Fixed Deposits could get stuck forever- Some Pointers if You have to

People losing money through Fixed Deposits keep happening at an alarming rate. So thought it would be useful to bring home some pointers.' Fixed Deposits with companies have always been an avenue for savers. It is essentially an instrument of ‘trust’. You place your money for periods ranging from six months to five years. Interest is paid quarterly, half yearly, annually or compounded and paid with principal, at maturity. I have also seen people splitting their deposits in to chunks of Rs.45,000/- and put it in to many companies, to escape the TDS net. In doing so, they end up putting money in to high risk areas and the need to follow up with many companies for interest, repayment etc. Most often, we do not do any homework about which company we give it to. We either go by broker recommendation or by our perception of the company or on the basis of interest rate offered. Fixed Deposits with companies are one of the riskiest investments. There are hundreds of companies where people lost money due to default. Leasing companies in the eighties were amongst the biggest to default. Unlike any other borrowing by a company, Fixed Deposits are not regulated or vouched for by anyone. The law simply allows every public limited company to raise money from the public. This is as good as permitting them to carry on banking. There is no security or any guarantee provided by anyone. In the event the company goes in to liquidation, the Fixed Deposit holder is the last in queue. However, FDs do offer the highest rate of interest as compared to other forms of investments. Perhaps they offer the only returns that help you to battle inflation. If inflation is at ten percent, a bank fixed deposit that gives you eight percent or nine percent means that you actually erode your purchasing power. The risk that we assume is that in a company FD, we may lose the amount invested if we choose without thought and homework. Just pause to think. Why is a company raising money through this route? Surely it must be due to reasons of poor credit standing or bankers’ reluctance to lend them more money. There is one class of companies that raise FDs on a regular basis from the public. They are NBFCs and Housing Finance Companies. Here the key issue is that whilst you put in your money for one to three years, they may be lending for longer tenures. In essence, unless they keep finding new investors on a regular basis, they will have problems of finding money to repay. If the Fixed Deposit tap were to be suddenly turned off, the NBFCs and Housing Finance Companies with less than high reputation or credit standing will be hard put to repay. That is what happened to the leasing companies in the eighties. Only a handful survived. If you have to invest in Fixed Deposits, look at the following: i) A credit rating that is at least of AA (Double AA) level, signifying “High Credit”quality. And ideally they must have this rating from a minimum of two well known rating agencies. ii) Keep the duration to one year ideally, ask for repayment and then reinvest. If the credit rating is the highest (AAA or Triple A) from two agencies, then you could consider a longer duration. iii) Stick to companies that can service your investments in the city you live in. That makes it easier to follow up in case of need. iv) Do not get tempted by higher returns or incentives that may be offered. If someone is offering a high rate of interest, surely the risk is very high. v) If there is a choice between ‘listed’ debentures and fixed deposits, opt for the debentures. Presently, on listed debentures, there is no TDS. Listed debentures can be bought through a broker. vi) Never go in for automatic renewal of deposits. Take the repayment and then re-invest, if required. This will ensure that you check the repayment systems also. vii) Be very sure that you can afford to wait for the maturity period. Whilst some companies may offer premature withdrawals, it is better to be safe than sorry. viii) Avoid new companies or small sized companies. Go for companies with ten to fifteen years of standing and reputation in the industry. ix) Check on the internet for any news about the company that may warn you for any signs of trouble. Google is a fantastic resource for checking news. x) Avoid unlisted or private limited companies or industries that do not have regular cash flows (engineering, real estate, infrastructure, capital goods etc).

MANAGING GREED- Chit Funds and other pickpocketing schemes

The latest financial scam where people lost money (the Saradha Chit fund of West Bengal) proves just two points: i) There is still a lot of financial illiteracy; and ii) Those who are literate find it difficult to curb greed. We can assume that some of the investors had no idea about anything other than bank deposits and were simply lured by high profile selling tactics of the neighbourhood agent and lost their moneys. Surely, there will also be a large bunch, who were lured in to it by what they thought was “easy money “. Today, there are thousands of schemes floating out there that will leave you poorer. Whether it is a gold deposit scheme or a booking scheme in some real estate project or a MLM scheme or a fixed deposit scheme with fancy returns, each one of them is fraught with risks of the unknown. Almost all of them have exhausted their legitimate ways of raising money and are banking on the gullible Indian to lend them money. It is possible that a few of them may not have bad intentions. They may genuinely believe in their project which may be dependent on too many things going right and exactly as per their expectations. Let us do some logical thinking. If a bank deposit can give us, say, nine percent per annum for a three year period, some else can give us nor more than two or three percentage points more than that. If they are willing to offer you, say, eighteen percent per annum, it means that after all expenses; they should be able to earn more than that. There are very few businesses that earn this kind of money and those businesses are unlikely to need or borrow money. This has to be your starting point. Find out what are they going to do with the money they take from you. Often, you will get stories of your money getting invested in land or property. This is the biggest risk and there are no guarantees that the price will rise and one can sell it in time to repay any money. The other thing you will notice is that none of these borrowers and fund raisers will tell you how many legal and illegal entities they run, what are the financials, who are the directors etc. It generally means that the only business of the borrower is to raise money and keep on doing it till the whole thing collapses. And most of them will never give you a full picture of who the promoter is, what his background is, what success he has achieved in any domain of business etc. There are salesmen who push these schemes at you. They get very high commission rates. They may be called agents or some such designations. Apparently this is the only income that person may be having. If someone comes, ask him directly about what commission he gets. You will never hear the truth and get some evasive answers. Real estate bookings are another area for you to lose money. The company, again, will not show you any balance sheet. One plot of land in a far away location, perhaps one model house and no government permissions in place but asking you for money is another sure road to losing money. Most likely, you will end up with a piece of land that will never be saleable at any price. Similarly, booking apartments is another high risk game. I had personally booked an apartment in a property called “Estancia” by a builder called Arun Excello near Chennai. The handing over is delayed by five years and what appreciation I hoped for is a mirage. The best of builders cannot withstand a slow down or a delay. So if you are investing in property, go for ready property in prime location. I would urge people to make a checklist of a few questions they should ask before they invest money: i) Who are the promoters? Any track record? ; ii) Their latest accounts are a must; iii) What are group companies? Any record of success? iv) What business is it that earns more money than the interest it promises to pay you? v) Why can it not get money from a bank and is approaching you? vi) Is there a way to know how much money they have raised? Will raise? vii) What is the entity that is borrowing? If it is not a listed company, the chances of losing are so much higher. Not because listing gives any guarantee but because there are some regulators and there is disclosure. viii) Do not lend or invest money in proprietary, partnership, cooperative or private limited entities. ix) Never invest money in a scheme where the name of the borrowing entity is not disclosed; x) If they accept cash, stay away. You will lose your money for sure. xi) Invest only if it is a scheme like a FD or Debenture that has a credit rating in the public domain xii) Be sceptical about everything and everyone when it comes to money. Ideally, one should keep away from all these schemes designed to transfer wealth from your pockets to someone else’s.

An appeal to give for education- Someone needs your financial help

A request to GIVE. I do not know this charity, but somewhere a feeling that the person is doing a good thing. All of us wish to do something, but do not have the time. Many of us can give some money but not time. Here is a person who is taking the effort to do something and so I think we could help him with money. Not too much. His current project for a primary school in a village seems to be 250K. If I send a thousand rupees, it is perhaps not too much. A dinner with friends sets me back more. So an appeal. I have no clue about the bonafides. But I am going ahead in my small way. I hope the mission succeeds. Nothing like supporting the cause of basic education. Here is the mail I got: Contribute to set up a Primary School in village Mahabadia Ahambhumika is aiming to set up a Primary School in village Mahabadia,distt.Bhopal.We have been wrking in this village since last 3 years.The people of the village work as daily wage labourer in brick kilns,construction sites and stone quarries.This village don’t have any school therefore,the children don’t go to school except few ones.We have an informal literacy centre namely Mehak ( Fragrance) in this village where we impart basic edcution of Hindi,Mathematics and English ( recently started ) to 52 girl children daily ( except on Monday) for 2 hours.We have realised that 2 hours duration is enough time to educate the children properly.Besides that there are many more children in the village who needs to be edcuated.In view of above we have decided to start a Primary school for the children of this village. The school we are aiming at will provide education to all the children of the village.There are more than 150 children in this village. Our plan is to start the Primary School from the month of July 2013 and we need to raise Rs.2.50 lacs for this purpose by the end of May 2013. In past you have supported us whole heartedly therefore, I am requesting you without any hesitation to contribute for setting up a primary school.Please feel free to contribue any amount as per your convenience.Please drop a mail once you decide the amount you will be contributing, mentioning the time by when you will be contributing.( Please try to contribute before the month of June 2013).Drop a mail to us once you transfer the amount with transcation number. You may further help us by spreading words to the people you know who may help us for this cause. Below is the banking profile of Ahambhumika. *Online Bank Transfer: AHAM BHUMIKA SWAYAM SEVI SANSTHA, SAVINGS ACCOUNT NO. 2073101015874, IFSC Code- CNRB0002073, CANARA BANK, Branch - MAHARANA PRATAP NAGAR, BHOPAL Important: If you're doing a online transfer to our account, please send us an email with your name, address and donation amount, so that we can send you the receipt. **Account payable Cheques/ DDs in favor of – AHAM BHUMIKA SWAYAM SEVI SANSTHA, Payable at BHOPAL (M.P.) and send it by post to *Postal address to which you may send cheque for the project : Subrat Goswami Ahambhumika C/o Archaeology 3rd Floor,B-Block, G.T.B.Complex,T.T.Nagar, Bhopal-462003 (M.P.) -- With regards (Subrat ) Founder Ahambhumika http://ahambhumika.org http://anganwadikids.blogspot.com (M) 98264 72718

SAVINGS AND INVESTMENTS- PART TWO- DISTINCTION BETWEEN SAVINGS & INVESTMENTS

(FOR the first part go to :http://frustrationsamalgamated.blogspot.in/2013/03/from-savings-to-investment-financial.html) Having started off on our ‘savings’ plan, let us understand what kind of savings instruments one can use and for what purpose, duration etc. i) Savings accounts in banks- Keep enough to tackle a month’s outgo and some emergency needs depending on your situation. You can always keep a ‘sweep’ account that ensures highest return: ii) Liquid funds are good if you need money in two to three years time; iii) Fixed deposits and bonds are good if you need the money after three to five years; iv) FMPs of mutual funds are a better option than fixed deposits from safety as well as tax impact is concerned; v) Savings instruments will never be subject to market risks. Yes the can have risk of default, so better not to chase high returns and sacrifice on risk. vi) Savings has to be in a form that you completely understand. Cannot be an insurance policy or ULIP. I have a different take on financial planning. I ask each of you to write down what you earn now and what can be spared for savings and investments. From there, one can take a call on what is achievable and what is not. There is no point first saying that this is what I need and then go about finding the money. It may click once in a way, but more often, you will end up taking risks that you can ill afford to. For example, if I can spare, say, five thousand rupees a month for two years, it could accumulate to around Rs.1.40 lakh at approximately eight percent per annum. So, I can plan to spend around 1.40 lakh at that point in time. However, if I decide first that I want to spend around Rs.2 lakh at the end of two years and cannot spare more than 5K each month it would need a return of more than 15% p.a.! So I would have to search for something with that kind of potential. Alas, there will be only uncertain avenues that risk losing principal also. In short, first decide what you can spare and fix your aspirations in the realm of possible. Do not get carried away by the crazy advertisements that drive you to aspire for the moon and then choose a road that will destroy your wealth and health. All other schemes are ‘investments’. Returns would be unpredictable and will have risks attached to them, with the potential of higher returns. It is common to say that equities deliver fifteen percent compound returns. However, in the last five years, it has delivered zero. You cannot plan to meet a certain financial outlay with any ‘investment’- whether it be equities, land or gold or anything else. They are subject to factors beyond your control. After the savings plan, I would surely look at ‘spending’ money on some medical insurance. Life insurance is something that you need so long as you have commitments or financial dependents. Once you cross that hurdle, stop the policy. Today, a term policy with payout only on death, costs less than medical insurance. Do not fall in to the trap of thinking that there has to be a ‘return’ from a life insurance payout. There are better investment options available. Investments are financial outlays, where the final result is not predictable in terms of value. It is subject to market forces and business cycles. The outlays could be on equities, real estate, precious metals or commodities or currencies. These do not trade at predictable prices and there is no guaranteed return. Once these are covered, you might like to start ‘investing’. For equities, mutual funds (go for either large cap diversified or an index fund) are a good option. To get the best out of equities, it is important to keep investing regularly and not just in one go. Of course, that strategy can work, if you are capable of picking stocks at their lows or are able to time the markets. If you cannot, then the SIP route is the best. One more thing to invest could be a second house or a plot of land, depending on each one’s appetite. I have covered this in one of my earlier pieces. Investments are financial outlays that over time can give you a chance to change your lifestyle or leave behind an inheritance. Investments over time can give you a new goal or a desire to be fulfilled. Investments go to build wealth. A second home, a plot of land, stocks, gold etc. are not things you buy to meet some future goals, but to create your portfolio of wealth. Once you get here, your concerns are more towards preservation of wealth than rapid appreciation. Do not be in a hurry to acquire assets for wealth creation. Savings simply takes care of your normal needs over your lifespan. So, savings are the first step. Savings will take you to a goal with reasonable degree of certainty. Investments will change your state of well being.

Picking stocks- of sectors I like and dislike

In Moneylife http://www.moneylife.in/article/stock-picking-what-to-avoid/32026.html

SAMRUDHA JEEVAN- MLM?? PONZI?? TAKE CARE

A tweeter alerted me to this. Samruddha Jeevan. Has all the hallmarks of being a ponzi scheme. Do check it out and be cautious. Check out this webpage: http://www.sjfil.com/profile.php Obviously a company that seems to be soliciting funds under different heads, with no details about numbers or economics but with a lot of beating round the bush. One sentence in the page makes me very very suspicious== Reads as: :”In some plans customers are provided with Banker's post dated cheques.” The whole page smells suspicious. Oblique references to begging for money, but no direct statement. Something is terribly wrong here. The business is described as : Agriculture, Sales/ Purchase of Goat & Buffalo, Milk products, Vermiculture, Bio-fertilizer, Bio-gas plant and other agricultural business. The future plans of the company is to come into Real Estate, Windmill and Insurance sector. Caution advised. Regulator will not do anything. See the ‘why join us” section.

From Savings to Investment- Financial Literacy

MONEY MATTERS- THE FIRST STEPS Managing money has been made in to a very complicated business. None of us seem to be able to agree upon either the path or even agree on common definitions. Words like savings and investments are used interchangeably and at the end of it all, the lay person is confused about the whole thing. Planning money for future has assumed greater importance with the breaking down of the joint family system. In the joint family system, one did not have to worry about life after employment. Today, with the families going nuclear (remarkable, that the word can be jumbled up to read as ‘unclear’) it is each one for oneself. Emotionally it may sound disturbing, but India is surely going the western way. Children want to migrate. Once having gone there, those who have spent formative years in India, wish to return at some point. Those who are born abroad and study out there, have no intention of even visiting India, forget relocation. With all this, the pressure on current earnings to provide for oneself and for one’s children becomes intense. Too many demands on current earnings do leave us without a sense of being in control and we tend to take hasty decisions. I would say that ‘savings’ are the amounts needed to meet fixed or known outgoings that are committed and deemed to be essential (as opposed to desirable. A car may be essential, but a Porsche is not). For these, we put aside money that we cannot afford to take risks with. I would call them as ‘savings’. Savings is money kept aside for spending at a later date. Typically savings are needed to meet inescapable milestones. So we cannot afford to risk our “principal’ amount. Savings can be put in to some form of interest bearing investment only. Whether it is a Liquid Fund of a mutual fund or a debenture or a PPF a/c depends on when one needs it and the tax situation. Unfortunately, savings have a tendency to give returns below inflation, unless one can avoid or minimise the tax outgo on that. Typically, we have to use a combination of ‘savings’ and borrowings (housing loans, vehicle loans, education loans) to meet most of our ‘needs’. As a rule, what amount is needed as ‘savings’ should never be put at risk. This money should not be in equities or real estate or commodities, since they suffer from problems of liquidity as well as market uncertainties. Even mutual funds that invest in equities are subject to the same vagaries. The key thing in savings is that you work on the power of compounding. At an eight percent annual return, your money doubles every nine years. If the economy does not get in to a hyper inflation, this rate might just about beat inflation. Once you fulfil all your basic needs, you can afford to take some chances. Some equity, some real estate or commodities can be considered. We are now entering the ‘investment’ zone. The key about an investment is that you cannot plan an exit in terms of value and time. You can fix one but not the other. Whilst your time objective is easily attained, it is possible that the value objective is never achieved. You principal can be at hundred percent risk. In logical order, my first building block would be the Public Provident Fund. This I would keep towards my retirement corpus. If I start off at age 25 and can invest a lakh every year, by the time I am sixty, the amount accumulated would be Rs.186 lakh!! The key is to start early. The more you delay, the worse off you are. For instance, starting five years late, would end up in your corpus at the age of sixty being just Rs.122 lakh. A five year delay has meant a Rs.64 lakh difference!! In addition to PPF, you may have your company provident fund / pension fund. This should form your first and most important building block in your financial planning. PPF is tax free. In fact, one of the best things you could do for your child is to have a PPF account opened for her/him at the first possible opportunity. Start with savings and graduate towards investment. That will leave you without stress about money. The main thing is to understand what each type of investment can do and how to use it effectively so that we can maximise our options, without too much risk. Of course, I am not talking to those who have all bases covered and simply need to dabble in money for the sake of it. For them, the prescriptions do not matter. In the next part, I will navigate through the various investment vehicles as we progress through life.