Digital Data - an Asset

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Our lives are definitely becoming more virtual and hence it is no surprise that when you think of making a will, you also need to consider your digital data as an asset. In simple terms, your will should answer the questions like “Who gets your email id after your death?
With most of our lives going online, it is important to consider the data accumulated over our life-time as a data which should be either passed on to your legal heirs or totally destroyed. Digital data includes email accounts, social networking accounts, internet banking accounts, online photo albums, blogs and any data residing on your computer.

Why the heck would anyone want any access to your digital data? Why you should care? The reason is exactly the same with respect to your off-line assets like a house. You create a will since you do not want your legal heirs to fight over your assets and there is a good chance that they will fight over your digital data as well. I can easily think of legal fights over getting a dead writer’s un-published work or a ace photographer’s digital album or access to a extremely popular blog (which can be a revenue stream) in the event of a death.
The on-line assets are definitely more complex to come under a single umbrella of legal laws since each on-line website have different policies related to this issue. For example, gmail terms and conditions allows a legal heir to access the account if proof of death is furnished.
I reckon that in future digital data succession will become as crucial as any other offline asset succession and hence making a digital will become absolutely necessary.

When to make your Will?

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This is a most difficult topic for most Indian households and oft ignored. I yesterday went to a friend’s place and he had called up a LIC agent to his home. I distinctly recollect that they talked in a very hush’ed tone, because he was discussing about how much money his family will get post his death. It was obvious that discussing death and money together is still taboo in Indian society and hence the same goes with making a will.
I think most people know what is will and it’s importance but still probably I reckon that 90% of Indian household never discuss this topic. I believe majority of Indians die without making any will, causing major dispute among legal heirs post any death.
It is so simple to make a will in India and so important especially with legal recourse taking many years that everyone should definitely have gone through this process. It is important to note that  assigning nominations alone does not help and a will is very important.
So when should a person make a will?

The question is never answered appropriately. As per the Indian Law, any person above 21 years of age can make a legally valid will. But the key point before deciding on making a will is to think about :
  1. A sudden death is more probable in today’s fast paced life. So don’t think that you will not die till 80 years of age.
  2. If you die intestate (without making will), your legal heirs are not only your spouse/children. Check out this Hindu Succession Act and you would know who all can be your legal heirs.
  3. It is foolish to think that your legal heirs love each other and will never fight over your property. This has been found untrue in so many cases.
  4. There is no threshold asset value, only above which legal heirs will consider it substantial for fighting.
  5. The distribution of assets are done equally by the court of law without considering who is more needy amongst your legal heirs.
I would recommend that you should start thinking of making a will as soon as you get married. You can start with making a will on a simple white paper and asking your friends to act as witnesses. As you grow financially and acquire assets, you could add codicils to your will. If the number of codicils are more than five, then re-write a new will. You can think of registering your will once your assets have reached a substantial amount (you can decide what is substantial).  Where there is a WILL there is a way!!
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AMFI plugs hole for Third Party scam

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When investing in mutual fund schemes, it is very common to call up a broker and issue a cheque to him in the name of fund schemes. The cheque does not necessary be from you, so it could be from your spouse or your friend or as a matter of fact from anybody. The regulatory bodies wouldn’t have thought that this simple flexibility could actually lead to various scams.

Hence, to plug this seemingly innocuous hole in the mutual fund investment mode, AMFI has come up with guide lines to not allow any Third Party cheques[PDF] when investing in mutual fund schemes.

As per guidelines issued by the Association of Mutual Funds in India (AMFI), mutual funds are required to put in place strong processes by November 15, 2010 to ensure that Third-Party payment instruments are not used for mutual fund subscriptions.

So from 15th Nov, you will have to issue cheque from your account when investing in mutual fund in your name. The few exceptions are like parent investing on behalf of minor child or employer on behalf of employee.

But what is the Third Party Scam? It is simply a common case of trusting a middle-man and not doing due diligence. Here is how it works: You ask a broker to suggest a mutual fund scheme, and issues a cheque against that mutual fund scheme. He will fill a form and get your signature, but the problem is not in filling the form or not reading it properly, the actual problem is of trusting the broker. The broker can simply go home, shred the form you filled, then fill another form in his own name and submit the cheque along with the form issues by you. Since mutual fund accepts Third Party cheques, your money is being used by the broker to have scheme in his name. He simply needs to forge the receipt and give it back to you. The broker could simply redeem the money without you noticing anything.

The interesting aspect is that SEBI dis-allowed third party cheque in stock investment few years ago, but it is continued in mutual funds. I believe that AMFI has taken the right step in this direction, thus blocking these Third Party scams.

How to obtain your credit rating?

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Every wondered why sometimes a bank refuses to provide you with that loan despite the fact that you satisfy all their criterion or why sometimes the credit card company refuses to increase your credit limit?

The answer typically lies in the fact that you may have a poor credit rating. CIBIL is India’s first credit information bureau. The CIBIL shareholding pattern is like this :

The CIBIL agency gets the information from its members about any individual person and creates a rating system. In simple words, whenever you go to any bank for taking a loan (car/house/personal), the respective bank contacts the CIBIL agency to verify your credit rating, which is based on your own history of borrowings and payments.

How does the credit report looks like?

The credit report typically looks like this [PDF]. It contains your personal details (like name, phone number, account number, address etc). It also contains the history of your accounts and your borrowing history and the way you have repaid your loans. It also contains the history of banks/institutions that requested for your credit report.

How can you obtain your credit report?

It is simple process.  You need following documents as mentioned on the website ;

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It is important to note that there are no authorised agents for CIBIL who can get you the credit report. Check out the message indicated by CIBIL

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Why it is necessary for you to get your credit report?

The reason you would want the report may simply be for informational purpose, but typically it will help you in understanding why a certain bank refused loan to you. Also there could be a possibility of your credit information being incorrectly stored in CIBIL data-base. In such case, you could actually contact the respective bank and ask them to make corrections and inform CIBIL of the correction as well.

Is there a security issue since all your information is with CIBIL?

Not really. The information is accessible only to you and the member banks (who already have your personal information). Also the RTI Act does not apply to CIBIL, since it is not a Public Authority.  Also the information is kept securely using state-of-the-art technology.

Check out the information about credit bureau in other countries.

0% EMI–An excellent mechanism and a good trap

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There’s no such thing as free lunch. But marketers are promising exactly that with the 0% EMI schemes. You must have come across such deals especially while buying consumer electronics. The main claim of such schemes is to offer you an EMI scheme which will have

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  no interest charges. This seems too good to be true, but in reality there are some really 0% Interest schemes. So what is the trap and how to know which schemes are really delivering a fully interest free EMI scheme.

Some few years back this was the most popular schemes for selling consumer electronics products especially with banks supporting and providing the finance. But RBI regulations advising banks to not indulge in such schemes have helped. The reason why the central bank decided to give a directive is because the scheme being promoted in a false manner. The problem with these schemes is mostly related to hidden charges. The way the charges are mentioned/categorised gives a false impression to the customer and making it difficult for the customer to have an informed choice.

Here are some hidden costs in the 0% EMI schemes:

1) Processing Fees: Such schemes typically asks for one-time processing fees for the loan. These are variable depending on the dealer/bank/purchase amount you are dealing with.

2) No Cash Discount: If you avail such scheme, any other discount provided by the dealer is not applicable. This is a real catch, since most of these 0% EMI schemes are promoted during festival period, when the dealers are willing to give lot of discounts to increase their sales.

3) Advance EMI/Down-Payment: These types of schemes typically asks for some part of the payment done in advance. In essence, you are not entitled for the entire amount of purchase to be converted into EMI.

4) Documentation Fees: Some offers ask your salary and if it does not meet a required parameter, they ask for certain documents. In such cases, an extra charge for document processing may be applied.

5) Availability on select models only: Sometimes the schemes are available only on select models/products. If this is the case, it surely indicates that the dealer wants to empty his inventory for these models which are probably old or not selling well.

6) Shipping charges/Installation charges: Sometimes dealers apply shipping/installation charges if you buy the product on 0% EMI scheme but no such fee if bought through cash.

7) Hidden conditions: Sometimes there are hidden conditions/restrictions while buying through 0% EMI scheme, which should be understood properly before signing the dotted line.

It is important to understand and calculate the real charges for such 0% EMI schemes before getting into one. As an example, if your purchase bill is Rs 36K, and availing 0% EMI scheme for eight months, with processing fees of Rs 1000 and forfeiting the cash discount of Rs 2000, the interest rate effectively turns out to be around 18.75%, definitely much higher than availing personal loans.

These schemes are not all that bad given the fact that the effective interest rate is still much less than using a credit card. Hence such schemes can be utilized by a consumer after carefully calculating the real rate of interest.

There are also some “real” 0% EMI schemes, where the manufacturer or the dealer absorbs the interest charges in favour of higher sales (may be for that specific period). So having an awareness is much better and wiser while availing such schemes.

Chasing the Sensex is useless

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With BSE Sensex closing at spectacular high during the Diwali season, it made a big news all around. But chasing the Sensex has become an addiction to not only the media but the retail investors as well. The problem is that the euphoria corrupts the minds of retail investors and they start thinking of investing because Sensex is going up and not based on their understanding of the fundamentals of company. The question that came to my mind is that does it really matter to chase the index and to try to time the investment at lowest index to gain spectacular returns?

The answer comes out as a resounding “No”, and it is based on the historical data. I started digging at the BSE Sensex index history for the last decade starting from 2000 onwards. Let us assume that your investment exactly reflect the BSE Sensex performance. So let us compare the compounded gains when you invest at

1) Lowest Index each year

2) Highest Index each year

3) At a fixed date (say 1 Aug) each year

So if we look at the BSE Sensex for the past decade (2000 – 2010), it turns out that the index gave a CAGR return of 16.187% at lowest value investment, 13.125% return at highest value investment. The surprise is that when looking at historical data at a fixed date every year (1 Aug), the return is actually 15.501%, very close to investing at the lowest levels.

This is significant in the fact that instead of timing the market to find the lowest value, if a person invest every year at the fixed date in a steady manner, the returns are almost similar.

The key learning is to ignore the short-term sentiments of the market. If  you make steady and consistent investments, you would get decent returns without fretting over timing the markets.

Reverse Mortgage–It doesn’t work in India

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Reverse Mortgage is not a very oft heard and used term in India, despite the fact that there are millions of old age people in the country. Just taking a peek at the Age Transition graph for India [Source PDF], it is clear that the population of old age group folks are going to increase many-fold from this year onwards. It is obvious that the entire old population is not going to be financially stable with the rising inflation & increasing imagehealth care costs and they would not have much means to earning in old age since the working age population will be growing as well.

The concept of Reverse Mortgage is very simple as shown below, where any senior citizen who owns a house can go to a bank. The person can avail the reverse mortgage loan from the bank by mortgaging the house to the bank. This loan ensures that the senior citizens can get a decent monthly income(based on the valuation of the house) till the senior citizen is alive and can stay in the house as well. It helps the “house-rich-but-cash-poor” people.

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The whole idea is to ensure a financial monthly cash flow to allow senior citizens to live freely and independently. Upon the death of the person, the bank may return the house to legal heirs if the loan is paid back or else the house is sold and loan recovered, with the remaining amount paid back to legal heirs. An excellent post on what is reverse mortgage is here.

The concept is simple and on the paper it sounds to be a super-hit with the ever increasing population above 65 years in India, especially with the family support system breaking very fast. In my apartment complex itself, I have seen hundreds of old age people, who are staying alone with their kids settled out of country. But to the surprise of financial institutions, the scheme has seen a very damp response in India.

Let us ponder over why this superb scheme doesn’t seem to attract enough investors.

  • The scheme targets the senior citizens, but who are currently the senior citizens? The folks who are above 60-65 years. These are the people who were born when India attained independence. These are the people who saw liberalization, when they were already past their youth. These are the people who had very less opportunities for earning money and with too many social taboos and rituals. These people never knew consumerism and did not know how to spend the money. They just know how to save money and make assets and that is why these people built houses sometimes more than one. The whole thinking of the current senior citizens is “What will I do with the extra monthly income, for which I need to sell my house?”, rather when I die, I will give these houses as assets to my children and my grandchildren.The scheme would make sense for people who are currently in their 40s-50s, and hence the banks should actually make these schemes available to people above 40s (definitely lot of varieties/conditions can be included for different age-brackets)
  • The scheme is not marketed very well and very few people actually understands it. I feel that most financial institutions feel that dealing with senior citizen is very risky. The risk arises from multiple factors especially from the fact that they have not much alternate source of income (and exactly the reason they enter into reverse mortgage in the first place) and hence these people can not be pulled into other schemes of the bank. It is also important to note that the value of a house over a period of time will be sustainable when it is maintained properly, but with senior citizens having health issues and not much available cash, it would be difficult to do so. This may cause a deterioration of the house value over long periods of time. Also it is very difficult for marketing/sales people to deal with their idiosyncrasies and the paranoia. The fact that a banking institution while giving loan typically prefers a longer duration (in normal loans they have pre-payment penalty for early loan closure), but for senior citizen the risk of the scheme getting closed early is high and hence their is less chance to earn profits. Then their may be multiple issues of dealing with legal heirs in case of a death. So, all in all, senior citizens are not worth looking forward for in terms of making a customer base and hence banks have very little in marketing these products. In fact, I see very few schemes targeting the senior citizens and even if their are, they are not marketed enough.
  • The legal framework is not very strong in India and which makes this scheme much more risky. There are moral issues related to these schemes, for example, if an old widowed lady is not able to maintain the house causing deterioration of the value of the house, would a bank take a legal recourse for ensuring say the roof be made leak-proof or to paint the entire house etc. It is very difficult to handle legal issues related to old people where the legal heirs are all settled outside the country especially when either the legal heirs are not interested or when the residual amount to be gained by them is miniscule. Also there may be issues of corruption when a broker/legal heir/bank employee may seek money outside the agreement (under-hand dealing) and sell the house at a very low-price, thus making a loss for the bank but a personal monetary gain. There could be issues where an elderly person discovers a major health hazard (not everything is covered by medical insurance) and which may require them to sell the house for treatment (or may be to move to a smaller house and use some money for treatment). In such a case, both the bank and the borrower may set to loose the benefit. Then their are multiple legal issues with priority of liens (
    It is a legal claim by one person on the property of another as security for payment of a debt.), in terms of taxes on the sale of the house and to prove the legal heir claims. The laws are not clear when a person or household declares bankruptcy, the issues of  senior citizens mortgaging the ‘other’ house and also putting it on rent (so essentially gaining money through rent as well as selling the part equity till they are alive).
  • The upfront charges are typically high and these loans are rising debt loans. A typical loan, when repaid through EMI is a decreasing debt loans. So if you carefully understand how EMI is calculated, you would notice that some part of EMI goes towards lowering the principal as well, but with reverse-mortgage, the interest paid out get added to the principal and hence the debt keeps rising. The psychological barrier to this scheme is the loss of house equity as time progresses. Also since the ownership still remains with the borrower, the wealth tax, insurance, water charges etc have to be borne by the owner itself thus lowering the cash flow.

If I consider all the above scenarios, I would advice that this scheme is helpful only for those who do not have any legal heirs to pass-on the assets or to those who are desperate for some cash-flow (may be because their kids are no longer looking after them). This should not be considered as a means to fill the retirement goal corpus. Also it will take some time for the schemes to become more customer friendly.

Real Estate - Real Returns

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                  Buy Land, They’re Not Making it Anymore – Mark Twain

Investing in real estate is crucial to Indians, especially owning the first house/apartment. In India, it is common to call it as investment but not to think of it as investment. Note this difference, since most people who “invests” in real-estate do not think about real return on investment (ROI) on real-estate investments.

I would be really wary of putting my hard-earned money in buying a house, unless I get a decent ROI especially when it needs so much efforts and also it may induce emotional trauma.

So what exactly is a ROI for a house and how to calculate it for real-estate investment?

If you are buying a house for purely emotional reason and if this will provide you satisfaction, then calculating ROI is useless. So if you are happy being a owner of a house, then you wouldn’t think of “returns” and ROI is immaterial. But, it is important to distinguish between owning a house for “satisfaction/being happy” Vs “showing-off/rat-race competition”.

But if you are the one who thinks buying a house will make you rich or it will make you financially stable, then you seriously need to calculate a real ROI on the investment.

Almost everyone must have heard about their lucky friends who bought an apartment for Rs 15 Lakhs almost a decade ago which is now quoting at Rs 50 Lakhs. This sounds like an amazing deal, isn’t it? Well not actually, since the CAGR return is just 12.79% which is not a great deal. So if the same 15 Lakhs would have been invested in BSE Sensex stocks, it would have ballooned to Rs 65 Lakhs, definitely better than real-estate.

Note that this is a simplistic view not considering multiple factors like efforts required for investment, overhead costs and risk factors. If these factors are taken into consideration real-estate investment will not sound attractive anymore. The graph below indicates that CAGR return of various asset class over past 10 year period. As indicated, stocks and gold image out-perform the real-estate easily.

Some argue the virtue of real-estate investment by giving the leveraging logic. The idea is that if you buy a house, you would just give a 15-20% of cost as a down-payment (e.g. 2Lakh) and then see the real-estate price going up (say Rs 50 Lakh) and calculating the CAGR to be much higher (~45%). This is foolishness and simply twisting the truth to show-case an amazing returns. It is a fact that borrowing money is always costly (how would banks otherwise make money) and more risky. It is important to remember that the loan amount is owned by you, along with the interest to be paid to the bank. Also any decrease in the price of your house will in-fact be a huge loss rather than any gain at all. 

Let us compare some points while investing in Stocks Vs Real-Estate.

1) Performance: We already saw that the returns from stock are higher compared to Real-Estate investments.

2) Leverage Advantage: We discussed the leverage logic in real-estate. The same kind of leveraging can be done in Stocks as well.

3) Overhead Costs: The real-estate overhead cost is huge (10-15%) which consists of Stamp Duty, Brokerage Charges, Loan Processing Fees, Legal Fees, Utility Connection charges etc etc. The costs for buying stocks is much less.

4) Taxes: Stocks score over here since you just have the long-term gain (if held over more than a year) but in case of real-estate one has to pay property tax apart from long-term gain tax on selling the house.

5) Transparency: The biggest advantage while buying shares is that you can use the web to determine the fundamentals of stock easily. The same doesn’t apply to real-estate investment. It is so difficult to determine a handsome bargain with so many variables that investing is more dependent on luck than a logical analysis.

6) Efforts: The real-estate investments really gets killed in this parameter. There is not only enormous efforts to find a good house, but once you own it, a lot of effort is needed to keep it in good condition.

7) Diversification: If you invest in stocks, it is so easy to put your money spread across industries/companies/funds to give it protection. This can not be applied to real-estate investment at all.

I feel that the real-estate prices in India are not at all justified and the hype is driven by the artificial demand. Also most people can afford to get into this thanks to easy loans from banks. I hope the bubble does burst early enough to save lot of people who are not in the trap yet.

IPO Investment – Myth Busted By Statistics

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IPO investments are definitely a hype. I don’t like IPOs as a investment due to the excessive marketing which makes it much tougher to find the fundamental value of the company and makes a retail investor more gullible.

IPOs just make gullible investors get excited by creating excessive hype, especially with the promise of making the investor super-rich in a shorted period of time. I have read The Intelligent Investor by Benjamin Graham and remember that  he also recommends that investors should stay clear of IPOs. The simple reason is that IPO is raised to get capital which results in a premium price and offers a very little choice to buy the stock at a discount.

So just to validate this I decided to look at all the IPOs from 1 Jan 2010 till now and to check out the issue price Vs current price of the stock and here is the table:

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If you look carefully, all the red-lines are the ones which are giving negative returns (essentially in loss), while all the orange-lines are the ones giving less than 10% returns. So this actually validates what Benjamin Graham has been preaching for so long:

1) Out of 57 IPOs only 21 IPOs are actually providing gains of more than 10%. So essentially only 36% of IPOs are giving decent returns

2) Out of 57 IPOs only 4 IPOs actually make returns more than double. So essentially 7% of IPOs are giving exceptional returns

3) Out of 30 IPOs in losses only 7 IPOs actually gives loss in single digits (i.e. < 10%). In essence, 77% of loss making IPOs are giving losses more than 10%

This definitely busts the myth that IPOs are a source of short term quick gains. Some of these IPOs can actually go above their issue price after certain years, but that again indicates that prices during IPOs are at higher premium.

The “get rich quick” hype generated during the IPOs are typically by the marketing companies and promoters of IPO companies to raise the premium price for mopping up more cash, but for the retail investor it is much better to wait for few days after listing, before investing in the IPOs and that too after the value study of the company.

The only people who possibly gain from IPOs are definitely other than retail investors.