Credit Card Fantacy

You might be getting frequent unsolicited calls from the Bank (or their agency) to avail of the credit card. They usually offer 30 - 45 days of interest-free spending. Even if you have one, they insist to take another or transfer your existing outstanding to the new one with EMI options. 

Credit cards work on the principle of 'spend today and pay later' and if you pay entire dues within the prescribed date without fail, you get another credit-free days.  

You may be wondering Bank generally pay interest of 2.5% - 4% p.a. in a savings account and around 5%-7% in FD. However, if you don't maintain a monthly average balance or default in cheques, they levy a huge penalty. If you take a personal loan, the interest charged is very high. Then all of sudden how they are so generous to you to provide you interest-free services through credit cards! With credit cards, Banks earn huge profits in form of penalties & interest. 

We must understand the following points:

• There is no 'free lunch'. All things in life which come to us as 'free' cost us indirectly.
• If you default in payment or pay a partial amount then monthly interest is being charged as 3.5% appx., which comes out to be 42% p.a. (APR)
• Now, people by nature, are not very disciplined with respect to their finances. People even forget to pay their electricity bill, insurance premium,  or other utility bills in time and always bear a penalty of late payment. 
• Banks know that around 70% of people are going to default on their payments and where Banks can charge you late payment fees, interest on the borrowing goods, surcharge & tax.
• The point is that if anyone is not disciplined in their life, should not get into the marketing gimmick of the credit-free offer. That will cost you huge later. And discipline means military discipline in your finance - strict control over your habits.
• People also overspend through credit cards in comparison with when they pay through cash. This is human psychology, when you pay in cash, taking your wallet out from your pocket, you get concerned/aware about your spending. However, when you swipe a credit card, you don't feel any concern/pinch as it required to be paid later even if you don't have cash in the bank right now.
• Making the part payment is not a default, however, it attracts huge interest. When you skip the payment or delay the entire payment then it falls under the default category and downgrades your CIBIL score, which affects your creditability & future borrowing in form of a loan from any financial institution.
•  A credit card works as a double edge sword. You become more lenient w.r.t expenses due to easy availability of money and on other hand, if default, you end up with paying huge penalty & interest payment. 
• Many people get into the trap of rolling interest month by month and find themself very difficult to get out of it. Your entire savings & investments can be wiped out in a short period of time.

If you are the kind of person who is financially very disciplined, you can make use of a credit card in your favor, however, if you lack such control, better to avoid using a credit card and go with a debit card instead.

Client Objections

There could be two main hurdles in the investment process which most investors play across.

1) Procrastination - not yet motivated  (lack of urgency)

Procrastination is the human tendency to get anything delay. We keep on postponing unless important becomes urgent. Probably we design in a way to work under pressure only. But we must understand that time lost is an opportunity lost and can never be retrieved again ever. Therefore taking daily some small action like a baby step is much better than no action or taking big step afterwords. 

2) Objection Raised - not finding purpose why to invest (lack of need)

Many times objections are raised, some of them are genuine and some are baseless just to keep the matter pending without any particular reason. Some of the objections could be...

• The equity market is risky
• I want safety first
• Can you give a guarantee like FD
• The market is very high
• Will invest after correction / I will wait for a correction
• The market has corrected and it will correct further. I will wait till things ger settled down
• Market sentiments are not good. Just look at the newspaper
• Analyst are predicting a bear market
• No one is investing in the stock market now
• The economy is not doing well
• FII are selling from the equity market
• There is a global uncertainty/recession period
• I don't need mutual funds. They also go down with the market
• I can hardly portfolio my own. I am educated, intelligent & expert
• I want to stop my SIP as returns are not good in the last 5 years
• I am already investing in PPF. Why should I invest in ELSS?
• Its too expensive
• I don't have a budget/money/funds to invest
• Why should I trust you
• I don't think this will help me
• It is not a good time to invest
• There is plenty of time for my child education/retirement
• I can not afford it
• I will invest directly. I don't need a financial advisor
• I will think & get back to you
• Call me after a month time

Managing objections requires practice. Don't sell the product, present your solution in terms of value and benefits that will uniquely help the clients in the future. 

Comfort Zone - disaster to the economical life!

Many people afraid of investing in equity or mutual funds because of mainly two reasons:

1) They want risk free returns to get financially secure.

2) They (or their family members) had a bad experience in the past while investing in the security market/MF.

We knowingly or unknowingly prefer to remain in our comfort zone. By the way, this is Newton's first law which is universally applicable in every aspect of our life. Now the question is why do we seek risk-free returns which actually do not exists? This practice or concept was good decades ago during our parents'/grandparents' time. However, with the change in our lifestyle, socially & economically both, and with the advancement of technology, we need to adopt a new thought process and we have to move out from our cage sooner or later.

To address our fear, we need to learn/acquire knowledge about the availability of various investment avenues, their risk factors, how actually it works and how can we manage our expectations in a better way. WE have to come out from a mediocre mindset, then only we get acquainted with new processes & methods which suit to our aspiration & requirements. 

Flexibility & adaptability is the new ara of the world to grow in life economically. And nothing is permanent, change is very fast, beyond our imagination!

unsolicited sms / calls / tips

It is very common especially during a bull market you start getting a lot of unsolicited SMS/Call/Email/Whatsapp from strangers for subscribing to their paid services to get immense profit in a couple of days. Some of them even offer free services for initial 5 - 7 days to get you into a trap. 

This is totally a scam/fraud and one should never ever indulge in this kind of offer how much it could be lucrative to you. Nobody in this world can offer you a guaranteed return above than FD rate except a small savings scheme by Govt. Also, understand if you are being offered any assured return by any of the private companies above the FD rate, there must be some risk involved. 

With market-linked instruments like equity or MF, if you manage to double your investments in 5 - 7 years that's pretty good. This will fetch a CAGR of 11% - 14%, which is a reasonable expectation from the market, however, this is again not assured or guaranteed. 

Wealth creation is a pretty long-term boring process and to get the financial freedom you might have to remain invested for a minimum of 2 decades. It can't happen just in 2 months or 2 years. Understand if these people are making such decent profits in just a few days, then why they don't invest their own capital... Just because they are only interested in taking fees or brokerage or both from you.

Imagine, if you get a PARAS stone (the stone which has the capability to turn anything into Gold), what do you think, whom you make billionaire first... yourself or your neighbor? Second, if you become a billionaire with PARAS, then would you charge a fee of Rs. 1000 or 5000 to make anyone a billionaire?

                                    

Disclaimer: Investment in securities & mutual funds are subject to Market Risk

Pillars of Diversification

Diversification plays a key role in portfolio management. Diversification mixes a wide variety of investments within a portfolio. Some of the advantages that diversification provides are:

• Includes distinct asset type
• Limiting exposure to any single asset class
• Create well-balanced portfolio
• Yield better long term returns
• Lower risk of individual security/industry/company
• Risk management strategy - mitigate unsystematic risk
• Choose to have negatively correlated assets in your portfolio
• Hedge against market volatility

There are following various pillars of diversification, which need to be taken into account while making any investment portfolio.

• Asset Class Base: (across asset class)
• Equity
• Debt
• Real Estate
• Commodity
• Liquid/Cash
• Art & collectibles

• Type Base: (within asset class)
• Equity -
• Market cap wise - largecap, midcap, smallcap, multicap,
• Sector wise - auto, cement, pharma, IT, bank, finance, power, metal, consumables, real estate, oil & gas, commodity, media, etc.
• Theme wise - Infrastructure, special situation, dividend yield, value fund
• ETF, Index, FOF
• Children fund, retirement fund
• Private equity
• Debt - 
• short duration, medium duration, long duration, Gilt, Corporate bonds
• Small savings schemes
• Hybrid - Balanced, Asset allocator funds 
• Real Estate - 
• residential, commercial, agricultural
• MF REIT
• Commodity - 
• Bullion: Gold, Silver
• Metal - Non-metal
• Liquid - 
• Bank
• Liquid MF

• Return Base:
• Guaranteed/fixed return instruments - FD, PO, PPF, Small Savings Schemes, Bonds & NCD, Insurance Annuity
• Market link return instruments - MF, Equity, NPS, ULIP

• Geographical Base:
• Domestic market
• Foreign or International market - emerging market, developed market

• Time Base:
• Lumpsum - onetime
• SIP - fixed, step up
• STP - fixed, value base, flexible    

• Vehicle Base:
• Direct, MF, NPS, Insurance
• Mode - Online or Offline, and Demat or without Demat

It is very important to have the right mix of asset allocation & diversification as per your risk appetite, life stage, financial goals, etc.

Disclaimer: Investment in securities & mutual funds are subject to Market Risk

Home - To Own Or To Rent?

Making the decision to go from renting to owning your dream home is the biggest decision one can possibly make! The decision to construct or buy a house is not an easy job. 

We need to understand the pros & cons of owning & renting both before taking any final decision.

To OWN: PROS

• You can choose where you want to live - location/area/society/city
• You can leverage your investments by taking a loan
• Owing is kind of forced savings
• Get the security of equity ownership
• You pay for the ownership of your own property
• Potential equity growth - capital appreciation
• No landlord & their rules to follow
• Can renovate/reconstruct property anytime
• The mortgage (home) loan rate is the cheapest among all kind of loans
• Hedge against inflation, rather provide a better return than inflation in long-term
• Tax-efficient
• Protection from the rising rental cost
• Get community & stability
• A vehicle for retirement
• RML (reverse mortgage loan) is available in the worst scenario post-retirement

CONS

• EMI cost more than monthly rental outflow
• Have to save for down payment, which is a minimum of 15% - 20% of home value
• Will bear the burden of property tax & insurance cost
• Difficult to change/shift to another location, if doesn't suit to you
• The cumbersome process to liquidate & transfer in case of succession
• Part-payment in cash component above the market valuation, for which you don't get a loan
• Pay for the parking space
• Registration cost
• Cost of interior
• Preferred location/story charges
• Society maintenance charges/deposits

To RENT: PROS

• Low upfront and ongoing costs
• Flexible lifestyle
• Not responsible for home repair
• Not responsible for property tax & home insurance
• No risk of depreciation, if the house value come down
• Can change/shift to another location easily, if doesn't suit to you
• Amenities included

CONS

• Rent money is dead money - you are paying for the landlord's mortgage
• Rent is rising faster than income
• A threat to your privacy
• Play by the landlord’s rules
• Have to move out whenever asked by a landlord
• You still need to save for advance deposits required by a landlord
• Pets can be a problem

Buying or renting is not an instant or easy decision for many. And there is neither Right nor Wrong to follow anyone. Its total depends on your utility, income, and circumstances which have to get change over a period of time. 

Some amount of homework &calculation is required to do before making any final decision:

1. Checklist:
• Do you plan to live in this home for 5 or more years?
• Do you have enough contingency funds?
• Do you have enough savings to pay the down payment &  registration fee?
• Can you budget your EMI along with maintenance cost, taxes & incidental cost?
• Can you further plan to invest for your other financial goals? 
• Do you have a credit score of +700 in CIBIL?
• Are you comfortable with the location/area/society/city where you want to buy your house?

Prima facie, if your answer to above all questions is 'yes', then go for burning a house else prefer to stay in a rented one as of now.

2. Affordability calculation:
• Another calculation you can do apart from the above that if you want to buy a house property that cost Rs.50 lacs to you then checkout with buying you have to pay 10 lacs immediate down payment + 35000/- EMI (appx.) for 20 years to the Bank if going for the loan. On the other hand, you can get it on rent at 15000/- p.m. 
• So it will be an immediate cost of comparison as per your affordability to take a decision.
3. Ratio check:
• What is the house price to annual rent ratio? Ideally, anything below 25 is good from a buying point of view, however, this ratio is difficult to get in metro cities.
• Historically return from the property is 11% CAGR and rental yield is appx. 2% - 3% p.a. 
• Your Home EMI should not be more than the threshold limit of 30% of your net monthly income.
• Ideal asset allocation for any millennial could be Equity (50%-75%), Real Estate (0-25%), Debt (10%-20%), Gold (5%-15%) and Insurance (5%)
• [Disclaimer: this is not a recommendation, check your risk profile & other parameters first]

In India buying a house is seen as a lifetime investment. It is an emotional decision to buy a house. However, the millennial's mindset is now somewhat different from their previous generation. The youth today want to stay away from buying a house and rather like to live in a rented one. They want more liberty so as to move across geographically anytime without worrying about the property and also to be free from the burden of EMI.

Money Magnet & Affirmation

Just like positive affirmations, money affirmations are equally powerful and helps to attract more money & abundance in our life. 

Financial freedom is 90% mindset & attitude.

Some of the daily money affirmations to become a money magnet are:

1. I Like Money. I Love It. I play the Money Game to Win
2. I use money wisely, constructively, and judiciously
3. My income will double this year
4. Money is constantly circulating in my life. I release it with joy, and it returns to me multiplied in a wonderful way
5. I believe money is important, money makes life more enjoyable and money is freedom
6. Money flows to me in avalanches of abundance
7. I get rich doing what I Love
8. I use the money for good only, and I am grateful for all the money I have now
9. I am a money magnet and the whole universe works in my favor
10. My financial life is great. I am growing. I am getting better
11. I feel rich, I am rich, I am abundant
12. I am financially free because I now know how to Truly Think & Grow Rich

While doing affirmation don't let your mind stop & thinking about how it is going to achieve. 

Just focus on 'What' you want and not on 'How'. Give your intention and gratitude.