Archive for July, 2015

Inflation is injurious to your wealth

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” – Red Queen from the book Alice in Wonderland.

Power of compounding is called the eighth wonder of the world, However not many of  realize that inflation is the Himalayan blunder that we all do without realizing.

Consider that you had Rs. 100 as capital in 2010, today in 2015 as per governments cost inflation index it is worth only Rs. 72. In other words you would have lost Rs.28 worth of purchasing power if you kept the Rs.100 hidden under your pillow.

If you reply, hey, i’m smart i saved the Rs. 100 in an FD for 1 year at 9.5%, Now i have Rs. 109.5 in the bank, you have just about preserved your  Rs. 100 here is how.

Interest 9.50%
Inflation 6.70%
Taxation 30.9%( at highest bracket)
Net of Tax Return 6.56%
Actual Return post inflation and tax -0.14%


So, longer you run the FD more you will lose thanks to inflation and taxes.

PPF and other tax saving investments offer some hope as they are tax free and also investment is subj to tax savings, but they accept only upto 1.5 Lac per annum, this limit is not enough for people with higher income and savings.

Which is why the red queen in Alice in wonderland is right, you have to keep running ( by saving in FD) to be at the same place ( ensure your Rs.100 remains the same after inflation and taxes !!).

But, unlike the red queen you don’t have to run twice as fast as to go to someplace ( to get some real returns on your savings) but you have to make your investments do the job for you in two ways.

Debt Mutual Funds are allowed to be indexed for inflation so the net taxation is only 20% that too post inflation, and if funds like Monthly Income Plans which have 25% equity are considered, returns could be better than FD on a 5 year basis and taxes much lower.

This is however not guaranteed hence people stay away from it, people keep away by saving 100% in FDs,  This is not a either or situation, as one can invest a portion of their savings. For retired people without pension, guarantee may be paramount and hence safety of FDs needed. For those who are working and are several years away from retirement, MIPs can be considered.

Equity mutual Funds : Equities over long periods of time are best at beating inflation, and what is more are tax free too ( after 1 year of investments). On a 10 year basis, equities are better positioned to FDs or any other investments. They are risky but that goes down with both time invested as well and can be invested monthly too to avoid the risk.

So, if you would like some real return post inflation and post taxes invest in debt funds, MIPs and equity funds apart from FD, PPF etc.

Here is a post from the paper Mint making the same point :

Disclaimer : Tax rates and inflation vary from time to time, Returns from mutual fund are subject to market risks.






Saving investors from themselves

Saving investors from themselves:

First written in Industrial Economist in August 2013 when gold just had started its fall and real estate was still holding on.

Link to the original article here :Industrial Economist

The fault, dear investor, is not in our stars — and not in our stocks — but in ourselves…” Benjamin Graham

(Endearingly called father of value investing and more famously known as Warren Buffett’s Guru)

The year was early 2000, opened the business newspaper to see a front page picture of a large crowd standing in queue outside a bank, with the headline “ Investors queuing up to apply for shares of an unknown software company”. Cut forward to 2001, many software companies went bust.

Year was 2003, had told an acquaintance to invest at least some amount in mutual funds, but he never did. Suddenly in 2007 he found courage to buy into two IPOs ( Initial public offering for the youth & public issue for rest of us!  ) of a large industrial group. In 2013 those 2 stocks were still in losses. It is estimated that 1/3 of Indian investors have bought those 2 stocks only and are staring at a large loss.

How did this come to pass? People who refuse to invest, suddenly find courage to buy anything and everything that their brother in law tells them?. The fault as usual lies with us, we don’t follow basic rules ( the comparison we do, questions we ask, for mobile phones and tablets are never done before investing hard earned money).

Here are few basic thumb rules that we can use to not only save us from ourselves but put our money to good use


  1. Putting all of your eggs in one basket: Whenever I travel my father always advises to keep some cash and a debit card separately from the wallet so that in case the wallet is lost I still have some money & a debit card. The idea is same as not keeping all eggs in one basket. For some of us our house is the biggest investment but apart from the house one lives in the other investments needs to be well diversified ie some portion in bonds/ deposits, some in equity mutual funds/stocks, some in gold etc. At the height of the real estate boom of USA in 2008, an NRI told me that her servant maid owned 4 houses (all bought on zero down payment loans, of course) and finally had to sell all of them and still owe the bank money. Diversification is about sleeping well. The best of our plans may turn sour, hence diversify.


  1. Falling for high returns and low risk trap: whenever you hear someone saying ‘ 24% returns with no risk’ run as if a dinosaur is chasing you. Promise of high returns whatever may the business model be reeks of a Ponzi scheme (where capital given by one person is used to give  returns to another works till it goes bust)  any  investment that promises high returns especially within a short span is suspect.



  1. Not investing regularly : While we all understand Fixed Deposits and invest heavily there or in Real estate most never look at investing regularly in equity markets via monthly investments called Systematic investment plan( SIP). Indian investors invest little in their own equity markets but today foreign investors hold a large stake in many of our banks, manufacturing companies etc. The foreigners seem to have more faith in our future than us.


  1. Falling for the new-new thing, be it dot-com/software rage of 2000, Infrastructure stocks or funds in 2007, Gold in 2012 or may be real estate in 2013 buying into anything that is extremely fancied by most is a recipe for at best very low returns or at worst disastrous.

Happy investing!

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Minimalism in life and investing

Profit from folly, do not participate in it – Warren Buffett

Simplicity is the ultimate sophistication. – Leornado Da Vinci (1452 AD)

More is better, is what we are led to believe, in both life and investing. In life through larger house, cars, phones, home theaters. This consumption is led by the belief that one needs ‘new’ things all the time, especially when there are three apps in your smart phone which keep reminding you to buy the new smart phone (on EMI of course!) or the LED TV.

Waste & want that is my motto.

Waste & want that is my motto.


But the problem, as the above cartoon says is that ‘ everything we get turns into something you have’ which is why Calvin says one needs to keep getting new things and so we shop till we drop. The old TV looks out of place, the home looks cramped, car looks dented etc.

This is indeed great for investors in those companies ( buying a new Iphone is sort of transfer of wealth from your end to shareholders of Apple and to the shareholders of the bank that finances your purchase 🙂 ), which is why Warren Buffett says profit from folly ( by being an investor ) dont participate ( by avoiding being a full time consumer) in it !

Minimalism is about getting more done by doing less.  If you have a hundred shirts to wear, you surely are going to waste lot of time wondering what to wear, have 5 shirts and the choice becomes much easy. Also maintenance becomes even easier. Have a house that looks cramped ? give away some furniture and make space, wardrobe is cluttered? give away clothes that you don’t wear anymore, you will get some space and help another person too.

De-cluttering  helps in life as well as in investments,  having too many mutual funds(because you read in paper they are doing well) , insurance plans ( brother in law in pushed it) , bank accounts ( nephew shifted three jobs and now you have three bank accounts and hope he stays there !)  is a recipe for confusion.

This weekend I plan to start with clearing up my desk of all the magazines and brochures, my investment life is simple enough have one investment account, 2 bank accounts   (one for regular expense and one for investment), one insurance plan and one medical plan.







Get rich slowly vs quickly – A comparison

Market is a mechanism for transferring wealth from the impatient to the patient – Warren Buffett.

In movies sometimes we see that all it takes is one song of few minutes by which time the hero who was washing cars for a living zips along in a chauffeur driven limo ! Real life though is not that easy, and the road to riches are not easy too,  unless one happens to be Rajinikanth ( both in his movies and in real life !).  

Getting rich quick is what everyone dreams of and as we have seen unless one is smart even keeping what we have is tough. See link : Five crores to four cows !

Getting rich slowly on the other hand is much easier as SIPs are there and we can invest monthly, though some disagree with that and think it is easy to start an SIP but tough to keep it while markets become volatile. this is true as many who had started SIPs in 2007 stopped by 2011-12 as they did not see much return but after 2013 markets turned up and those who held on made decent returns

My take is that, SIPs offer a simple (but not easy way out as the discipline of staying the course matters and i dont think that is very tough if one understands few things ) :

1. No other way to increase allocation to equities for as little as few thousand rupees per month.

2. Since you buy monthly you are unlikely to bother about the negative news ( Greece down or China down etc) and focus on the longer time frame automatically.

3. Since you average the cost by buying every month, you automatically buy more when market is lower which is the very opposite of what most do, they buy on hope when market goes up and sell in fear when it goes down.

4. You may not become a dollar millionaire  by investing 15,000 Rs per month for 15 years but you could end up with 1.4 Cr apprx at 18% pa returns over next 15 years, which is pretty good. ( Rs. 15000 p.m invested in Franklin Bluechip for last 15 years is now worth 1.59 Crs as against invested value of 27 Lacs, returning 20.9% p,a on average but start 5 years back ie since 1995 and curren value is Rs. 5.5 Cr vs 36 Lacs invested)

5. This would also mean that if you are 35, you could achieve this by 50 or wait till 55 for building a good retirement plan with SIPs. and earler than 55 if you are younger.

What is more this is achieved in a much simple manner compared to trying to get rich quick, and is hassle free, as it is said to be a good driver one need not understand how and engine works but just how to drive similarly one need not understand stocks and market cycles to invest but can do it easily via SIPs.

Disclaimer : Mutual Fund investments are subject to market risks, please read the scheme documents before investing. Past performance may not be repeated in future.





Inner vs outer score card

“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?” – Warren Buffett.

The answer to this question would tell what kind of score card we all have in our minds. Outer or Inner.  The thing about outer score card ie worrying what the world others think of  you and doing things that would make them think you have arrived in the world is an endless rat race. It is fine to be ambitious and hard working but that must be because deep down you want to be better, not because you want the 1008 friends on facebook whom you have never met to think you are better. Why is this so? because peoples change all the time, and it is tough to have their approval all the time also we may erringly put up appearances for their sake.

Having an inner score card is more rewarding to yourself, and i would say less stressful. You would have lesser EMIs to pay, more money to save and invest for the long term.

An outer score card person may do something like this : Have a large car, big house for a small family, splurge on gadgets and holidays, send children to a ‘posh’ school because that is the best money can buy, keep buying new gadgets. The result will be a person whose sole aim in life is to make his bankers rich as he keeps borrowing more. He will find it difficult to sit down and enjoy because he has to work hard to pay for what he has bought. Michael Jackson and Mike Tyson were both worth hundreds of millions of dollars, in their peak. Yet MJ was forced to sell his mansion and Tyson is bankrupt today.

An inner score card person on the other hand will do something like this  : Live in a small apartment, have a two wheeler or a small car, eat out where the food is good,  Less hurried hence more time for family, is seen jogging  in the park or the playing in the beach with his family than in the mall or fancy restaurant. Travels by planning ahead and saving for a holiday instead of borrowing for it. Invests well for his goals like retirement, children’s higher education etc so that neither he depends on them for money in old age nor they depend on him for lack of education. He may not be the “king of good times” but he certainly is a happy and content man.

While the outer score card person worries about being better than others, the inner score card person thinks of being better than himself compared few years back.

Put this way, the answer seems obvious which score card to follow.