Sunday, December 16, 2007

Sampadyam -Malayalam Magazine for Newbie Investors

Sambadyam (a savings and investment magazine in Malayalam)

Type: Magazine
Language: Malayalam
Frequency: Quarterly
Topic: Investment, Insurance and all Personal Finance Topics
Price: Rs.15.00
Published by: Malayala Manorama

Sambadyam is a Malayalam magazine, dealing with money related topics. The tagline of the magazine reads 'nikshepakarude vazhi kaatti' (investors' guide).

Although the magazine claims to be a guide to investors, I think the magazine is good for newbie investors only. It is good for newbie investors, but seasoned investors find it grossly inadequate.

After the odd feeling of reading finance and investment topics in Malayalam is over, I could find the magazine as a guide to insurance policies, mutual fund schemes, stocks and tax planning.

The magazine has stock suggestions, without ticker symbols. The writers pick a few stocks and ask readers to consider them. Though the stocks are good bargains at the prices mentioned in the magazine, they are already trading at double the prices by the time I checked the prices. Buy the stocks at available prices and you are making big speculations. I do not expect anything better from a magazine, which is published once in three months.

Both issues had in the last page, a Tax Corner feature, where tax related doubts by readers are cleared. The questions mailed in by the readers are answered straight, clearly and in simple language.

The magazine has several pluses and a few minuses. The strong points are Tax Corner, insurance advice and mutual fund advice. The write up on systematic investment plan (SIP) offered by different fund houses was an insightful one and would inspire youth to separate a monthly sum towards investments.

The writers could do a better job by introducing better-managed funds. I miss funds by DSP ML, Fidelity and Reliance MF (although it featured Reliance Tax Saver fund).

The column titled 'Portfolio Doctor' is the weakest link. This column generally discusses the asset allocation of an investor and suggests a prescription for weaknesses in portfolio allocation. The writer has to identify some weak points in the asset allocation and suggest a remedy for a selected portfolio followed by an investor. The prescriptions are hurriedly prepared and do not qualify as studied suggestions.

The November issue discussed a portfolio (of Dr. Saji P Soman and Bindhu). The first prescription was to diversify the stocks to different stocks (I approve the suggestion) from current domination of infrastructure stocks. The second suggestion is to entrust a portfolio management to handle the stocks (Nov 2007 issue, p.66). I think a portfolio management service is not necessary for someone who has significant levels of investments in mutual funds and knows what he is doing with his money. Moreover, Warren Buffet has told you to "make your own firewood, it warms you twice".

The investor doesn't go for a PMS, but will reduce risks by diversifying his stocks to pharma, communications, entertainment, tourism and banking sectors.

The asset allocation of the couple revolves around stocks only. That is the weak point of the portfolio. It doesn't involve any real estate and gold. The saddest part is the writer starts the column by praising the absence of real estate and bullion in the portfolio – the writer also encourages average families to copy the investment style (a big mistake).

A good suggestion would be to lock in the profits from stocks, at least three years before a significantly important event and redirecting the investments to assured return funds. This step is important. Even though the good stocks can perform well in the long run, it can go down in short terms. You will lose money, if you are forced to redeem cash during a dip in the stock market. You will insulate yourself against such risks, if you redirect your cash to assured return funds.

There was a review on Benjamin Graham's world renowned book, The Intelligent Investor, which is a necessary read for everyone investing in stocks (or anything). The facing page (p.72, Nov 2007) has day trading tricks, which includes buying a stock if it has breached the 52 week high. Benjamin Graham in his book talks in detail about concepts like 'margin of safety', which is about identifying the real value of a stock and buying it at a price lower than the real value. While day trading is the recipe to burning your shirt (and underwear), 'margin of safety' is something that protects you from the volatilities of markets. I find it a bit odd to print these two concepts in face to face pages.

Who makes the good readership?

Anyone who doesn't have any insurance, mutual funds and stocks, but likes to get started. The Tax Corner is also good for tax payers.

People with some experience in money and investment matters feel this magazine inadequate.

Monday, December 10, 2007

Give Time: Your Mutual Fund Investments will Grow

I was once talking to a person in my family. I know this man had no investments and is past retirement age. I just wanted to introduce him to the world of mutual funds. I asked him to calculate the returns on an investment of Rs.6000 if it grows at 20% per year for 20 years.

He is good at math, but wants the number of years reduced to three, saying it'd be easier to calculate. I gave him a calculator to do the original problem I had given him. He returned a number – 230,025.60.

I asked him if he could invest that money for that many years for this return? After a long pause, he said: "How much return will I get in one year?"

He just told me an investment of Rs.6000 could turn to Rs.230k plus in 20 years. But, he now wants the math for one year.

Though I appreciate his situation (cash flow, not value growth is important in retirement), it kept me thinking. I think and think and . . .

If he invested Rs.6000 in a fund, which grew 20% every year for 20 years, he would have Rs.230K now. (And he could invest more than 500 a month 20 years ago and could invest 15000 a month five years ago. That sums, if he did invest, would have grown to a nice sum now. Nothing happened.)

Do you plant a seedling today in hopes of plucking its fruits tomorrow? The obvious answer is no. However, when it comes to investments, people believe the seedlings become plants and bear fruits in a few days.

You read about a well-managed fund giving 30% returns per annum. (Mutual funds giving returns 70% is not rare in India, thanks to the Bull Run).

If a fund can give you returns of 20%, your money can double in just four years. Many so called investors are happy to redeem their earnings, once they see their money doubled in less than four years.

If you close your account at this stage, you miss major gains.

You read it right. You are missing out major opportunities, even if you see your money doubled in four years or less.

Leave the investment running for another four years. Your investment quadruples. Leave your investment for 15 years in total, growing at 20% and you see your investment growing by 15 times.

Keep invested in additional number of years and you will see your investment growing more times than the number of years. Stay invested for 20 years and you will see your money growing by more than 38 times. Stay invested for 25 years and you will see your money growing by 95 times. Stay invested for 30 years and you will see your money growing by 237 times.

OK. No one can expect a fund to grow by 20%, consistently for 30 years. I agree. There will be dips in the market, corrections, recessions, etc that will negative affect the performance of your investment.

However, with a professionally run company, you can normally expect a return of 15%, even in volatile market conditions.

How much will your money grow if it is growing by 15% per year?

5 years – 2.01 times
10 years – 4.04 times
15 years – 8.14 times
20 years – 16.36 times
25 years – 32.91 times
30 years – 66.21 times

There is no comparison of 237 (with 20% growth) and 66 (with 15% growth). The point is find funds capable of giving your returns more than 15% (investing in index funds can give you that returns) and keep invested in the fund long enough, for the money to grow and bear more money for you.

Disclaimer: I used the following formula to calculate returns.

FV = PV (1+r)^n

PS: I am not good at math. It will be helpful if you do your math and correct me if some errors have crept in.

Yet, my point is simple - by maximizing n, which is the number of years you allow your investment to grow, you will also maximize the chance of multiplying your money.

To maximize the advantage of n, keep investing and stay invested for as much as you work and earn.

See what Motley Fool has to tell about this formula.

Tuesday, December 04, 2007

CIBIL-TransUnion Credit Scoring System Launched in India

Lenders in India will now have a clear system to identify the credit worthiness of persons, while borrowers can effectively bargain for lower interest rates, citing their clean repayment history.

Credit score is new system in India, launched on Thursday, November 29, jointly by Credit Information Bureau of India (CIBIL) and TransUnion.

CIBIL-TransUnion score tells lenders about the credit worthiness of a person, based on his/her repayment history. The score is a number between 300 and 900. Individual credit worthiness increases with the credit score.

Reserve Bank of India, the central bank is yet to issue directions and rules for co-operative banks to be members of CIBIL.

Repayment of credit card bills and personal/home/auto loans is the main criteria of a credit score.

According to Geoffrey Miller, vice president, TransUnion said, "The scoring model factors in the payments history, outstanding debt, credit account history, recent credit enquiries and the different types of credit the borrower has availed of."

The lenders however will not get data on job status, type and salary of the borrower.

Only persons who have taken a loan six months back will have a credit score.

Presently, there are 77 banks, 32 Non-Banking Financial Companies, six state financial corporations, 10 financial institutions and two credit card companies are members of SIBIL.

Insurance companies and telecom companies also express interest in CIBIL memberships.

Similar credit system exists in the US



Although this system is new in India, similar system exists in the US. There are mainly three credit-reporting agencies – viz. Experian, Equifax & TransUnion.

Apart from the repayment of loans and credit card bills, timely payment of utility bills like electricity, phone, etc also play a role in individual credit score.

Before applying for loans, individuals can check their credit score from the agencies for a nominal fee. They can also ask to remove any false information. Credit history that is older than seven years is removed from the reports.

The message to borrowers is clear - if you want to take a loan, be punctual in repaying your credit card bills and do not delay the payment of loans of any type – personal loan, vehicle loan or home loan.