Sunday, March 21, 2010

Do the rich know something?

Do the rich know something?
IN A recent survey of Global High Networth Individuals, Cap Gemini/ Merrill Lynch found the following allocations to asset classes:
Equity: 31 per cent,
Debt: 23 per cent,
Real Estates: 20 per cent,
Cash/Deposits: 13 per cent and
Alternate Investments: 13 per cent.

The average urban Indian's allocation in comparison looks something like

Equity: 3 per cent,
Debt: 12 per cent,
Real Estates and Gold: 21 per cent and
Cash/Deposits: 64 per cent
(NCAER Max New York Life Survey 2007).

On a weighted average basis with historic asset class returns, that's a difference of 4 per cent net return per year, that is, a difference of 3.2X over 30 years!

You bet the rich know something!

It's all in the asset allocation
This is even more striking considering the rich need to be conservative with their larger corpus and yet, they choose a better allocation. How can they be so cavalier? They are not; with higher net worth the aversion for risk actually increases. So, it is clearly not that they are more risk taking. Empirically, asset allocation in the portfolio is the single greatest driver of return. But the above portfolio is higher risk than the average Indian holding, right? Not necessarily!

Individually, each asset class has a risk-return profile but in a portfolio, the total risk is much lower than the sum of individual risk. This is the idea of diversification, where your portfolio return is an average across asset classes, where losses from one are absorbed by another. Further, a 100 per cent allocation to risk free securities (Gilts) is not optimal on a risk adjusted return basis. This is the basis of the modern portfolio theory called the efficient frontier. How do the rich know this? They have access to the best advice and robust analysis. But, now you can peak into their playbook and know exactly why they do it!

Is there a cultural bias to these allocations? Interestingly, not amongst the rich around the world, but strong differences exist by culture on an aggregate basis. This can only be explained as better access to information and learning. India has the highest savings rate of 28 per cent in the world; it also has the highest household gross contribution to the gross domestic product (GDP). So, putting these together and a 4 per cent increase can add 2 per cent to the GDP growth rate—Wow!! Can this happen? Yes!

The US and UK have become world's largest economies partly because they earn more on their savings than continental European economies. The Indian policy makers realise this and are, therefore, doing their most to encourage a higher allocation of domestic savings to equity by introducing some of the most favored tax treatment for equities in the world.

Number crunching
Let's do a quick retirement plan assessment. Suppose your annual family income is Rs 10 lakh. You pay 30 per cent in taxes and save 30 per cent or Rs 2 lakh per annum. Your monthly expenses add up to Rs 41,665. So, our first goal is to find out how much this expense will be 25 years on, when you retire. Inflation will reduce your buying power for each rupee and your standard of living will go up over this time, trading up from a Maruti to a Corolla perhaps!

Let's assume this is 5 per cent, a conservative estimate. But wait, you can reduce your expenses in retirement as a lot of your responsibilities would be taken care of by then. Let's assume that you can live on 90 per cent of your pre-retirement monthly expense. One little thing, you still have to pay taxes! Let's say, that rate is lower in retirement at 20 per cent. Putting these numbers together you would need Rs 2.4 crore saved up at retirement!

Now, let's see if that is feasible with the 8 per cent historic return from deposit products. Assuming you have a corpus of Rs 1 lakh saved and you would be adding Rs 2 lakh a year in savings, further that the savings will increase by 3-4 per cent for the duration of your work life. These are very generous conditions. The amount you will end up with at retirement is Rs 1.4 crore, an entire crore short of what you need!

Now, the very realistic scenario above is just planning for your life in retirement, it has made no extra provision for your kids' education, those overseas vacations or any of the things that you want in addition to your normal expenses. Any large (typically six months of savings or more) or unplanned expense will make you horribly insecure about your financial future. This is because the entire analysis above is contingent on compounding, which will amplify the projected short fall. But you have silver bullet—real estate!

True, real estate has outperformed in the past decade and so has emerged as a bulburk of the middle class retirement. Real estate is great only if you see it exclusively as an investment asset class. In India, these are highly emotional purchases, that are illiquid, require maintenance and tax payments. These are great insurance plays but are poor sources of income. The point in all of this is that you simply cannot afford to ignore equity as an asset class if you seriously want to plan your financial future. I know a lot of you wanting to know if using equity in the above example bridges that short fall. Yes, even after factoring in a lower progressive allocation to equity over time to account for risk!

Sum up
If you are not the number's kind and glossed over the frightening figures above, here are some changes that our generation will face much more than the generations past.

• Increasingly, people are taking more ownership of their investing lives. This is being accompanied by the phasing out of defined benefit pensions, long the cornerstone of retirements. The message is clear: the individual bears all risks.

• Job security is fast disappearing leading people to worry about their financial future.

• Inter-generational savings is becoming a thing of the past, so people are looking to formal investment options to structure their future.

• India is transitioning from a supply constraint to consumer led economy. Increasing affluence is raising the need for employing savings to more productive uses. There is high empirical correlation between investment growth and material disposable income.

• Given a large (63 per cent) percent of India's domestic savings are in low yield savings products especially gold, the government is working hard to bring this capital to more productive uses by an encouraging tax regime on equity ownership.

Saturday, March 13, 2010


1. Compound Interest
I want to take a loan of Rs 1 lakh to buy a used car. How much will the car cost me at an annual interest rate of 8 per cent for four years?
The compound interest formula can be used here to calculate the final cost, which would include the loan amount and the interest paid. The amount that is actually paid for Rs 1 lakh is Rs 1,36,048.90. The total amount of interest charged for borrowing Rs 1 lakh is Rs 36,048.90.
Formula: Future value = P(1 + R)^N
Type in: =100000(1+8%)^4 and hit enter. P: amount borrowed; R: rate of interest; N: time in years.
Also used for: Calculating the maturity value on lumpsum investment (bank fixed deposits and National Savings Certificate, for example) over a fixed period at a certain rate of interest.
2. Compound Annualised Growth Rate

I had invested Rs 1 lakh in a mutual fund five years back at an NAV of Rs 20. Now the NAV is Rs 70. How should I calculate my returns on an annual basis?
Compound annualised growth rate (CAGR) will be used here to calculate the growth over a period of time. The gain of Rs 50 over five years on the initial NAV of Rs 20 is a simple return of 250 per cent (50/20 * 100). However, it should not be construed as 50 per cent average return over five years.
Formula: CAGR = {[(M/I)^(1/N)] ? 1} * 100
Type in: =(((70/20)^(1/5))-1)*100 and hit enter. M: maturity value; I: initial value; N: time in years. CAGR here is 28.47%.
Also used for: Calculating the annualised returns on a lumpsum investment in shares.
3. Internal Rate of Return

I paid Rs 18,572 every year on a moneyback insurance policy bought 20 years back. Every fifth year, I received Rs 40,000 back and Rs 4.5 lakh on maturity. What was my rate of return?
The internal rate of return (IRR) has to be calculated here. It is the interest rate accrued on an investment that has outflows and inflows at the same regular periods.
In the excel page type Rs 18,572 as a negative figure (-18572), as it is an outflow, in the first cell. Paste the same figure till the twentieth cell.
Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in ?18572. In the twenty first cell, type in Rs 4,50,000, which is the maturity value of the policy.
Then click on the cell below it and type: = IRR(A1:A21) and hit enter.
5.28% will show in the cell. This is your internal rate of return.
Also used for: Calculating returns on insurance endowment policies.

I bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold off all the 650 shares at Rs 655. What is the return on my investment?
XIRR is used to determine the IRR when the outflows and inflows are at different periods. Calculation is similar to IRR's. Transaction date is mentioned on the left of the transaction.
In an excel sheet type out the data from the top most cell as shown here. Outflows figures are in negative and inflows in positive. In the cell below with the figure 4,25,750, type out
=XIRR (B1:B4,A1:A4)*100
Hit enter. The cell will show 122.95%, the total return on investment.
Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance plans.
5. Post-Tax Return

My father wants a bank FD at 10 per cent return for five years. He pays income tax. What will be the returns?
The post-tax return has to be calculated here. The idea is to know the final returns on a fully taxable income. Interest income from the bank is taxed as per your tax slab.
Formula: ROI ? (ROI * TR)=Post-tax return
Type in: =10 ? (10 * 30.9%) and hit enter. You will get 6.91%
ROI: rate of interest; TR: tax rate (depends on tax slab)
Also used for: Calculating post-tax returns of national savings certificates, post-office time deposits, and Senior Citizens' Savings Scheme.
6. Pre-Tax Yield

My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?
An investment's pre-tax yield tells us if its return is high or low. The return on PPF (8 per cent) is tax-free. Also, this has to compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF's 8 per cent.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%. ROI: rate of interest, TR: tax rate, (depends on tax slab)
Also used for: Calculating the yield on an Employees' Provident Fund or any other tax-free instrument.
7. Inflation

My family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will I need 20 years hence with the same expenses?
The required amount can be calculated using the standard future value formula. Inflation means that over a period of time, you need more money to fund the same expense.
Formula: Required amt.=Present amt. *(1+inflation) ^no. of years
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as the answer, which is the required amount.
Also used for: Calculating maturity value on an investment.
8. Purchasing Power

My family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years?
Inflation increases the amount you need to spend to fetch the same article and in a way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at an inflation of 5 per cent will be able to buy goods worth Rs 18,844 only.
Formula: Reduced amt.= Present amt. / (1 + inflation) ^no. of yrs
Type in: =50000/(1+5%)^20 and hit enter. You will get Rs 18,844, which is the reduced amount.
9. Real Rate of Return

My father wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital will be preserved and he would get assured return on it.
It is true that fixed deposit is safe and gives assured returns. However, after adjusting for inflation, the real rate of return can be negative.
Formula: Real rate of return=[(1+ROR)/(1+i)-1]*100
Type in: =((1+9%)/(1+11%)-1)*100 and hit enter. -1.8% is the real rate of return. ROR: Rate of return per annum; i: rate of inflation (11 per cent here).
10. Doubling, Tripling of Money

I can get 12 per cent return on my equity investments. In how many years can I double or even triple my money?
Formula: No. of years to double = 72/expected return
Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in: =114/12 and hit enter. You will get 9.5 years. For quadrupling, type in: =144/12 and hit enter to get 12 years.

Monday, March 8, 2010

Shri Hanuman Yantra

Hanuman who is esteemed devotee of Lord Rama is very much worshipped for realization of all cherished desires. The Yantra is to be drawn on bhorjapathra with asthagandha or carved on copper plate. This Yantra of hanuman brings about safety. By wearing the Yantra the devotee shall become victorious in battle, win in lawsuits. He is never suffered by adverse effects of planets, obstacles, poisons, weapons, or thieves. He shall get rid of all ailments and be fortunate. He shall live a long life.

Shri Ganapati Yantra

The one who worships Ganesha is blessed with success in his work, business, and other desires. Ganesha pooja can be done through Idol or through Ganesha Yantra. The elephant headed god, represents the power of the Supreme Being that removes obstacles and ensures success in human endeavors.

Sri Yantra

Tripura Sundari is the third among Mahavidyas. She is also called sri vidya. Sanskrit word “Sri” means wealth, property, fame, higher position, beauty, goddess of wealth “Lakshmi”, etc.Sri chakra actually represents the symbolic energy form of the Goddess Tripura Sundari.healingsindia

Shri Gayatri Yantra

Gayatri Yantra is bestowal of knowledge of Vedas, religion, business, and salvation. This Yantra is kept in house of business place. By the sincere use of this Yantra, one cannot be affected by evil spirits and is blessed with health, wealth, and happiness. This Yantra washes away all sins of the devotee if he worships the Yantra.

Shri Mahamrityunjaya Yantra

Lord Mahamrityunjaya is the winner of death. On worshipping Mahamrityunjaya one can escape from the miseries and troubles of this materialistic world as well as the problems related to inner soul. He checks our problems, tensions, stress, as well as our ego. This Yantra is used to free the fear of death, grave dangers, and fatal diseases and makes one courageous and healthy. It bestows the person with wealth, health, happiness, good fortune, and fame. Mahamrityunjaya Yantra dispels all sorts of fears, influence of evil planets, fear of ghosts, accidental death, and diseases, etc. The person who performs pooja of Mahamrityunjaya Yantra remains in good health and free from all ailments.

Thursday, March 4, 2010