally. Why then have the prices soared so much? Let us look at the background. The Indian pharma industry.. The Indian pharmaceutical industry is the world's third largest in terms of production volume and has received $11.3bn in FDI last year. It is ex...

More and more hospitals are opening up across all cities and towns in India. The good news is that it increasingly provides access to medical facilities for a higher percentage of our population. However the cost of availing these services have increased manifold which is covered either by insurance policies or personal savings. According to NSSO (National Sample Survey Organization), escalating medical costs are pushing more people into indebtedness across all income groups. In India, the government finances only 6% of the medical costs, while a whopping 75% comes from the individual's personal savings. In contrast, the Brazilian government takes up 48% of the cost and an individual shells out a far lesser 45%. How much does it cost? Broadly the medical conditions fall into four groups: Lifestyle diseases - Diabetis, Cholestrol, respiratory, internal medicine Geriatric conditions - Eye, ear, Ortho & Neurological Unknown/new conditions - Cancer, Infections (antibiotic ...

Ten years ago, the cost of an engineering course was Rs.5-20k p.a - today it costs Rs.1-3L p.a. A medical degree that costed Rs.10-25k p.a a decade ago now costs Rs.2.5-3L p.a, while a business degree that costed Rs.10-50k is now costing Rs.5-15L p.a. Put in financial perspective, over the last decade, "education inflation" in engineering is 30% p.a, 40% p.a in medicine and 50% p.a in business courses - way way higher that our CPI inflation which is at sub-10% p.a. The scenario overseas is equally bad - if you consider US, the education inflation over the last decade has been 5% p.a - what costed $150k ten years ago is now $240k. However the dollar-rupee conversion rate further deteriorates it, so a 2-year course that costed Rs.80L a decade ago in US (including living expenses) would now cost Rs.1.5 crores. What do the numbers say? Per AICTE (All India Council for Technical Education) India produces 15Lac engineers p.a thru its 3300+ engineering colleges - more than a thi...

In the recent years a plethora of activities related to child development has led to sky rocketing costs of education. Talk to any parent and their foremost priority is educating their kids by giving them the best option available in the country. There does not seem to be a limit or budget when it comes to child education (the only other category that enjoys the same treatment is healthcare). No wonder education is now a very successful & lucrative business. Let us look at some of the child related expenses that form the education kitty of parents. School fees Tuition fees (private tutions) School bus fees Accessories - School uniform, bag, lunch bag, Shoes Gadgets - Desktop, laptop, Printer & stationery Not to mention the special coaching and developmental classes outside of school, some of which include but are not limited to: IIT Coaching Cricket Coaching Tennis Badminton Swimming Learn a sport Martial arts Dance/Music/Instrumental ABACUS Computer skills...

The foundation of economics lies on 4 pillars - Land, Labor, Capital and Enterprise. Land being nation, labor being workers exchanging their work for wages, capital being money from investors and Enterprise being a combination of all factors to create a business. In the farming age, wages were directly correlated to the number of hours of work. Industrial age followed similar norms with an additional measure to quantify volume of goods produced. Income gap In the industrial era, the pay ratio between a rank-and-file worker and CEO was 1:42 (1980) while it is now at 1:1800 or more. In the current knowledge era, which is based more on services & infocomm, work is no longer measured by number of hours of work or goods produced per day. But wages are based on a complex combination of metrics such as qualification, experience, network & expertise. The income gap between a worker (Senior Engineer) and his management (VP) has grown widely and now stands at 5-20x. At the "C...

These days many complain that their wages are not commensurate with their work, experience, qualification, expertise etc. Here is a reality check (all data based on first hand information and quoted in Indian rupees). Organized sector ( starting scale per month ..) Software Engineer: Rs.10-15k BPO officer: Rs.7-12k Retail assistant (@supermarket): Rs.8-10k Doctor: Rs.15-25k Teacher: Rs.8-15k Government Employee: Rs.20k Informal sector Plumber: Rs.500-Rs.700 per day Electrician: Rs.700 - Rs.2500 per job Mason: Rs.25-40k per week's job Nurse: Rs.7-10k p.m (full time) / Rs.200-500 per 12-hour shift (home care) Private tutor (tuitions): Rs.30-40k p.m The gap between the two sectors is closing in and in some cases, the skilled worker earns better than a university degree holder. Even if you look at the mid-level (Rs.20 Lacs) or senior level pay scale (Rs.50 Lacs - Rs.1 crore) in the organized sector, they are outdone by the informal sector professionals like real estat...

Every business, be it small or big, domestic or foreign, retail or corporate, bank or hedge fund - are all raving about the emergence of India's rising middle class and are very interested in getting a pie of the new well-to-do Indian market. Lets get down to the numbers to see what India's income pyramid looks like. Based on the data from NSS (National Sample Survey) and NCAER (National Center for Advanced Economic Research), there are about 70-90 million (7-9 crore) households with an income range of Rs.75,000 to several crores. Upto Rs.3 Lacs income       - Mass Market           - 4.8 crore households Rs.3-15 Lacs income           - Emerging Affluent  - 1.6 crore households Rs.15 Lacs - Rs.1.25 crore  - Affluent                   - 2.4 Lac households Rs.1.25 -...

That'd be an apt term to describe the current generation of investors. Every conversation hinges on high returns from an investment - be it the traditional gold or the contemporary derivative products. While it is only natural to look for returns from any investment, the point that investors are increasingly ignoring these days are that high returns are inherently highly risky as well. How do we chase returns? It is alright to take high risk as many people do so (small cap stocks) Capital will be safe since land never loses its value (real estate) It is brilliant to venture new (unknown) domains as returns from all known investment avenues are unattractive (EMU farms) Not many people are aware of this investment, so it pays big to be an early investor (MLM schemes) My agent told me this investment is absolutely risk-safe (Ulip policies) My broker said this is a capital protected safe bet scheme with high potential returns (NSEL commodity futures) Why do we chase return...

The last decade (2003-2013) has been a one-off property boom era fueled by a high growth economy, excessive leveraging and rising income levels. However recent economic indicators are proving that growth is on the decline - Rupee is on a 20-year decline, inflation is not reigning in, manufacturing index (PMI) has been declining, FIIs exiting from stocks & debt markets and employees are being fired (but as a huge relief, agriculture is expected to produce better results this year!). Given this doom & gloom situation, one would expect property prices to decline as well - surprisingly they have not budged in, we are told that Realtors have deep pockets, so prices would not correct. But a quick check on the listed realty companies shows they are sitting on a mountain of debt & their stocks have lost up to 80% of their peak value. So, what is keeping the property prices up? Lets answer by looking at some of the key underlying factors. How is the real estate sector funded? ...

For a decade Indian real estate has boomed as a high profit business for builders, land-owners, land bankers/hoarders, real estate companies, foreign investors, property agents, speculative retail buyers, NRIs and numerous supporting businesses in the informal sector. This has led to a new breed of real estate millionaires and tycoons who profited largely from the property boom with very little capital in a short span of time taking away 100s if not 1000s of crores in profits. What happens on the ground? Property story in India is similar to its onion story. In the case of onions, the farmer gets a fixed price for his produce of Rs.8/Kg (includes Rs.3.6/Kg profit), which the middlemen and traders hoard, inflate and sell @Rs.70 to the average consumer in the vegetable market. Similarly, the original land owners (mostly agriculturalists) sell their land for a pittance to land bankers, who hoard and sell them to developers at anywhere between 10-60x depending on the time of their sale...

Gone are the days when rising realty prices were the topic of any gathering (social/official). Today's topic is all about (un)affordability of homes and how owning a home has become a distant dream for a good majority of Indian urbanites. As for those who could still afford it, it comes with a 20-25 year EMI tag, enslaving them for the rest of their working life to pay up a huge liability. This was not the case even prior to 2007, so what has changed in the recent past to make homes so unaffordable? Let us look at the details. What is affordable? In economic terms, one practical way of measuring affordability is the income-to-property price ratio. A look at annual wage-to-land ratio and annual wage-to-apartment price ratio reveals the underlying problem of unaffordability.                         Wage-to-Land Ratio   Wage-to-Apartment Ratio Prior to 2000...

Every article written on this topic has put forth tapering of QE (Quantitative easing) by US Fed, widening of India's CAD (current account deficit), a stubbornly high inflation and fiscal profligacy (the act of splurging budget money) by the Indian government as reasons for the rupee decline. A deeper look at the situation reveals that these are only symptoms and not cause(s) behind the rupee decline. Fundamentally there are two sides to this problem - an external & an internal side. External factors include state of the global economy, policy changes of major trading partners and direction of major currencies in the world. Internal factors to look at are domestic policies, economic reforms, local consumption pattern and value of domestic assets. It helps to focus on the downhill period of the Indian economy from 2007 to 2013. What happened globally between 2007 and now (Aug-2013)? Lehman brothers collapse in Oct 2008 leading to a major Financial crisis World over gov...

The Rupee has lost 27% since May 2013 (Rs.54), 14.6% since 1 Aug 2013 (Rs.60) and is @Rs.68.80 at the time of publishing this blog. Some analysts have a target of Rs.72 while others Rs.100 by the end of the year. We need to look back to see what has happened to the Incredible India that it was once. Ever since the post-liberalisation of economic reforms in 1991, India has been on a steady growth path attaining its peak growth rate of 9% GDP between 2005-2007. Few facts on the Indian currency: Rupee depreciated by 37.5% from 1991 (Rs.32) to 2007 (Rs.44), i.e @2% CAGR From 2007 to 2011, it was stable at around Rs.45 From 2011-2013 it depreciated by 53% to Rs.68.8! How does the Rupee decline affect an Individual? Loss of stocks and mutual funds portfolio (30-60% down) Higher price for all consumables, leading to higher cost of living expenses High inflation @10% p.a, leading to erosion of personal savings and wealth Decline in domestic savings rate from a peak of 36.8% (2007)...

Total tax revenue as a percentage of India's GDP is 9.48% (@Rs.10.77 Lac crores). To understand where your tax money goes, it helps to first know how the government derives its income. Any amount going to the Government is called "Receipts". Two types of receipts are in place - Revenue receipts and Capital receipts. Revenue receipts include interest and dividend income from government's investments and direct and indirect taxes collected. Capital receipts include external assistance, market loans, small savings and provident funds. Any amount going out is called Expenditure which is also of two types - Plan and Non-Plan expenditure. Plan expenditures are those that are required for the functioning of the government, buying of fixed assets like land, building, machinery & equipment and loans and advances. Non-Plan expenditure includes interest payments, debt repayment, defense, subsidies, police, pension, Loans to PSUs, state & union territories and to forei...

Most salaried people pay taxes via TDS (Tax Deduction at Source) and file refund claims through the returns filing in July of every year. In the recent past, a lot has improved in this arena with the introduction of online e-Filing of returns and processing of refund claims through CPC (Central Processing Cell) in Bangalore. Although most people that fall under the formal sector of employment pay taxes on the salaries they earn, people in informal sector pay taxes on their income from a variety of sources such as income from house property, business/profession income, capital gains from real assets and financial assets and interest income(s). Who makes up the Indian workforce? Total worforce in India: 487 million (~40% of population) Informal Sector: 453 million (93% of workforce) Formal sector: 34 million (7% of workforce) Government employees: 21 million (61% of formal workforce) Non-Gov employees: 14 million (39% of formal workforce) IT/ITES/BPO employees: 3.5 million Ot...

Come July, Indian tax payers are reminded of tax and tax returns. Indians pay tax on a variety of income sources and the tax rates in India are progressive, i.e, lower income earners pay less tax and higher income earners pay higher tax. While salaried employees get their income after deduction of tax, non-salaried income earners pay advance tax after self-assessment. TDS is also applicable to other payments such as interest income, contract payments, professional charges, insurance commission etc. What are the various income heads? There are 5 heads under which income is charged to income tax. They are: Income u/h salary Income u/h house property Income u/h capital gains Income u/h business profession Income u/h other sources Depending on the sources of income, assesses would have to use appropriate tax forms (ITR forms) to consolidate their income and file returns. There are provisions in the IT Act to set-off and/or carry-forward losses under one head against another so...

Aside real estate and gold, Indian investors save largely in safe, low-risk, capital-guarantee financial instruments. Let us look at the corpus accumulated in some of these instruments. Bank Term deposits - 85 Lac Crores (Rs.1 Lac Crore is Rs.1 Trillion) LIC policies - 15 Lac Crores EPF - 6 Lac Crores PPF/NSC - 8 Lac Crores Mutual Funds - 7.6 Lac Crores The total well surpasses India's GDP ($1.873 Trillion ~ Rs.104 Trillion). Bank deposits provide inflation-adjusted real rate of returns @ <1%, most LIC policies offer a paltry 3-5% return, Post-office/Small savings and EPF offer returns similar to bank deposits. Select mutual funds have offered 15-20% returns over 10 year time frame (shorter time frames have offered negative returns). Next, let us look at some published statistics on capital markets (Equities/Mutual Funds). Total market cap of Sensex is Rs.72 Lac Cr (top 100 firms m-cap @ Rs.51 Lac Cr) From 2006 to mid-2013 FIIs bought Rs.46 Lac Cr of equities and so...

Indians have one of the highest savings rate in the world, yet the performance of its equity market and debt market is largely dependent on FII (Foreign Institutional Investors) inflows. RBI publishes yearly reports on various metrics and has conducted surveys to establish the investing pattern of Indian households. Some of the facts are provided below: Gross domestic savings of Indians as a percentage of GDP is @30.11% (Rs.30 Lac crores p.a) Per RBI, 10% of this forms financial assets (~Rs.10.48 Lac Crores ~$174 bn pa) Out of a total of 227 million Indian households, 11% (24.5 million) are investor households Remaining 89% households invest only in safe-assets Of the 15.3 million URBAN investor households, 43% have strong preference to Mutual funds 41% households feel lack of transparency is an issue in investing in capital markets 53% households are highly risk averse A breakdown of the choice of savings instruments over the last decade is provided below: 46% - Bank Ter...

Recently, there were a lot of measures from the government both direct (import duty on gold) and persuasive (public awareness & messages) to discourage investors from locking up their savings in gold. So, it makes you wonder why the government is advising against your purchase of gold. The primary reason is to reduce our current account deficit (CAD) to managable levels. Why is it advantageous to have a lower CAD?   Having a lower CAD offers the same advantages as having a lower debt in the case of an individual. The amount of money locked up in buying gold could be used to import other valuable and productive commodities much needed for the economy. Lower CAD helps in stabilizing the Indian Rupee and assists in managing import costs This in turn could bring down inflation and benefit those that save 30% of their earnings to get better real returns on their savings A lower debt provides India with an ability to borrow at lower rates, greatly reducing our interest burden...

Gold is one of the two assets that almost every urban indian household buys (property being the other one). Looking at some numbers helps comprehend the quantity of gold Indians buy, gold reserves that we hold and the impact that this gold rush has on the nation's economy as a whole. Indian households are estimated to have 18000 tons of gold reserves. That is about the same as the total gold reserves of top 6 countries in the world put together - US, Germany, Italy, France, China & Switzerland). India's offical gold holdings are only 557 tons (all numbers based on World Gold Council data as of Dec 2012). Some interesting statistics about Indian's love for gold: Indians have one of the highest savings rate in the world - 30% of their income is saved. Out of this, 1/3rd goes to buy gold. Gold as a percentage of Indian household savings is 10% (vs) to Equities at 3% In the past decade, household gold consumption has increased @21% p.a Y-o-Y India is the largest co...

W.e.f April 2013, SEBI (Securities and Exchange Board of India) has mandated that Investment Advisers (including individuals & companies) must offer their services in a fee-based manner. Prior to this notice, Investment Advisers (including Financial planners) could offer their services on a fee-based or commission-based manner to their clients. It helps to understand various fee-structures prevalent in the industry. Fee-based planners usually earn their remuneration only on the basis of fees they charge their clients. They do not earn commissions by selling products to clients. The main advantage of fee-based financial planner is he/she offers an independent financial advice, placing client's needs and interest ahead of all other factors. No pushing of unsuitable insurance policies or low-yield mutual funds, client is free to buy recommended products from any provider directly. As planner receives fees only from client, there is no conflict of interest. Commission-ba...

Just like any sport, there are some simple rules to keep in mind while investing. These A-B-Cs would go a long way as guiding light in an investor's life to build his/her long term wealth. Rule #1: Which one comes first - Expense or Savings? Most of us learn to spend and save like our parents. Bring home an income, spend on expenses and then save the remaining. The equation takes the form: Income - Expense = Savings While this approach looks perfectly practical, the nature of this savings is volatile depending on lifestyle choices one makes. Certain choices could also result in zero or negative savings, leaving nothing for the future. One approach to long term wealth creation would be to make a simple change to the equation as follows: Income - Savings = Expense In this approach, the nature of savings is fixed and stable through out the income earning phase of the investor. Another big advantage here is savings rise along with income levels through the income earnin...

Investing has become an integral part of today's fast growing urbanized world. Every income earner is learning to invest in assets of his/her comfort and choice. And the investment choices are only growing by the day. Each investor uses his/her own methods to invest in various assets and there is no one formula or means to attain success. This pegs the question whether investing is an Art or Science. To understand this better, it helps to draw analogy from a sports such as Tennis or Cricket. When we start out, we learn to play the sport by following certain rules and applying prevalant methods in practice. Gradually the rules blend in and we start formulating our own strategies, both tried and untested. Then we perform our little experiments and collectively these result in gaining some money and losing some. This approach is more scientific at this stage and most investors take some time to get here. Some investors go beyond the scientific stage and become natural at investi...