A case of misleading credit card statement- American Express

American express guys are clever buggers. Imagine reading your credit card statement with things like opening balance, new credits, new debits and closing balance. I guess they assume everyone who has good fortune of having a Amex card will know basic accounting terms. Or may be not. There is something that we are missing.

Amex never tells directly how much TOTAL amount is due on your credit card. Its always hidden there in debits and credits. Not satisfied by that they even go and tell you that ” We would appreciate receiving your payment of XXXX( this is minimum amount due) by so and so date. Then to make it look legit they add that we should make the payment prior to due date to avoid levy of penal charges. To a ordinary eye it will seem like if I pay minimum amount due then it should be okay. No. Not okay. On the balance they are going to charge 3.65% interest per month. And that is a lot of money my friend.

This is nothing but robbery in broad day light. First of all confuse the customer by debits and credits. Then advise them only to pay minimum and then charge nterest on balance amount. Don’t believe me. Look at the American Express card statement

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Compared to American Express, ICICI Bank guys are much nicer.  Their statement is clear, it tells you to pay the total amount due to avoid interest charges and a layman can understand it as well.

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Time to complain to someone and get it sorted.

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Rhinophobia and the art of doing nothing

Republished from http://www.simplerupee.com

Here is a beautiful word. Rhinophobia – the dread of ever having any cash in the bank or in your pocket. Feels familiar. A lot of us  suffer from this temptation of buying stocks or mutual funds as soon as we have some cash in the bank. After all what good can dirty cash do when we can buy some nice blue chips and not so blue chips with it. We all have suffered from rhinophobia at some point of time in our lives. A common anxiety is what if the stock market goes up and we are left huddling our cash in some sad savings account or a post tax 6% fixed deposit. What good that can do to us and to the world.

The number one rule and most probably the only rule of investing is to conserve capital.  The temptation to put this capital to good use to generate more capital ( capital gains) is maximum when everything is going up. This is the number of reason why some of us are left with no capital at all. A sure sign of times like this is when your aunt comes up to you and say ” Beta, here is your uncles retirement savings, can you suggest some stocks for us”. When that moment comes you can mumble something intelligent like – well the P/E ratio of Sensex at the moment suggest that risk/reward ratio is not in the favour for investors and get the hell out of there.

So how does one conserve capital and hopefully also get some capital gains. Well the trick  is so simple that no one actually believes it.

Its to have a plan, put it in motion and do nothing. Yes, just sit tight. I know you won’t believe it so I’m going to repeat to one more time

Its to have a plan, put it in motion and do nothing.

The plan can involve many number of things from simple to complex. But once set it  should not involve you having to do anything. For starters you can open a PPF account and start saving some money and tax. If you can take a little bit of risk then start with investing a little bit of money in any large cap mutual fund through the systematic investment plan ( SIP). If you want to take even lower risk and would rather tie your financial destiny to the wisdom of the markets ( vis a vis wisdom of the wizards of the mutual fund industry) you can invest in exchange traded funds. They are cheaper than all of the actively managed mutual funds and just as good as them.

Once your PPF and SIPs are set via the ECS route of your bank just sit back and watch those “Saas bahu” serials. No need to check CNBC and flare up rhino phobia. Yes that is what I said. Put a plan in motion and then get the hell out of the way.

The different rupees in my wallet

God created all rupees as equal- we divided them into bonus, gifts, salary and other things. Here is a sneak peak into the world of mental accounting and behavioral economics

The Simple Rupee

So you are walking alone on the road and you found a 500 rupee note. Like a nice person you ask around if someone has lost it but after a few minutes it is evident that lady luck is smiling at you.This 500 rupee note is yours to keep.

What would you do

Choice a) Keep this money in your wallet and move on

Choice b) Keep this money in your wallet and immediately start thinking about ways to spend it in ways you would have not spent your own money.

The chances are most of us will choose for b. The money that we found on the road is the money to splurge  where as the  money that we have in our pocket gets a serious thought.Behavioral economists call it mental accounting. To borrow George Orwell- All rupees are equal but some rupees are more sacred than others.

Mental…

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The simple rupee: Direct is best

Sometimes good wine and good advice feels better as you age. I almost wish that I knew at 29 what I knew about money at 40. But I guess everything has a  set time to appear in your life.

A friend introduced me to Mutual Funds. Before that I was too busy losing money buying penny stocks and hoping that they will be the key for a house and a brand new car.

Another friend introduced me to investing directly in Mutual funds. He was persuasive and  he literally dragged me to the AMCs office to convert all my regular mutual funds into Direct plans.

Why ?

Because direct plans are cheaper by as much as 0.7 percent. And that is direct savings to you. You are buying exactly the same scheme just that part of your money is not going as commissions to mutual fund distributors. So your overall costs are low.  In the words of famous money Manager Jack Bogle”Don’t let the miracle of long-term compounding of returns be overwhelmed by the tyranny of long-term compounding of costs.”. In my words- Go Direct.

When I ask around very few people know about Mutual funds. Even those who advise people on Mutual funds have very little knowledge of direct plans and their benefits or they don’t want to share. And some people like me are too lazy to spend half a day to convert their plans into direct ones.

Very soon I will be launching a venture to help people make better personal financial decisions. Timely and fair advise and not the one that is biased  can help one achieve personal financial freedom. I have friends who have money back insurance policies because some gullible agent sold them because of hefty incentives. People I know have low insurance cover or hefty credit card bills.

Yes to term insurance and no over due payments on credit cards. This is simple rupee. Coming soon.

How idle money in your savings accounts make the banks rich

Money in your savings account gives you an interest rate of 4% per annum. (Except for a few banks like Yes, Kotak, IndusInd).

Most people keep too much money idle in their savings account much to their own detriment. Money in fixed deposits or liquid funds can easily as much as 8% with nearly similar liquidity.

Fixed deposits linked to savings account gives you exactly the same liquidity but twice the earning. Linked deposits are exactly like money in your account. You can withdraw by cheque and ATM.

So would you like to know how much you lost by keeping money idle in your savings account. Here is it. I will make some simplifying assumptions to explain the point

1. First check how much interest you got last financial year on your savings account. Usually these are credited twice a year and in some cases quarterly. Let this amount be INT. This should be sum of all your savings accounts

2. Next see what is your average monthly outgo from these accounts. Let this be OUT

3. Assuming interest rate on savings account is RATE.

Now assuming that you need an average balance of at least 2 months expenses in savings account and that you could earn at least 1.75 times the RATE on idle money elsewhere (Linked fixed deposits),

MONEY YOU LOST = (INT – 2*OUT*RATE)*(1.75-1)

Let me explain with an example

1. You earned 30000 rupees as savings bank interest, so INT = 30000
2. Interest rate is 4%. RATE = 4%
3. My monthly expense is 1,50,000

Then amount I lost is (30000-2*1,50,000*4%) * (1.75-1) = Rs. 13500.

This number is much larger for businesses which keep money idle in current account as RATE = 0% and interest earned is zero

You can change the months of security you find comfortable to find out how much your laziness is making the banks rich by. Have fun

P.S. : This incidentally is the CASA ratio that banks so zealously try to increase as this is the cheapest source of funds for them

So how rich did you make your bank last year. Let me know

Invest in Mutual Funds Directly if you value your money

Mutual Funds – Direct Plans are the only ones to invest in

1. For those who came in late (Jan 1, 2013) saw a silent but giant revolution in the mutual fund industry. All fund houses for all funds had to offer a Direct Plan for those who came to buy and sell directly to Fund House which had a lower expense ratio than the non-direct a.k.a (regular) plan. It works out to about 0.7% per annum for equity funds and a bit lower for debt funds. The difference is available on the website. Yes, it is the exact same fund with same fund manager but with different costs. So if Direct gives a return of 12% per annum, Regular will give about 11.3% return due to higher expenses mainly which are paid to the brokers and distributors

2. If your mutual funds statement does not show the words “Direct Plan” then you do not have the Direct Plans.

3. Funds bought through icicidirect, any bank side or the friendly guy who comes and picks your form and cheque are all regular and not Direct Plans

4. So now you must be thinking why should I cry over 0.7%, Here’s why, 1 lakh invested at 15%(per annum (direct plan) compounded for 20 years yields 16.36 lakhs and at 14.3% (regular plan) it becomes 14.48 lakhs. So a cool saving of Rs. 1.88 lakhs for maybe a day’s work over 20 years. At 20% and 19.3% the difference is 4.22 lakhs. It gets progressively worse if you increase rate and time period or amount invested. I hope you get the message

5. Now the tough part. How do you invest directly. Since you are already investing in mutual funds, you must be already KYC approved. Most fund houses you can now start a new folio completely online (Quantum and Franklin) I know do. For others like HDFC, ICICI, IDFC you need to make one transaction directly which involves just one visit to their office or a CAMS centre with your cheque book and PAN card. Once done you so everything online (SIPs, buy, sell,etc). You don’t have to run to office for every transaction

6. Stop all SIPs and investments in Regular Plans immediately and start Direct Plans

7. Move your existing invested money from Regular plans to Direct Plans. You’ll save a lot over the long term

8. If you are taking someone’s advice to invest in funds, I suggest you pay him just for advice but if you have to invest through him, give him 5% of your money and replicate whatever he does through direct plans. You’ll save a hell of a lot of money

9. After reading this if you still invest in Regular plans, you are either lazy or an idiot or maybe a lazy idiot

BOTTOMLINE : Invest in Mutual Funds through Direct plans only.

Hope this helps. Happy reading and comments. Amy help needed regarding this. Just write in comments. Ill be happy to walk you through this for free.

P.S. : For guys who feel they need to keep investing in regular plans, please give me your number, Ill send the forms with my broker code printed. ( I dont have one, but ill get one if there are still enough lazy idiots) If you are bent upon wasting money, why not give it to me.

Compound interest and PPF

Those who don’t understand compound interest end up paying it.

Einstein once said that the most powerful force in the universe in compounding. In financial terms compound interest means earning interest on interest that your money is generating. Same principal applies when you don’t clear your credit card dues. So leave everything and clear that credit card bill now.

If you want  to get rich your money has to compound at a rate that beats the inflation.

Two important things that you have to keep in mind is the  interest rate and the time for which you have kept the money undisturbed. The longer you keep the money the bigger is your fortune. While there are automated excel sheets to calculate compound interest there is a basic formula to calculate the same .Its something that you you probably read in your 7th or 8th standard or even earlier. It goes like this M = P( 1 + i )n. M is the final amount including the principal, P is the principal amount, i is the rate of interest per year and n is the number of years invested. For instance if your Principal is Rs 1000, rate of interest is 8% and you invest this money for 3 years then your final amount M= 1000( 1+.08)^3 which is Rs 1259.

Simple interest on the other hand doesn’t give you interest over interest. It only gives you interest over the capital invested. The formula is M= P(1+in). So your Rs 1000 would only grow to Rs 1240. Now you would say what is the big deal. Its only 19 Rs less than compound interest. But over ten years the difference jumps to Rs 359.

While their are many financial schemes that can give you compounding benefit like Fixed Deposits, Equities  there is nothing as powerful and almost risk free as a Public Provident Fund account. First of all it saves some money from taxes. From the current financial year you can put almost Rs 150000 and this can be deducted from your taxable income. For guys in 30% tax bracket it is a saving of whopping Rs 45000 every year.  Second all the returns that you generate are tax free. PPF doesn’t attract wealth tax and no court can attach PPF account. There is one small catch though that your money has a certain locking period.  You can withdraw part some after 5 years or so.  But in the final reckoning PPF is far superior to your average F.D and it also helps building saving as an activity for you. I would also stick my neck and say that before you start investing in stocks you should exhaust your PPF limit.

So go and open a PPF account if you haven’t done so. Think of that money as a retirement plan for you. Save the maximum permissible limit if you can which is Rs 150000. Put this money right in the beginning of every financial year. And then forget it for the next 15 years.  You will be surprised how your money will compound. Here is a basic chart

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Now days PPF accounts are fairly easy to open. There is a wide choice of banks where you can open your account. You can also deposit money electronically so that you don’t have to worry about cutting cheques and depositing them. This is as easy as it gets. So get going and get rich.

 

Investing for future

Lets say you have been following the golden principle of saving before spending and now you are generating a nice surplus. Well done. Half job done. Now comes the question of where to invest this surplus so that it builds into a nice nest in future and you can retire and enjoy that cottage in the mountains.

See investment has two  primary goals 1)  protection of  capital invested and  2) beating the inflation. This essentially means that where ever you invest your real returns should be positive and not too much risk is involved in the same.  F.Ds are safe but they lose money  every year as the they have negative real returns ( 10% inflation and 8 percent F.D rates).

That leaves us with three options- Gold, real estate and stock market. Gold is a perfect investing instrument for the day after tomorrow. So we are left with stocks and real estate. Stocks can be very volatile and you have to know your stuff. And until this year unless you had lump of cash you cannot possibly invest in real estate. But now SEBI has allowed REITs or Real estate investment trust so soon you will be able to invest through this instrument.

So that brings us to investing in stocks.  So you  can either invest in the stock markets by directly buying  stocks or  buying through mutual funds. If you have time at hand and you understand stocks then may be you can buy directly. A right stock can beat the market big time but you can lose money quite quickly too.  But majority of us who don’t understand the stock markets  and don’t have time to track the market investing through mutual funds is a much safer bet. And over long period of time ( 10 year plus) its not unrealistic to expect 12% returns from mutual funds. At-least that is what I have been made to believe.

There are many mutual funds so again you to decide where you want to invest your money.  Some mutual funds are rated some are not. Some come with New Fund Offer-NFO and some are around for donkeys year.  You also have to choose between actively managed or  Index funds. Everyone has their own preferences. There is a lot of data in the US market to say that none of the fund managers have ever beaten the index so you re better off buying a index fund.  And secondly Index funds have lower expense ratios which means that they don’t charge too much fee ( GS Index fund will cost 0.5% every year where as FT India blue chip can cost as high as 1.6%).In India too one case save more than 1% every by investing in index funds compared to investing in a actively managed fund. However since Index funds don’t have a long track record in India its hard to say how they will perform over a long period of time. Some people believe that Indian markets are not deep and perfect and smart fund managers will be able to do stock picking and beat the index consistently every year. Some guys funds like HDFC top 200, FT India Blue chip and IDFC premier equity have done that. But who knows what tomorrow brings.

One can read more about advantages of investing in Index funds at http://articles.economictimes.indiatimes.com/2013-04-29/news/38904782_1_expense-ratio-index-funds-active-funds

Credit: reuters
Credit: reuters

My advise is to do a bit of research on the internet on sites like valueresearchonline.com, moneycontrol.com and livemint.com and identify where you want to put your money. Mint50 mutual fund list is also a good list to start with. Another important decision  is whether you should buy it through systematic investment plan(SIP) or directly. Both has its advantages and disadvantages. If you believe you have the necessary discipline both emotional and financial and you can time the market then go for buying lump sum a few times during the year . But if you cannot then SIP gets the job done. One of the advantages of  SIP is that it puts distance between you and the act of buying on impulse and intuition. And it adds to the discipline of buying regularly. So you save more and consistently.

I have one advise to offer irrespective of which ever you way you buy into mutual funds. Buy Mutual funds  from the Mutual fund provider ( HDFC, Franklin etc) and not through a broker. This is called buying a direct plan. For most of the fund houses you can do this online. In the long term buying directly is cheaper compared to buying it through a broker. All mutual funds are now mandated to have a direct plan. You save on the money that ICICI direct or any other broker charges every time you buy ( it can be as high as Rs 30 per transaction). Also direct plans tend to be cheaper then the regular plans which are sold through brokers.  Their expense ratios are less so over a long period of time you save money by going direct. You can read more here http://www.moneycontrol.com/investor-education/classroom/are-direct-mutual-fund-plansbetter-option-1032685.html.

So in summary if you want to invest for future then first invest some time in the same . Do some readings.Identify the right mutual funds or stocks .Once you know what you want to buy then invest directly. Invest regularly and for long term. 10-15 year is long term and then hope that you get 12% or more annualised return tax free. Don’t worry too much about where markets will go to. If our economy doesn’t grow and if there are global problems like war or disease then stock market will be the least of your worries.

So sit back and enjoy the show.

Next: PPF account and why each one of us should have it.

 

 

 

 

keep still and do nothing

Temptations temptations and temptations.

There is a second hand mitsubishi outlander available at a price that I can possibly afford to take a loan and buy. But then when I calculate the total cost of ownership including the fuel efficiency, insurance and wear and tear, suddenly its no longer in my reach. For so long I have wanted to buy a nice SUV that I can take to the mountains. Not scorpio or Tata safari but a real SUV. Don’t know when the day will come when I will not look too much into future and make the decision and buy what I want to buy. But then I ask this question. Do I really need a SUV? Can’t remember where I read ” No consumption, No wants”.

So what about the Long term

In the long term we are all dead but when it comes to investing you have to be dead serious. I want to save 10k per month for the next 20 years hoping that it will multiply to something big. Bank recurring deposits give you nothing. So the only choice is Mutual funds SIP. Confusion is between index funds and actively managed mutual funds. Still to make a choice. Both have their own advantages and disadvantages. For one India is not a deep market and some fund managers to consistently beat the index as they have done in the last 5 years. But then the first lesson on investing is that past performance is only one of the indicators and not a guarantee of future performance.

Short term is now.

In the short term only clear communication will keep everyone happy or you can attempt to make everyone happy. One of the dangers of a multicultural and multilingual family life is that you have to make sure everything is understood by everyone in the same way.

Keep still and do nothing

For starters both are different things. By Keeping still you are actually making an effort to be still, while doing nothing is doing nothing. Where do I pick these things – Jackie Chan starrrer “The Karate Kid”.

No eyes, no tooth.

Unless we do something about it. Israel has so far killed 1000 or more Palestinians. People are shooting planes out of the sky. In our own backyard riots are happening all in the name of God. An eye-for-eye and tooth-for-tooth would lead to a world of the blind and toothless. Here is a prayer for peace everywhere. Let know man die unnecessary, let there be food and good health and let every one live peacefully with their families, neighbours and friends