Author: Jagoinvestor

I am Jagoinvestor Admin

7 basics of Personal Finance you should know

Posted on by Jagoinvestor

Today I am going to write on a simple topic which will highlight some basics of personal finance, which you can see as axioms or the core rules of personal finance. If you understand these simple rules then you can probably build lot of understanding and strong knowledge about money. Some days ago I heard Subra saying a one liner – “I strongly believe it requires a brilliant mind to understand simple things” and it is so much true to personal finance.

Investing basics

If you want to learn personal finance in a better way, you don’t need to look at all the policies , all the products and 100’s of topics . All you need is in the start is to build a strong foundation of understanding some of the core rules of money . If you know these core insights, you will automatically be able to see all the complications and secrets behind the complex world of personal finance. I can see that most of these points are nothing but common sense .

1. When you invest in Safe products , Its nothing but Lending

This can’t get simpler. When you choose products like PPF, Bank FD, companies FD, NSC, KVP, Infra bonds, RBI bonds etc … You are choosing safe investment product, where the money will come back with a high guarantee … Now with these products its foolish to expect very high returns, you are doing nothing but lending your money to someone else so that they can expand their own business. In case of Companies FD, your money is used in Companies expansions.

In case of PPF, it is used by Govt. In case of Infra Bonds, it is used by Infrastructure companies and in case of Bank FD’s, it’s used by banks to lend it to other people who are in need of credit. So your money is used by others. You are nothing but a lender, lender and only lender; get that point. All you will get is some near inflation returns or even less.

2. When you invest in Equity or Real Estate, you are a partner

When you put money in stocks, Mutual funds, ETF’s, Index Funds, Real Estate etc, you are not lending money to anyone; all you are doing is putting your money in some business or an idea. You share all the good and bad phase and its effects and  become part of profits or share the risks involved. You can get high returns or low returns or negative returns and that’s not happening because of some secret, you have chosen it yourself.

So if you invested in HDFC Top 200, you are agreeing to take ownership in Reliance, Infosys, Bharti Airetl and dozens of other companies. Your investment will depend on their future and how these companies perform. If you expect 20% return without any risk involved, come on!… Wake up. Over the long-term these investment options will perform good , but in short-term there will be a lot of volatility, which can scare you .

3. Risk and return go hand in Hand

“Where should I invest for next 5 years to get maximum return and minimum risk?” . This can be a question from someone who really has no clear idea of basics. What is being proposed here is just not possible. The safest investments at any point are Bank FD’s or PPF. See how much return they are providing. If any other product offers higher returns than these, there has to be higher risk associated with that, otherwise wont every bank will put their money in these high return product itself and enjoy.

So if you want more returns, then you need to be taking more risk. Else it’s not possible. Over short-term, there is no chance you can get high returns with high probability. Its only accidental and on luck.

4. Companies are here for business, not charity

All the companies offering Mutual Funds, Term Plans, Endowment Plans, ULIPs, Health Insurance, PMS, Motor Insurance, FD’s etc are all in existence only for one reason i.e.- to make excellent profits for themselves. Don’t expect charities. If you are obese, then your life insurance premium or health insurance premiums have to be more than some normal person. Don’t feel bad about it. It’s perfectly ok and ethical from company’s points of view. Even you would do the same thing what companies are doing if you were to run that business.

If you are investing in Mutual funds, AMC’s are bound to charge Fund Management Charges. Insurance companies are there to take your money and exploit your attitude of “If I get something back, the product is good” mentality (example) and throw all the useless policies at you. If you have a Relationship manager assigned, his main job is to motivate you to keep investing your idle money in company’s products and less of helping you with personalised services.

5. You are never sold something, you always buy it

Don’t try to get sympathy of others by telling them “An agent came to my home, threatened me to shoot and took my signatures on the policy, he sold me that policy” or “My uncle created a situation where I had to buy it”. While that might be the case at times, please accept that you were wrong and you need to change that attitude, or else you will keep blaming what happened to you, but never yourself. It will create more problems in your life. A nice short article on mis-buying from subra.

6. Pain now or later, your choice

Pramod Moudgil , one of our readers once told me what his grand mother told him

“zindagi maein bhagwan ne sab ko khane ke liye Channe aur Halwa diya hai aur ye dono sab ko khane hain. Ab agar pehle chane (which are hard) kha loge to phir aaram se halwa khana otherwise abhi halwa kha lo phir chane chabane padenge. Bas fark itna hoga ki tab tak daant nahin rahenge so make your choice abhi mehnat kar ke saari umr aaram karoge ya abhi aaram karke saari umr mehnat”

If you have not inherited lots of money or are not working on something great which will make you millionaire soon, then probably you will work for salary for most of your life and your financial life will be mostly like majority people. If you are enjoying too much today at the cost of future, then there are tough times ahead for you.

People burning their money in useless spending today do not realise that they are eating money from their retirement corpus right now, they are putting pressure on their future at this very moment, just because its years away, you don’t realise all this, but one day you will remember all this. Look around people who are retired today, how many of them are self-sufficient and totally independent, enjoying their life to fullest and exactly the way they dreamt all their life ? Not many . Do you want to be like them ?

7. Not taking risk is extremely risky in today’s world

I remember how one of the person I was talking on forum told me that he keeps all his money in FD’s and PPF and LIC policies , because he does not want to take any risk , All I asked him was “What are doing now then ?” and he didnt understand what I am pointing at .. If you are like that and hate to put your money in Equity , don’t like to spend time on your financial life , don’t like to take time from your busy schedule to organise it , your are already taking a high risk in your financial life , you are distancing yourself from a good financial life each day and each moment. You will probably meet all your goals , but may be half-baked, not on time , who knows !

So what is your learning from these basics of personal finance ? Do you feel more knowledge in yourself now ? Which of these points do you think is hardest for other people to understand ?

What is CIBIL report ?

Posted on by Jagoinvestor

What is CIBIL report ? Are you looking to check your credit score and want to know why your loan application was rejected ? Yes, if you are misusing your credit taking capacity, you are being watched at like never before in this country. I am talking about CIBIL here and in this article let me show you how your current behaviour related to credit card, personal loan, home loans are going to affect you in future in a good and bad way. Also see 2 real life cases where a person’s loan application got rejected because of Bad CIBIL report and how they didnt even knew about it ! .

CIBIL Report

What is CIBIL and why you should be concerned ?

CIBIL is Credit Information Bureau of India Limited, which acts like a central repository of credit information in India. As many as 500 different banks and financial institutions are CIBIL’s clients and they report each of their customers (like me and you) actions to them.

So if you take a credit card from ICICI Bank, then ICICI bank reports to CIBIL about it. If you enquire about car loan to HDFC Bank, hold your breath! as even that enquiry is reported to CIBIL, if you can’t pay your EMI for home loan with SBI Bank for a particular month, that also gets reported to CIBIL.

Not just your bad actions, but even your good actions like paying EMI’s on time, paying credit card with punctuality also gets reported with CIBIL. You can see that this way, a history is maintained at CIBIL for each person, which can be good history or bad history depending on the case and this information is very useful for banks to decide if they want to give loan to you in future or not. All the banks are now looking at CIBIL report before taking the decision.

Good and Bad credit Report

CIBIL report is not always bad. It’s an extremely good concept which is now taking shape in India recently. If there are two people A and B and A is a good guy and B is a bad guy, obviously A should get better rates of interest, faster processing, first right to loan. Whereas, guy B should get loan at higher rate of interest (because he is risky) and may be banks can even deny entertaining him at all.

CIBIL gives us the power to build our credit report. So if you become responsible and use your credit effectively and with planning, you can build a good credit history with CIBIL, which will help you in long run. Also note that taking a lot of loans without having the capacity is also a negative thing and that can affect your credit report.

CIBIL Report

I would like to warn you that you have to be super sensitive and careful with credit card and loan repayment, because one small mistake or being lazy in this area can cost you a lot. I would like to share some instances of readers who faced a lot of issues in area of getting loans and finally they checked their CIBIL report and found that they were having bad history

Some bad experiences from readers

Rajaram mentions on our forum how his home loan payment was rejected because of his credit card late payment issues

I had two credit cards one from HDFC and other one from ABN AMRO.

In case of ABN AMRO, salesman told me that if I do purchasing of Rs.1000 within 1.5 month then the annual fees will be waved off. As per his instructions I did purchasing of Rs.1000 within that stipulated time frame. But still I got a bill with annual fees after a month. Hence I complained to the Call center executive gave the brief about my complaint. I also told him that I will be paying the amount which was spent by me and according I paid it through cheque. No further transactions done through the card and subsequently told them that I am returning it to them. But later on bills started coming with annual fees with charges. I again informed the call center executive and told him that I am not going to pay the annual fees which wasn\’t there. Later on bills stopped coming.

In HDFC case I had used this credit card for one year and in one month while paying the dues I dropped my cheque in their drop box 3 days prior to due date. When next month\’s bill received it came with late fee charges. I contacted to call center executive and told him that I had dropped my cheque 3 days in advance then how come this charges. He said it received 2 days later than my due date as was not having any proof I could not prove it. I paid the amount due to me excluding the charges. 2-3 month they sent the later but later on they stopped sending bills.

Above two instance happened to me and had forgotten also. But this year when I applied for Home loan from one of the housing bank then suddenly they put down one condition to give clarification about Credit card issues. They got this information from CIBIL which I was unaware of.

Now I need help to come out of this issue so that my housing loan clearance will be faster.

How Nihal credit report got messed up because he gave his pan card to his friend

One of my friends took a car loan from a nbfc 3 years back and he wanted a reference for this loan (i now realize there is no such thing as a reference for a loan) i obliged and gave him a duplicate copy of my pan card.

For atleast 2 years i have been applying for credit cards and getting rejection letters from all the banks. I finally was fed up with this and decided to get my cibil report and was shocked to see that i was the co-applicant for the car loan my friend had taken 3 years back. He had defaulted on this loan which was reflecting on my cibil report and that being the main reason for me not getting any credit card.

Like i mentioned earlier i had given my friend a copy of my pan card but i had never signed any loan application form, so i followed up with my friend (who still claims that i was supposed to a reference for this loan) and also with the customer care at the NBFC (who i must say were extremely rude). I managed to get the loan application form from the NBFC and i’m a cent percent sure that my signature has been forged on the form. Now my friend (would not want to call him a friend anymore) claims that the person who gave him this loan never told him about me being a co-applicant and he always thought i was only a reference.

How Ganesh faced issue with CIBIL report because of his credit card outstaning bill

Yes, I checked my cibil report last month because i had a suspicion and it was proved right.i had a c/card from icici which for a meagre sum of rs.2000 which i lost track because i was transferred to different city and didnt notice the bill. i also didnt use the c/card at the new place, as i had another card with c/limit of rs.45,000 which i started to use(sbi).

after 7 months, when i tried using the card again, it was getting rejected. when i checked with icici, they said the card is blocked. then only i came to know of the card outstanding, which by this time due to interest, and fine/charges etc had come to about rs.4000. Immediately, it was settled in full and closed the c/card a/c.

Now my cibil report shows “810″ with “history of more than 6 months outstanding 7-12 months back”

i feel cibil should consider the fact that the outstanding was settled in full – including fine/interest/etc…. and give a good score….

so i feel the system is flawed and i am paying a price for it.

my other loans – 2 wheeler loans and other sbi c/card a/cs – was showing prompt payment, either payments finished or under regular payments.

i dont know why i am still given a defaulter score when i have settled in full.

is there any way to reset my score with cibil.. pls advise…

How to get your CIBIL Report Offline

There are two kind of reports which you can get from CIBIL . The basic one is called CIR Report which is nothing but a basic information on how is your credit history and what kind of information is there with CIBIL . This is called CIR report and it costs Rs 142 . This is good enough if you just want to check your status with CIBIL .

Update : Now you can also apply for your CIBIL Report Online

The second thing which you can get from CIBIL is your Credit Score which is called as CIBIL TransUnion Score and ranges from 300 – 900. This is number which scores your credit ranking . A lower number means your credit score is bad and you will be considered as Risky ! . If its 900, you are doing great, Higher the better . The cost of CIBIL TransUnion Score along with your CIR report would be Rs 450 . I would say this is not at all expensive if you can get this vital information at such a cost . If you are facing any rejection for loans or if you fear that your past history can haunt you , then its a good idea to check the CIBIL report each year and find out how does it look like. I have created a step by step procedure for you on how to apply for CIBIL report . Have a look

CIBIL Report

Can you fix the CIBIL report have wrong Information?

A lot of times Banks makes mistakes in Cibil Report and it is mostly manual mistakes or lot of times delay in communicating the details . If you check your CIBIL report and find out any problems , please ask your bank to communicate it to CIBIL as soon as possible . Also if based on your CIBIL report, if you clear some loans , make sure you ask your bank to communicate to CIBIL that you have cleared the liabilities , so that it can get updated in CIBIL report. CIBIL report is your lifeline for future , don’t do anything which makes its dirty, else that will affect you in long run .

Personal Finance Workshop for IAS batch 2009

Posted on by Jagoinvestor

JagoInvestor did the first workshop on Personal Finance. Guess where? It was at Mussoorie and the audience were 120 IAS officers who graduated last year and are posted at various parts of the country. This workshop was done by Me and Nandish at LBSNAA , Mussoorie .

I would like to thanks Nagarajan, who is our reader and an IAS Officer himself, who invited us for the talk. His stand for his community is commendable and worth appreciation. He took a lot of effort in gathering all the officers, organising the talk and co-ordinating it with us. It won’t have been possible without his involvement and dedication towards Personal Finance.

Jagoinvestor workshop personal Finance for IAS Officers

Offline Workshops in Different cities

We have been collecting data of all those readers who are interested in paying a fee and attending our 1-2 days workshops in their cities, we will now start our offline seminars/workshops starting next month in different cities. We would really like to provide the value in these workshops. If you are interested in attending these workshops and want us to intimate you about fees and content before we do it, please register your details here . You can also fill up the form if you can gather a group of 20+ people .

I would like to hear from you what you think about these offline seminars/workshops, please put your suggestions and expectations in comments section. Note that these seminars would be a 1 or 2 day premium seminar which will take care of lot of your financial life related doubts and also give you a proper direction.

Endowment Effect affects your financial decisions

Posted on by Jagoinvestor

Do you know that you are holding some of the bad financial products in your portfolio? Also you are not clearing some of this mess because of a very well-known behavioural concept called “Endowment Effect”. Did you know that this same behavioural concept is used by the sellers to make more sales! I will talk about that also.

Endowmment Effect Behavioural finance

Endowment Effect

Endowment Effect theory is a well-known concept in the world of Behavioural Finance. Endowment Effect says that we tend to value thing more just because we own it. However we don’t value things more in pricing terms if we don’t own it. Endowment Effect also says that we tend to love what we have already and if someday we need to change it, it’s not easy for us. We resist it a lot. So final one line conclusion is “If I own it, it’s good and it’s valuable and if I don’t own it, I am not sure, maybe it’s not worth!” . You can see this in all aspects of your life. Check with any couple, who has the cutest child in the world? Check with any employee who loves his organisation; ask him which is the best company to work for ? Ask any murderer’s parents, if they really think their son/daughter is involved in crime and you can hear, “No it’s not possible, their son/daughter is innocent”. So the point endowment effect puts is, what is ours is clean, good and worth something. This is what happens with most of the people , if not all .

To explain it other simple words; How much money do you expect for your mobile phone, if you wanted to sell it? And then think how much money would you like to pay to someone if you wanted to buy it? In most of the cases, one wants a higher price when he wants to sell and wants to get the same thing for lower price. There is nothing wrong in this as we all are human and we will think from money point of view. But take the underlying learning from here. If a person has something, he treats it very special and does not think rationally at times and it affects him a lot in his financial life. A lot of people don’t want to admit that what they have is ordinary and just like others. Let me take each area of financial life and show you how it’s applicable there.

Example of Endowment Effect with Stocks

You might be able to relate to this. The stocks you own are always worth and they have potential to go up, that’s what you think. If market goes up, you feel that your stock has potential to go further up and if markets go down, you say – “huh!, this is temporary, they don’t understand how strong fundamentals are for this stock, I will wait”.

In 99% cases its nothing but endowment effect, just because you have it, you start feeling special about it, but the other guy from some distance can clearly see what an idiot you have been so far! And incase you didn’t hold that stock, it might happen that you would have not recommended it to someone else, you could see things clearly only if you don’t own it. (read my experience) Even in mutual funds, if some of your friend asks you which funds he should go for, most of the people will recommend mutual funds which they already hold. For them just because they have bought some XYZ mutual fund, it’s one of the best (that’s why they bought).

We get comfortable & repulsive to change

Another big thing which happens to us is that once we buy something or own something, we start being very comfortable with it and find all the reasons of why it’s good for us and why it’s not worth changing it. Look at your job portfolio, its same!. (read another beautiful concept called Mental Accounting).

How Trial & Money back guarantees make use of Endowment Effect

So now you will relate to Trial & Money back guarantees. Once we bring something on Trail or buy product on money back guarantee; almost never one’s returns back as they have tasted it, felt it, owned it and now they believe that they need it. I have never seen anyone returning some product which was on money guarantee! The sellers understand the power of endowment effect and hence use it to their advantage. In his book called “Stocks to Riches”, Parag Parikh talks about an incident relating to this.

Raju : Mom, See what I have got !, The latest Stereo system . It will fit perfectly in our drawing-room. Wait till I play it , you will love the sound.

Mom : Raju, where did you get the money to pay for such an expensive item ?

Raju : Its on a 15 day trial basis , The shop round the corner allows you to use the goods before you buy it . Since college is closed for 2 weeks , I thought I will listen to music for some days .

Mom : Are you sure they will take it without any fuss ?

Raju : Off course Mom , dont worry , see here is the card . It says that they will take it back , No questions Asked !, if refunded with 15 days trial period.

Mom : Thats great , Handle it carefully . They may not take it back if it’s misused.

Raju : Dont worry , I will be careful .

After 14 days…

Mom : Raju , dont forget that trial period ends tomorrow, We will really miss this stereo , we had so fun listening to music .

Raj : Did you notice how exactly this fits our decor and space . I really love its sound . We wanted it from so long , Lets keep it only , and make the payment , anyways we needed it .

Mom : Yea ,  I think we should keep it , the price is also justifiable and within our budget and we really needed on for long and the best part is we got to use it without paying :

Did you see how Raju and his Mom got comfortable with the stereo? A seller knew that out of 10 times, 5-6 times people will get starting loving what they start using and accept it as part of their life. Not a big price to pay for 15 day trial! 

Conclusion

One should think about his financial products from other’s eye also and should be open to accept that it’s time to find alternatives and change it. Don’t just concentrate on those points which makes you believe that what you own is best, also see the bad side. Let me know if you realise that you have seen this endowment effect in your life ?

How to file your income tax returns online in 6 easy steps

Posted on by Jagoinvestor

What is the best way to File your income tax returns online ? Tax filing season is on and most of us will still wake up after few days.

I will talk about efiling your tax returns with govt website and also private websites like taxspanner, taxsmile and investmentyogi which are autorised by income tax department. You can also win some free coupons for income tax filing through some online p0rtals .

Income Tax efiling using govt website

I just want to tell you that incase you are just salaried and have no income from other sources, then the whole process of e-filing is just as simple as filling up details in tax return form at govt website, creating a .xml file and preparing an acknowledgement form using the tools provided by income tax website and then you need to speed post it to Bangalore Income Tax Office.

Read do & dont;s of tax filing

File Income tax return online

Steps for Online Income tax filing

Step 1: Login to https://incometaxindiaefiling.gov.in/ and download the appropriate software from the website as per your case. This software is nothing but a nice detailed excel sheet (enable the macro’s)

Step 2: Once you have the excel sheet on your computer, fill up all the details (if you don’t have form 16, you can still fill all the details manually). After that verify it once again and then export it to XML (the export button is there in the software itself)

Step 3: Once you have the xml file with you, you need to login to the website (you will have to register for it once). You will see the option called “Upload Return” on left side after login. Click on it.

Step 4: There will be two options called “Digital Signature” and “No Digital Signature”. As most of the people would not have digital signature, just choose the option. Upload your XML file and just create your acknowledgement form called ITR-V , You need to download it . Once you have the acknowledge form, just verify it once again.

Step 5: Just send this acknowledgement form using a regular or speed post (no courier allowed) to “Income Tax Department – CPC, Post Box No.1, Electronic City Post Office, Bangalore – 560100, Karnataka”

Step 6: You will get the receipt of your ITR-V receipt by email in some weeks (takes time) , you can track its status of your ITR.

A lot of people who work in big companies might already have filed their taxes as they get lot of tax filing agents coming in their offices, but for people who still want to do it by themselves, they can take this pain. I personally prefer to to through an agent 🙂

E-filing your tax returns through private websites with Taxspanner or TaxSmile

There are various online websites authorized by income tax department who can file your tax returns . The major reason why you might want to explore these online options are because they are really convenient . One more reason for you to start e-filing your taxes is because in coming years e-filing is set to become mandatory (just like for corporate’s) .

Watch the video given below to now how to file ITR online:

So may be you want to be comfortable with that before it becomes mandatory . There are multiple benefits of filing e-return especially through private websites authorized by income tax department. The additional benefits over govt website include convenience, accuracy, tax planning cum saving, professional support after filing ITR and

1. Processing on real time: 

E-filing ensures income taxes are uploaded in the tax system instantly which helps in tax computations processing on a real-time.  If PAN details are matching the income tax department and income tax return filed, the taxpayers gets an acknowledgement on e-mail called ITR V.

In case PAN card information is incorrect, the electronic returns get rejected and the taxpayer is intimated for failure i.e. the ITR V copy is not delivered.  This ensures the return has been submitted in time.

2. Jurisdiction free:

In case the return is being filed manually and an employee gets transferred to other city than he/she need to transfer his income tax return to the city where he is working presently. Whereas, e-filing is jurisdiction free.

This means your PAN address will be the jurisdiction and same can be continued even if you move out of city or country.

3. Faster refund:

As per the Controller and General Auditor of India, there are 40 lakh pending cases of refund with the income tax department as on 31.12.2010. Refunds are generally received in 10 months in the case of physical tax returns ran.

Whereas, the refunds are getting cleared within 1-2 months in the case of return filed electronically. “We want tax-payers to file electronically as that helps in faster processing of refunds,” Sudhir Chandra, chairman, Central Board of Direct Taxes.

4. Revise return online:

In case the return is filed online before the due date, and taxpayer has missed out on declaring any income or investment. He/she can revise the return online without visiting ITO.  If the original returns have been filed physically then, the revised returns cannot be filed online.

If there is refund in the revised return then, you will get the benefit of faster processing and refund.

5. Rectify the mistake online: 

In case of physical returns, if there is an error at the time of filing, the mistake cannot be rectified online which means it will be more time consuming and costly too. The process of online rectification is faster and simplified.

However, online rectification is allowed only for the returns filed electronically

300 readers win free tax filing discount coupons

Whats the use of this blog if I cant get some freebies 🙂 . TaxSpanner & TaxYogi has agreed to give 100 & 200 promotional codes (taxspanner – 100 and taxyogi – 200) to jagoinvestor readers which can be used for free tax filing from their website.

I will pick 300 best comments on this article & other articles and all of them get to file free tax return using the promotional code. Note that it will be totally free and there are no charges for you . Apart from taxspanner.com & taxyogi.com, even taxmunshi.com has offered 5 promotional codes to jagoinvestor readers .

Note that these can be used to file only ITR1 & ITR2. Some other websites which can be used to file tax returns are taxsmile.com & taxshax.com.

E-Filing means faster tax refund

Did you know that if you have some refund to get back, then e-filing would ensure that you get it back faster than manual process.

With online filing it saves a lot of time which is taken in other process like generating acknowledgement form, feeding your details from the form and various other things, that itself takes few months. So e-filing ensures that you get your refunds faster. On of the very active members of our forum , Ashal Jauhari confirms this

Dear Rakesh, I’m already e-filing ITRs from the last year i.e. FY 2009-2010. Till date I have not face any problem for me & my friends (mainly office friends). Last year I e-filed some 40+ ITRs & this year the figure is already over 125.

Error has been reduced tp a great extent after e-filing on our parts.

Me or my friends who were calculated refund refunds, got the same last year within 40-50 days of ITR-V reaching Banglore & that too through ECS. Cool isn’t it?

Thanks

Ashal

No need to file return if, you have only salary income and earnings are less than 5 lakhs per annum

If your only income is from salary and its less than 5 lacs in 2010-2011, then you are not required to file the tax returns. Note that this is true only if you don’t have any other source of income. If you have some income from mutual funds, shares or bank interest etc, then you need to file tax return.

So which website is the best one to file your income tax returns online ? Which one did you use ?

How Chit Funds Works

Posted on by Jagoinvestor

What are Chit funds and how do Chit funds work ? There are lots of chit funds in india like shriram chit funds , margadarsi chit funds and I would like to show you how chit funds exactly work and what are pros and cons in Chit funds. Over the past many years there has been large scale frauds and scams done by large chit fund companies. However, a lot of people do not understand the working and wonder how chit fund works.

Chit Funds in India

What are Chit Funds & How they work !

Let’s say there are 20 people who come together and form a group. Each one will contribute Rs 1,000 per month and this will continue for next 20 months (equal to number of people in the group). In this group there will be one organiser, who will take the pain of fixing the meetings, collecting money from each other and then doing other procedures.

So each month all these 20 people will meet on a particular day and deposit Rs 1,000 each. That will make a total of Rs 20,000 every month. Now there will be a bid on who will take this money. Naturally there will be few people who are in need of big amount because of some reason like some big expenses, liquidity crunch, business problem, Beti ki Shaadi etc etc … Out of all the people who are in need of money, someone will bid the lowest amount, depending on how desperate he is for this money. The person who bids for lowest amount wins. Suppose out of total 3 people who bid for 18,000, 17,000 and Rs 16,000, the one who bids the lowest will win. In this case it’s the person who has bid Rs 16,000.

There will also be “organiser charges” which are around 5% (standard) of the total amount, so in this case its 5% of Rs 20,000 , which is Rs 1,000. So out of the total 16,000 which this winner was going to get, Rs 1,000 will be deducted and the winner will get only Rs 15,000, Rs 1,000 will be organiser charges and Rs 4,000 is the profit, which will be shared by each and every member (all 20 people), it comes out to be Rs 200 per person, and it will be given back to all 20 members. So here you can see that the main winner took a big loss because of his desperate need of getting the money and others benefitted by it. So each person actually paid just 800, not 1,000 in this case (they got 200 back). Note that when a person takes the money after bidding, he can’t bid from next time, only 19 people will be eligible for bidding.

Now next month the same thing happens and suppose the best bid was Rs 18,000 , then winner will get 17,000 (after deducting the organiser fees) and the rest 2,000 will be divided back to people (Rs 100 each) . So each person is paying effectively Rs 900. This way each month all the people contribute the money, someone takes the money by bidding lowest, organiser gets his charges and the rest money is divided back to members. You will realise that the person who takes the money at the end will get all the money except organiser fee, as there is no one else to bid now. So the person will get around Rs 19,000 in the end, if you try to find out the returns which he got out of the whole deal, it will depend on two things, how much lower bids were each month and the fees paid to organiser, if bids and charges are very low, then a person will make more money at the cost of other situations.

So this is pretty much how a chit fund works, there are various versions of chit funds and how they work , but the idea was to communicate the basic model and how it works.

Trusted and untrusted Chit Funds & Some experience

A big question which is in every one mind is “Should I invest in Chit funds?“. Chit funds are not some investment products in which someone invests! By design you can see that it’s only a support structure for needy people who are unsure of their cash flows or some big expenses coming on the way. It’s only for those who can’t get loans from banks or some lender. In which case chit funds provide that structure where one can take the benefit of it. But beware!  Whenever someone says “Chit funds”, the only thing which comes to the remind is “Fraud”, “Scam” and “Something Fishy” and its true to great extent as there many chit fund companies which come in market and run with the money. The only condition where I feel one can go for it is if all the participants of the chit fund are known to each other properly and there is high level of trust between them. For example, you can do it with your colleagues at office whom you trust and are friends with for long. But if you dont have liquidity issue and can get loan from a bank, then I dont see any need of doing this.

Good experience

In smaller cities, you can see your father, grandfather and even many housewives form these groups with friends with whom they are from last many years. A lot of people on this blog might have experienced how their father used these networks to get huge cash at the time of need. One of the readers Jagadees shared his experience with me on mail

The great advantage for the village people would be availability of immediate funds in the times urgent need. My father would say that he met all his life obligations like his sister’s marriage, his marriage expenses, my grandpa’s medical emergencies, our education expenses were met solely through this type of monthly chit fund investment.

Bad experience

Greed has no limit. What was created for help to each other under a trusted network is now converted as a business and many people have started opening Chit fund shops where they become the main organiser and pocket the organiser fee. Investors have started looking at these chit fund companies from investments point of view and in greed of high returns, they invest their hard earned money with these chit fund companies and at times there are frauds and scams. Chit fund companies are regulated in most of the states by Central Chit Funds act,1982 and they come under the purview of state governements. RBI has no role in regulating them. But still you know how easy it is to do frauds and scams in India (don’t forget commonwealth & 2G and 3G and 4G scams, wah !  I am futuristic). Let me share with you a horrible experience how an old man lost his 40 yrs of earning in chit fund

My father-in-law when he retired, without telling any of us he put all his money in a chit fund. nobody knows how much & in which chit fund he deposited. That was the time when a series of chit funds went bust in chennai. Pity the chit fund in which he deposited also went bust. he had a mild heart attack. The pain he underwent other than the heart attack was terrible. He was in an ordinary job & after 40 years of hard work he had earned that money.

More than the loss of the money, it’s the shame, foolishness and the iyalaamai to take any action by us, the government kills.we supported him, but he wanted to be independent even after retirement. that objective was defeated by his shear foolishness. none of us ever asked him anything about it. but every day he must have been repenting for that . (via)

Easy & MicroFinance Tool

Can you believe that as high as 5-10% families are associated with chit funds in South India ? For example – The share of households participating in Chit Funds increased by 9% in Andhra Pradesh, 89% in Delhi, 15% in Tamil Nadu and 4% in Kerala between 2003 and 2006. You can see below graph that shows Kerala having 9%+ penetration in Chit funds which means 1 out of every 10 family is in some chit fund.

Chit Funds in India

Source : IFMR research

As per a report from IFMR on Chit Funds , most of the people in smaller places are attracted to chit funds, because of easy availability of easy credit and simplicity of chit funds. In small places banks are not much interested in lending to poor people and poor people see chit funds as perfect way of getting a loan, though at a high cost. So you can also look at them as microfinance tools. All of south India and Delhi is deeply flooded with chit fund companies (thousands of them) and its reach is much above what you are thinking right now.

Should you invest ?

Overall, chit funds are not recommended unless it’s a person group formed by friends and relatives whom you trust a lot. I don’t think one should put money with chit funds which are not among their social circle. It might make sense for people in smaller cities to look up to them. As the last note, these chit funds are not investment vehicles where you park your hard earned money, So please avoid them unless you want to exactly take that kind of risk.

Please share your personal experiences about chit funds , I am sure all the readers who are from smaller places , they have seen it and for sure there father or grandfather had used chit funds at some point of time to fund a financial goal 🙂 .

What is Expense ratio in Mutual Funds

Posted on by Jagoinvestor

Do you know how expense ratio can impact the returns on your mutual funds returns ? We often hear that expense ratio of a fund is 2% or 1.8%, but we never put lot of thought to understand its impact on our mutual funds returns and our own wealth! Lets touch this topic today in detail. For simplicity, I will talk about Mutual funds in this article, but expense ratio as a concept is applicable in almost all the management financial products like Mutual funds, UlIP’s , NPS etc

Expense Ratio Mutual Funds

What is expense ratio in Mutual Funds?

Let me first clear out what is expense ratio? As an investor we just buy and sell mutual funds, but in the background there are many expenses which a mutual fund (and even ULIP’s) has to incur. Some of which are; fund management fees, agent commissions, registrar fees, and selling and promoting expenses. As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.

Now who will pay for this? Obviously you have to pay for it and that’s where expense ratio comes into picture. Expense ratio is cut from your investments on daily basis from mutual funds and only after that NAV is published and that’s how you pay expense ratio. For Example, If you have invested Rs 1,00,000 in a mutual fund whose expense ratio is at 2% and suppose your mutual fund saw a growth of 0.5% in a day, which turns out to be Rs 500. You NAV won’t be 1,00,500. Before that you will have to pay 2%/365 (that’s 365th part of 2% as charges, as it’s for 1 day, remember 365 days in a year) and that would be, Rs 5.48. Hence, final value of your investment would be 1,00,000 + 500 – 5.48 = 1,00,494.50 that’s 0.4945% increase and not 0.5% .

So, the next question which will come in your mind is “So, does this small deduction really make a lot of difference?” The answer is Yes & No. If you are looking at 6 months or 1-2 yrs, it’s not much of a concern, you can probably just avoid it and answer is Yes, if you are looking from long-term point of view like 5-10-20 yrs. In that case it’s mostly something which you can put your eye on once.

Expense Ratio – With & Without

Let me first give you a very clear idea about the distinction between two scenarios where there was expense ratio and there was no expense ratio in a mutual fund. Let’s take this example at least to understand the concept.

Suppose there was a mutual fund called “Jagoinvestor-Ninja Fund” (attractive name haan!) which generates a 12% return before expense ratio. Now let’s see how this fund final returns will turn out to be in different expense ratio scenarios like 2% , 1.5% , 1% ,0.5% and 0% (imaginary) . Expense Ratio Mutual Funds

Did you see that? How same funds performance can lead to huge a huge difference depending on expense ratio. In a longer term, you can see how the corpus value reached 29.9 lacs without any expense ratio, but if the expense ratio was 2%, then despite the same performance, the corpus would be reduced to only 16.3 lacs. That’s huge deficit of 45% compared to original corpus. While it’s a little unrealistic to consider 0% expense ratio, because it’s not possible in real life. Let’s see the different between 1% and 2% expense ratio. You can see that with 1% expense ratio the corpus was 22 lacs and with 2%, it was 16 lacs, that’s again huge 20% difference.

Also if you see the chart above, you can see a greed part showcasing how low expense ratio cases achieved the same corpus few years early than the high expense ratio scenario. You can see that with 0.5% expense ratio, 16 lacs was the corpus in 26th year itself which took 30 yrs in case of 2% expense ratio. In the chart below you can see how much the difference in different scenario’s final corpus percentage wise was.

Expense Ratio Mutual Funds

Remember that when you compare returns of mutual funds in long run (video), the calculations are shown after-expenses; hence it might happen that a better fund today is better in returns because its expense ratio was lower than the other one. It might happen that two funds differ in returns to some extent, but don’t vary too much when it comes to their ability to generate returns before the expenses. Naturally the mutual funds which have lower expenses would have better return at the end.

Case Study – HDFC Tax Saver vs Canara Robeco Equity Tax Saver

If you look at Valueresearch website, it has given Canara Robeco Equity Taxsaver fund a 5 star rating, but HDFC Tax saver gets just a 4 star. If you look at both these funds history, both the funds are 15 yrs old funds and if you look at short-term performance of both the funds, you will see how Canara Robeco is doing equally good or better than HDFC Tax Saver. But if you look at long-term performance of both the funds, you will notice a big difference.

While HDFC Taxsaver stands with tall chest giving 31% annual return, Canara Robeco seems to stare the earth with just 20% annual return. Now there can be a lot of reasons for this, but if you look at expense ratio, Canara Robeco has as high as 2.49% expense ratio, where as HDFC tax saver has just 1.91% expense ratio. So it might happen that Canara Robeco these days has to perform better than HDFC Tax saver before expense ratio and only then it’s able to sustain the performance.

As per a small study by moneylife, this phenomenon is true across the category , here are the excerpts : –

Consider the performance of 43 equity diversified funds which have been in existence before 2000. We chose 2000 because we wanted to gauge decadal performance of the funds. Of these 43, we selected the 15 most expensive funds and 15 cheapest. Among the expensive lot, we have only seven outperformers and eight underperformers. Whilst among the cheap funds, we have 12 outperformers and only three underperformers. It is not that the expensive funds have not earned good returns, but a part of their returns has been washed away by their high expense ratio.

For instance, Birla Sun Life Advantage Fund, which is one of the costliest and was launched in February 1995, has given a return of 19% beating its benchmark, BSE Sensex, by a margin of 8%. Reliance Growth, launched in October 1995 (seven months later), has given a return of 28% beating its benchmark, BSE 100, by a huge 16%. Was it the pure stock-picking skill of Reliance? Maybe. But the fact is the Birla Fund has an expense ratio of 2.31% and Reliance Growth Fund has an expense ratio of just 1.79%.

Conclusion

High expense ratio will hurt you in long run, so incase you are choosing two similar looking and similar performing financial products, you should look at their cost structure.

Can you share what you took from this article and how you will apply in your financial life?

Difference between Gold Saving Funds and Gold ETF ?

Posted on by Jagoinvestor

Today we will see what is the difference between Gold Saving Funds and Gold ETF’s .

The biggest marketing pitch for selling the Gold saving fund is that one can invest in gold funds without a demat account and can set a SIP for the same, which is true.

However, the alternate option of Gold ETF’s doesn’t not allow investments and/or SIPs without a demat account. But most of the agents hide these details of costs and do not educate their clients on how things work!

how to invest in gold

Source : Kotak Website

As of today, Reliance, Kotak and Quantum have launched their Gold Saving Funds of Funds. All of these Gold saving funds are almost same. Lets take an example of Reliance Gold Saving Fund, which is nothing but a fund of funds which invest in their respective Gold ETF’s 🙂 Did you know that?

Difference between Gold Saving Funds and Gold ETF’s ?

Gold ETF’s :

Let’s understand this for a moment. In simple terms, these are financial products which invests in physical gold and tracks its pricing on day to day basis. These ETFs have their own expense ratio which is considered very high if compared to US market, but that’s the price we pay to invest in gold electronically.

You need a demat account to invest in Gold ETF and you can trade these ETFs through stock exchange.

Gold Saving funds

Gold savings funds are nothing but mutual funds which invests majority of its corpus (90%-100%) in Gold ETFs (of the same sister company), a small portion might also be in money market instruments or some short term debt products.

For example –  Quantum Gold Saving Funds of Funds as per its mandate can invest anywhere from 95%-100% in the units of Quantum Gold ETF’s, and rest in money market instruments and other short term debt products.

But the important point you should note here is that the underlying investment is still gold, but not directly! It’s indirectly through gold ETF’s, and now as there are two layers in between, you pay charges two times!

So you pay charges for Gold saving funds and also for gold ETF’s, this part is generally not revealed by the agent who sells you these Gold saving funds. Also for the gold saving funds there are high exit load’s 🙂

Gold Saving Funds

So which one is better and which one you should choose?

We can’t make a general statement that one is good and the other is bad, because it’s not like that. If someone does not have a demat account and wants to automatically invest in gold each month through SIP, gold saving funds are the best option.

But for someone who is conscious about the expenses and can invest through his demat amount each month, Gold ETF’s are a good option.

But high charges will surely hurt in long run! One important point is that do not confuse gold saving funds with “gold mutual funds” which are mutual funds investing in gold mining companies, they are totally different.

Gold Saving Funds

Conclusion

A lot of investors are lured into these gold saving funds without giving any information on the charges, which is not right. Gold saving funds over a long-term can really eat away your returns because the high charges will cut a big pie out of the returns earned.

Secret of Extraordinary Financial Life – Taking Actions

Posted on by Jagoinvestor

If asked, “Do you have a lot of knowledge about personal finance?” You would say “Yes, of course!” Now, on the next question, “Is your financial life great?” For most of you it would be “No”. We all know term plans are required, we need to start the SIPs to meet financial goals, we need to cut down on our expenses, etc etc. But, how many of us actually go ahead and implement what we all claim to know! A very small percentage!

In this article, me and Nandish will talk on how taking actions is the real thing to be done in your financial life and just by accumulating knowledge about personal finance (what most of the readers on this blog do!) does not add up much in our financial lives! . In the video above, we are sharing – how two of our clients have given a new direction to their financial lives. Watch the video above to hear some action-provoking conversations between me and Nandish. There are two domains each person has called ‘Knowledge domain’ and ‘Actions domain’ .

Knowledge and Actions domain in financial life

Knowledge Domain

This domain is filled with the knowledge aspects in your life. When you read a blog, magazine, watch a show.. etc…etc, you are increasing your knowledge domain. You knowledge expands and you know more and more things. Your clarity on various subjects increases. This part is very important because it gives you confidence and understanding along with reasoning ability. If you are following a blog from long, your knowledge domain might be very high. But guess what! Your knowledge domain has very less impact on your financial life

Action Domain

Action domain is very simple to understand. All it means is how much action you take after increasing your knowledge domain. The more proactive you are in implementing what you know; it will have direct relation with the quality of your financial life. Increasing your knowledge domain will be of little or no use if you don’t expand your action domain.

In our financial coaching program, we concentrate heavily on taking actions and moving things in our clients’s financial life. We see people have good knowledge, but the one place where they are stuck is “Actions”. Somehow they don’t move forward by implementing what they know. Take yourself, many of you know that you need to take a term plan , you need to start your SIP, you need to start exercising (that includes me as well), but we don’t Act! and that’s where our big knowledge domain is of no use! Start taking actions!

I see so many readers on this blog who keep sharing their actions and how they started their SIP’s after reading an article . How they took the term plan after reading my article on online term plan , how a lot of readers got in action and started exploring options for their health Insurance, after reading one of my recent articles on Health Insurance

Financial Life as a project

One of the biggest reasons why most of the people fail to take actions in their financial life is that they dont look at their financial life at a project which needs a completion in all areas dont take a lot of actions in their financial life .

If you are stuck in your financial life and feel that you need an extra support which helps you be in action, you can register for our paid Financial Coaching program

Conclusion

Which of the two, knowledge and action domain is important? I personally feel that action domain is much more important than knowledge domain, because once you choose to act, you are bound to learn things and find out ways of completing somethings.

Please share what actions you have taken in your financial life? Which domain is bigger in your financial life ? Also let me know how was the video and if you liked the conversation ?

Also wanted to know your opinion on “Financial Action Day”, when we celebrate a week or a month as “Action Month”, when we as a group take massive actions in our financial lives and complete the long pending tasks ! . What do you say ?

Which Banks have highest Fixed Deposits interest rates ?

Posted on by Jagoinvestor

Do you know which bank in india has the highest fixed deposits interest rates ? But before that, let me ask you – Do you know what is the interest rate of your Fixed Deposit ? If it was opened a few years back, all you would have got is around 6-8% depending on the bank and tenure. But today its a different scene! . Fixed deposits interest rates are high these days and you can observe one of the other bank announcing fixed deposits interest rates revised each month and in range of 9-10% . I will show you a snapshot of various banks Fixed deposit interest rates with varying tenures.

For simplicity purpose, I have not included tenures of less than 6 months . See the graph below . Green color represents interest rates higher than or equal to 9.25% . Pink represents exact 9% . The banks mentioned in the table below are Tamilnad Mercantile Bank, State Bank of Bikaner and Jaipur, Yes Bank, Karur Vysya Bank, Kotak Mahindra Bank, Catholic Syrian Bank, IDBI Bank, United Bank of India, Lakshmi Vilas Bank, Karnataka Bank, State Bank of Travancore, Corporation Bank, Indian Overseas Bank, City Union Bank, ING Vysya Bank, Indian Bank, Central Bank of India, Federal Bank, State Bank of Mysore, Punjab National Bank, Punjab & Sind Bank, ICICI Bank, Dena Bank, Indusind Bank, Canara Bank, State Bank of Patiala, Syndicate Bank, Barclays, Axis Bank, J & K Bank, State Bank of India (SBI), Union Bank of India, Bank of Baroda, Vijaya Bank, Dhanalakshmi Bank, South Indian Bank, DBS Bank, HDFC Bank, Andhra Bank, UCO Bank, Allahabad Bank, Bank of Maharashtra, Development Credit Bank, Bank of India, HSBC, Citibank , tandard Chartered Bank , RBS Bank and Deutsche Bank . Look at the table below for the indicative interest rates for different tenures.

Fixed Deposit Interest rates in India

Note that a lot of banks offer high interest rates for special tenures like 500 days, or 555 days or 1000 days, but they have some restrictions which people dont know – some of them are

  • Some banks have provision, if rates increased in future, you can not apply for extention at higher rate of interest, instead you have to close that account and apply for new one.
  • Automatic renew not possible.
  • Upon maturity, you will not be able to get overdue interest.
  • Sometimes, you cannot premature close the deposit. however, these conditions vary from bank-to-bank.

Thanks to Lokesh for this information

High level Observations

There are some patterns we can see in area of fixed deposits . here they are

  • Fixed deposits with high interest rates for almost all the tenures are not the heavyweight banks, but the new generation banks, they are Tamil Nad Mercantile Bank, Karur Vyasa Bank, Kotak Mahindra Bank, Lakshmi Vilas Bank and others
  • Most of the banks provide 0.5% higher interest rates for senior citizens if the tenure is more than 1 yr . But if tenure if lower than 1 yr, the interest rates are same for senior citizens also . This is widely true , but some banks like Axis bank , SBI bank , ICICI Bank and HDFC Banks gives 1% higher interest to senior citizens.
  • Most of the foreign banks like Citibank, RBS , Standard Chartered has low-interest rates in range 6-7.5% . This is unattractive during these times when other banks are giving higher rates .

Low and Medium risk appetite investors can cheer

For investors how find themselves not too comfortable with equity and for those who want to park their money for few years without taking any risk and earning some good return in range of 9-10% , Fixed deposits are very good options.

The only point is if you are in high tax bracket, most of the returns will go in tax, but for investors who are in lower tax bracket of 10% or below the permissible limits , they can look for these options without much thought . These fixed deposits were for the year 2011 , but for most part of 2012 also these bank fixed deposits interest rates will be applicable .