Wednesday, December 28, 2011

Parenting To Raise Financially Smart Children

"Someone's sitting in the shade today because someone planted a tree a long time ago." Warren Buffet

This quotation, it made me think that this is what children that were taught to be financially smart turned out as adults. This next made me feel that it was just not important to send children to school to learn how to count and write, but as parents to teach them about the value of certain aspects in life. With consumerism overtaking the economy even in developing countries of the world like India, many youngsters are having easy accessibility to credit cards and EMI’s, making our children realize the difference between a real want and need would make them financially smart for a lifetime.  

Hence smart parents should assume a vital role to render useful lessons of financial management to their children. Smart parents would not only render useful finance lessons, but would also be a prominent example and take effective feedback by making their children a partner in their financial decisions.
Let’s look at how we can make parenting to raise children, who are financially smart, an interesting and enjoyable experience.
Have a look at these aspects in inculcating learning about personal finance:
Ø  Simple living:                        
My grandfather has always been a part of my learning principles of smart financial management and I respect him for what he always told us as children, “Simple living and high thinking are the essence of life. We should be able to live with minimum wants if we wish to have an umbrella over us for a lifetime.” He was a standing example or what he preached, making me feel we could make our children lead better lives if we rendered these lessons to our children and practiced it ourselves to set an example.
Ø  Setting Financial Priorities:             
Setting priorities in our children such as ‘having basic necessities of life like food, clothing, and shelter were more essential than fancy and fashionable articles’ would surely help. The habits built at the cradle carry on to the death bed. This applies in educating our children about the clear demarcation between wants versus needs.
Setting up financial priorities in children could start off with teaching them budgeting that is appropriate to their age. Inculcating the habit of budgeting in our children would start off with working together with them and making a child friendly budget. Young children are very happy to have budgets prepared with bright colors, graphs and other visuals. A joint effort would make them feel a part of it and be ready to cooperate and learn.
Ø  Goal Oriented:                       
My observation of financially smart adults made me understand that they believed in saving for a goal. So we need to involve our older children by involving them in budgeting for costlier possessions like car, a house, new furniture or probably saving for a sound education or marriage. It is true that even younger children need to be encouraged to save for small fancy needs like probably going for a movie, an evening having pizza or that remote control toy or Barbie doll. Their achievement would give them a sense of fulfillment that could make them feel motivated and focused to save for bigger goals.
Ø  Rewards:                   
Motivation has always been the keyword to progress, so praise and rewards could also make a great impact on children learning and implementing financially smart objectives.  In addition teaching our children of how to survive and earn would help. So suggesting alternative ways to earn, like helping in the cleaning of the car, helping younger siblings with homework, running errands like shopping for essential or helping in small household chores in an age appropriate manner would surely help.
Ø  Banking:                    
“Putting your savings in the bank would help you earn more money to meet your financial goals,” is what most financially smart parents would have instilled in their children right from childhood.  A savings bank account started with parents being a guardian would help overlook their children’s spending habits and guide them.
Ø  Financial Learning:               
In addition instilling a habit of reading articles and reviews on finance have helped many financially smart children to save for their future once they started earning.
Stocks, shares and other financially appreciating instruments are best taught to older children, with involving them in real life examples of your investments helping a lot.  Next is to introduce them to credit cards and loans. When they should be taken and when they should be avoided need to be taught well in advance.
Experience makes principles of smart financial planning more deep. So allowing our children to borrow money from us and repay it back with/without interest makes them realize the impact of loans.  
Lastly do realize that each child is made in a different way with different spending and savings traits. Identifying each child’s financial habits early in life would help us to guide them tactfully without being imposing on them. I have known of children who have learnt better by their falls in financial decisions, so just rest assured that experience sometimes renders the best lessons for a healthy financial life.
(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners ( a firm that offers Financial Planning and Wealth Management. He can be reached at

Saturday, December 24, 2011

Investment Behavior and Returns

Why investors are not making returns in the stock market?

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

But how many investors have REALLY got these kinds of returns…?

In this context knowing about the study conducted by Dalbar to determine how the investment behavior and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20 year period ending 31-12-10.
The study revealed the following two important facts.
·        The average return of the S&P 500 during this 20 year period is 9.14%.
·        The average return of the equity investor during the same period is only 3.27%

When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns?
Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong?  It is because of the nature or character of the investor.
Agriculture is getting affected by nature, either because of excess rain or no rain.  But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.
Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.

What are the natures or behaviours of an investor that blocks him from getting the market return?
When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for “False Evidence Appearing Real”.


Most of us have a desire to acquire as much wealth as possible in the shortest amount of time.  This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.

An investment portfolio based on ones personality

Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

Follow the flock policy

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behavior lead us to buying high and selling less.

It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.

A look at positive investment behavior:

It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners ( a firm that offers Financial Planning and Wealth Management. He can be reached at

Wednesday, December 21, 2011

Factors To Consider Before Investing In IPO’s

IPO’s or initial public offering is best understood as the first public offering of shares by a private limited company before listing in a stock market. Looking down IPO’s history of success and failure stories, you would be smart to first fully understand the various aspects behind such offerings and makes the right choice to invest or not in IPO’s. It is advisable to understand that  
investing in IPO’s could prove risky with unfavorable market situations and sentiments and when the fundamentals of the company and industry are weak. It is best to go by facts, avoid being influenced by rumors and have a closer look at the past performances also.
Understanding the concept of investing in IPO does require a clear look into these factors:   

v  It is not wise to believe rumors and success stories of IPO’s at face value, for investing in IPO’s is not easily learnt and there could be some misconceptions. So it is best to venture into IPO’s only after you have learnt the art of investing your hard earned money in them. 

v  It is wrong to be overwhelmed with hearing general statements that some IPO’s are attractively priced. You would be smarter comparing the price earnings ratio that helps get the relationship between the stock price and the company’s earnings and comparing it with those of competitive companies.

v  Beware of being under the misconception that investing in IPO’s could give you great gains on listing. It has been noticed by both amateur as well as experienced investors that sometimes high losses are also made. It would be safer and secure not gambling in the shares of new issues. 

v  It is good to experiment with new products in the market. But I would say that it is not smart to have this attitude with shares and invest in IPO’s. Investing is about getting effective and safe returns on the hard earned money that you put into shares, so it would be smarter putting your money to work in index stocks that have been in the market for a long time and have survived the volatile economic market for long.

v  Beware of being influenced by the favorable feeling and trend in the investment market to borrow money from financial institutions of brokerage companies for getting higher allotment of shares. It is sometimes very difficult to judge the trend of the market especially as an amateur and this could make you end up in huge losses coupled with the repayment of the loan with interest.

v  Some assume that investing in IPO’s would surely bring about gains in the long run. However I would suggest that you would definitely be much better off investing in good listed shares that have a proven record, though they sell at a higher price. However you may invest with sufficient information of the IPO’s, but could not always be sure that the listing will not bring down the issue price.

So it is best to be prudent and informative before investing in IPO’s.  

Factors that have a bearing on analyzing investments in IPO’s:

v  It is first important to know that companies are required to file their draft red herring prospectus (DRHP) with SEBI while floating an IPO. Analyzing this document would give you financial and other information about the company. The highest percentage of shares held by institutional investors, banks and financial institutions could be a positive indicator to invest in IPO’s. 

v  The draft red herring prospectus (DRHP) would also provide other important information and indicators like the quality of management. The quality of management like their work experience, their past history or work experience, qualifications and projects handled would help in the decision to analyze IPO’s.   

v  Another factor having a bearing is strong promoter backing. Big companies like Tata and Birla bring about credibility and also add a premium to the price of IPO’s. The ownership by the government and public sector undertakings are also an indicator of high level of safety of returns.   

v  The other major, though not the only indicator though is grading, with a higher grading being good. However also could be false as seen with the IPO of Vasvani Industries that had a 2/5 grading.  Similarly high graded companies like Galaxy Surfactants with a CRISIL rating of 4/5 withdrew its IPO. So it is best to understand that even some good companies withdraw their IPO’s due to poor public sentiments and difficulty experienced in raising funds in the market.   

v  The objective for raising funds would prove to be an important indicator to its profitability and time for return. Finding out this objective looking at various factors like the businesses past performance, future growth prospects, potential rate of return and profitability. In addition it is best to avoid investing in businesses that you cannot understand.

v  Last, but most important a periodic review would help you understand how your investment in IPO’s are fairing and help effect follow-up. However it is advisable to avoid taking hasty decisions to sell, as some IPO’s have underperformed initially but has given consistent returns in the long run. But prompt follow-up action would be required in case of IPO’s that lose very badly or are fundamentally wrongly invested.  

To conclude investing in IPO’s is best kept to the minimum as they involve a high level of research and uncertainty. However if they are selectively chosen they would help avoid investments with bad performance.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners ( a firm that offers Financial Planning and Wealth Management. He can be reached at

Saturday, December 17, 2011

A Study on Physical Gold and Gold ETF

Stock Market has lead to tendency of many to go in for much safer investments that gives a reasonable return. This is the reason for gold gaining popularity as one of the safest avenues for investment.
Gold has always held importance as a good investment proposition since the days of our ancestors. But the recent trends of daylight robbery, murders and greed for the precious yellow metal with the difficulty of storage and safety of physical gold had made gold a cumbersome proposition. In addition, fraudulent and not uniform practices followed by jewelers and difficulty in establishing the purity of gold contributed to the popularity and desirability of gold ETF’s.

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETF’s are more ideal than physical gold due the following reasons: 
¨     Gold ETF’s are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.
¨     Owning something virtual like gold ETF’s does away with the difficulty of storage and security experienced in possessing physical gold. The units of gold ETF’s can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.
¨     Gold ETF’s are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.
¨     Low cost, with affordability in dealing with gold ETF’s contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETF’s also help do away with the carry charges in gold futures.
¨     The ease to convert gold ETF’s into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.  
¨     Right and uniform pricing in Gold ETF’s offered no scope for price discrimination that is experienced in encasing physical gold at the jewelers. One lacking knowledge and experience in dealing in gold would do best to invest in good gold ETF’s.
¨     Gold ETF’s offer protection from the liability of taxes. The taxation system for gold ETF’s is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.
¨     Gold GTF’s are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETF’s are a fictitious concept. It is purely a question of ones own perception, but I would strongly contest gold ETF’s if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold.

Tuesday, December 13, 2011

Know All About Form 16 – Be An Informed TaxPayer.

Most of us are aware of Form 16 given by our employers before April 30th each year that give details of the income earned, and tax deducted at source and paid to the government. This certificate proves useful in filing income tax returns. In addition banks also issuing Form 16 and Form16A to pension holders and those that earn interest income, with no Form 16 required when TDS is not deducted from salary. Knowing about Form 16 helps us to be a well-informed taxpayer and do better tax planning.

The 13 components of Form 16 are:
1) PAN that stands for Permanent Account Number, a 10 digit alpha-numeric code that is generated by the Income Tax Department of India. It is mandatory for everyone- NRI, PIO & companies that wishes to conduct business, file and pay taxes, invest, buy and sell property, open a demat or bank account to have this number in India. The need

2) TAN is best known as Tax Deduction and Collection Account Number is another mandatory 10 digit alpha-numeric number that is very necessary for all persons and companies that are responsible for collecting taxes. It proves useful to note that this number is unique in case of different companies.
3) Gross salary, the common term used in practice includes all regular incomes in an employee’s remuneration. It would include allowances, overtime pay, commissions, and bonuses, with all other amounts before the deductions are made.
4) It is best to know that perquisites are just additional benefits in addition to the fixed salaries. Known popularly as perks this term could include rent free accommodation, loans at subsidized rates and others.
5) Profits in lieu of salary are just payments given instead of salary that is given by at or in   connection with retrenchment or termination of employment.  This item forms a part of taxable income and includes gratuity, commuted value of pension, retrenchment compensation. However the contribution made by the employee or interest thereon is not taxed.
6) Next allowances in Form 16 are certain payments made or allotted to employees for bearing of certain expenses.  It could include allowances like medical allowances, and travel allowances that are generally taxable in the hands of the employees.
7) House rent allowance or HRA In Form 16 refers to a special allowance paid to employees to meet the cost of housing. There is tax exemption on HRA and it is limited to the least of either the HRA received from employer, or rent paid in excess of 10% of the salary, or 50% of salary in metropolitan cities and 40% in other cities. The term salary here includes basic, dearness allowance and other commissions put together, this exemption not available to those that do not pay rent.
8) It is best to understand conveyance allowance as an allowance paid to an employee to meet commuting expenses between his/her home and place of work. There is a maximum exemption of Rs.800, with a special provision for an orthopedically handicapped employee until Rs.1600.
9) The term medical allowance paid for medical treatments and medicines is fully taxable. However reimbursement of medical expenses against submission of bills could get you a maximum exemption of Rs.15000 annually.
10) The allowance received to employees for entertainment services or entertainment allowance is allowed as a deduction for government employees. However in other cases one can avail of deduction as a least of actual allowance received, or 1/5th of salary excluding all other allowances and perquisites or Rs.5000.
11) Deductions as in Form 16 is given as an incentive given by the government to invest in certain long term savings schemes. This includes long term savings for retirement, insurance schemes and others that give tax breaks.
12) All taxes in India are subject to an education cess that is 3% of total tax payable. This contribution is made towards the Secondary and Higher Education development in the Indian economy.
13) It is lastly important to understand the relief granted to employees when salary is paid in arrears in a lump sum best known as Relief u/s 89. This includes salaries received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation.

Understanding your form 16 helps you in many ways like planning for taxes, filing your income tax and so on.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners ( a firm that offers Financial Planning and Wealth Management. He can be reached at

Sunday, December 4, 2011

3 wheeled sprinter

After the advent of the revolutionary Tata Ace in 2005, analysts believed the Indian 3 wheeler Industry would slowly be phased out and be replaced with efficient 4 wheelers.  Even Industry Experts were betting big on bringing more 4 wheeler cargo/passenger trucks into the market. The more powerful, stable, upmarket & value for money 4-wheeled offering was a real scare for the 3 wheeler industry. The market changed drastically and slowly the sale of 4W numbers was higher than 3W.  The industry also saw a steady decline in the year 2006 to 2008 as a resultant of aforementioned reasons. Suddenly the vehicle stability, long distance travel, interior space, higher payload, increased speed and car like comforts/driving were the value propositions sought by the Indian buyer.
click to enlarge
As said and the done, the future was very different. The 3-wheelers suddenly emerged out of the grave and proved a valuable business proposition to the auto makers. The cognizance of the 3-wheelers was undeterred by the mighty 4-wheelers competitors. It grew manifold after 2008 and still is the first choice for the value conscious commercial vehicle seekers. The production almost touched 8 Lakh figures in F11 is the best example of its success story. So what is it that kept it alive???

Let’s start with a brief on the Indian 3 wheeler Industry: 

The 3 wheeler market in India is over four decades old and is currently the largest 3 wheeler market in the world. Initially only 3 wheeled passenger autos were introduced. Later in eighties lower capacity cargo carriers were introduced – 0.5 Tons open body Pick-up van. Till late eighties, 3-Wheeler market was virtually ruled by Bajaj Auto Ltd. Late eighties - early nineties, new manufacturers developed higher capacity category by introducing 6 seaters & 0.75 Tons Cargo carrier. Late nineties saw a renewed interest in the 3-Wheeler market. Optimism about growing need of free mobility as well as the need for remote and efficient distribution of the goods and services was the key factors for the same.

The OEMs involved in manufacturing 3 wheelers –
Slowly according to the market requirements LPG & CNG variants were also launched. The stringent government regulations also threw out the diesel variants from the city. 

The Segmentation of the industry emerged as follows –

Key Drivers to the sustainability and growth were:

1. Last mile transportation needs -
Its small turning radius, ideal for intra city operations and easy to drive in narrow roads made it the favorite for small distance load/passenger carriers. Its maneuverablity allowed it to pass through even smallest lanes of the town. High product maneuverability & driveability had been always ideal for congested Indian roads and tropical conditions.

2. Inadequate urban & rural public transportation infrastructure.
Infrastructure remained the biggest concern. Unavailability of structured roads/highways didn't allow the 4-wheeled machines to bloom. The 3-wheelers still proved to be the fastest and most viable alternative to the narrow, pot-holed Indian roads.

3. Low initial ownership/acquisition cost
It is still the most economical vehicle in the commercial  vehicle industry. Better mileage and Pickup Low maintenance cost along with amazing price and better load optimization made it the perfect choice! The low EMI's stood as an attractive option and the easy availability of spares in the local market was another added advantage. 

4. Self-employment opportunity
Various subsidies offered by the state governments encouraged the unemployed youth to openly accept this opportunity of owning it and make-a-living out of it.

Indian 3-wheeler market has seen its fair share of up and downs. Considering the exciting phases it has been through we had no doubt in calling it a '3-wheeled sprinter' who has able to keep upto speed to the market requirements and has evolved to survive the dynamism/vulnerability of the Indian Automobile market. It'll all exciting to track its growth/decline in times to come.  

Friday, December 2, 2011

Indian Car Sales Figures - November 2011

November 2011 Sales Figures - Pan India
Highlights -

“Every cloud has a silver lining” – This is what the sales figures for the month of November 2011 has to say. Except Maruti all OEM’s have seen a considerable growth in its volume. Even Maruti Suzuki has exceeded the 80k figure after 6 long months! This is a sure shot sign of revival for the industry, and with the slight decrease in petrol price along with the huge year-end discounts we can expect the sales registers ringing this December.
      1. Nano 2012 is here!!! The increased numbers surely bought some hope among Nano enthusiasts. This brand still has a long way to go in terms to prove its potential.
2)     2. Beat grows over 80 percent than last year – this surely shows how GM was devoid of the market acceptance even after having a winner in hands. With the diesel version it has emerged as a savior to GM and enabled it to sustain its numbers.
3)     3. Eon with its slapstick pricing and futuristic looks has the potential to push Hyundai to the top position in India. But it is not easy to shake Alto’s dominance.
4)      4. Maruti has been able to revamp its supplies – evident from the offtake numbers of 17273 for Swift, 24422 for Alto and 10403 for Dzire. Estilo seems to be in its death phase, we think it is the right time to phase it out.
5)      5. Tata seems to be on Steroids. Both its Indica and Indigo brands are doing extremely well. This is primarily due to the performing Vista and Manza variants.
6)      6. Verna has taken the C-segment by storm. It has consistently proved itself as a rightful competitor over the last 6 months and has strengthened Hyundai’s position in C-segment.
7)      7. Bolero seems to exceed the magical 1Lakh figure this fiscal. It has already garnered 63314 numbers within 8 months of this financial year. Also Scorpio has shown a strong growth this year. With 4646 numbers it has grown over 38 percent over last year.
8)     8. Skoda’s Rapid did a decent start with 957 billings. We can expect it cannibalizing Vento’s sale to an extent.


Thursday, December 1, 2011

OEM Offtake Figures - November 2011

November 2011 Sales Figures
1) Positive Signs in the month of November. Labour Unrest seems to be settling for Maruti - hope the sales completely revive in Dec'11.
2) Etios Brothers (Etios+Liva) has boosted the growth for TKM. Made for India Etios has got TKM to an enviable position.
3) Someone forgot to tell Mahindra about the Recession in the Auto space. M&M has an excellent growth of around 53%.
4) Tata Motors revive sales with the growth in Nano Sales. Also the new Indica Vista has boosted the numbers for TML.
5) Figo again emerges saviour for brand Ford - what a winner it has proved for Ford in India!
6) GM tastes the power of Diesel. Has a marginal growth (just 1%) - all thanks to the new Beat Diesel.
7) With more than 1600 bookings for Rapid, we expect a more RAPID growth in sales figure of Skoda in December'11.
8) VW's Polo & Vento has grown to a sustainable position and are bringing increasing numbers to VW portfolio.
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