=====================================================
Do you agree? Does this help you with stock selections?

A question that he ignored was about index funds. The question asked was, “So does it make sense if i do my equity investment only through an index fund?”. It sure was an uncomfortable question for an active Fund Manager. As he couldn’t bring himself to say that index funds do outperform the actively managed mutual funds quite often.

In any case, it’s good to know the mind of a Fund Manager.

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Your parents, they give you your life, but then they try to give you their life. (Chuck Palahniuk, Invisible Monsters, 1999)

The best way, obviously, is to help the child discover their own interest area and to facilitate that process.

Yesterday, I came across this press note from Aviva about a tool that help parents plan & calculate for their child’s higher education.

Here’s the link to the tool.

Educost

Aviva’s online insurance calculator, “Aviva Educost” helps to calculate the amount you would require to secure your child’s education. This application comes with 20 career options and a comprehensive list of 145 institutes across the world to choose from.

More interesting is that it claims to factor in the rate of inflation, hidden education costs like coaching/preparatory fee and application charges, cost of living if your child moves to another city or abroad, along with course fees, Educost gives you a fairly accurate idea of the financial implication of your child’s higher education.

I used the tool and got the following result:

My Wishlist:

I would have liked to understand the assumptions. For example what is the rate of inflation that has been factored in.

Is that amount required as on today, or is the inflation corrected amount after “n” number of years when my son will be ready to join FTII. And what is the assumption there about the number of years when my son will join FTII.

Conclusions:

In any case, education is undoubtedly the best gift you can give to your child. And a bit of planning for the child’s education is a good thing to do. And this Educost tool is a useful application to help you chart out a blueprint.

I also believe that life unfolds itself, and with utter disregard to your plans to achieve this or that. As Dwight D Eisenhower says:

Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. (Eisenhower quotes)

Update: I asked the person who sent me the press note about the assumptions and their response is as under:
The assumptions are:

i. Inflation @ 8%

ii. Cost of Education : This refers to the current cost of Education or the course fee. The time period for calculation of this is 18yrs-Current age of child

iii. Cost of Living : This refers to the current cost of Living in the city/country where the particular course will be taken. The time period for calculation of this is: (18yrs+ total yrs of course )-Current age of child

iv. Cost of Preparation : This refers to the current cost of preparation for the course fee. The time period for calculation of this is: 18yrs-( Current age+2yrs)

v. The total cost is the sum of all 3 above and shows the cost required when the child will be eligible to undergo the course i.e 18yrs

Apart from this there is a standard disclaimer that the cost is illustrative and generic in nature and are based on the information collected from a random sample of public and private institutions in India.

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I always believe that life unfolds itself, and with utter disregard to your plans to achieve this or that. But I guess, Dwight D Eisenhower is more articulate. Read on.

Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. (Eisenhower quotes)

Financial Plan

Now, the financial services sector in India is a hot area and I’ve written about it before. Link, Link2.

I have written about InvestmentYogi and how their  goal is to promote a holistic financial planning approach to investing and managing wealth.

I recently came across their online Financial Planning application and was immediately enthused to utilize the tool. After logging in, I found the user interface very cool and user friendly. Take a look:

There is a sample plan that you can download to see what kind of report is given by this financial planning tool.

Unless you have taken a bit of time to read the various things that your financial plan tells you, you will fail to see the importance of doing financial planning.

But once you see the various reports about your assets and liabilities, suggested asset allocation plan, networth, strengths and weaknesses of your financial situation, you would be compelled to take corrective actions.

I see it as this: What get’s measured, gets done correctly (atleast in future).

More Points:

A lot of people get phased out with numbers. Or may have difficulty understanding the numbers and the interpretations. That’s why, a Financial Planning exercise needs a trained consultant to help make sense of the numbers.

I also believe that a planning exercise is a blue print for further discussion and brainstorming. You can do this with your family members. But a trained consultant would add a lot of perspectives, I believe.

There are a whole lot of assumptions made to present the report. One should be able to understand those assumptions

Based on the above two points, I think it makes sense to have a fee based financial planning exercise. InvestmentYogi is charging Rs 5K for their fee based plan and to me it looks like a invitation price. Professional Financial Planners normally charge Rs 10K and above.

My Wishlist for a Financial Planning Tool:

InvestmentYogi’s tool assumes that you know your risk profile. I think that the newbie user may not be aware of his own risk appetite. That’s why it’s a good idea to ask a few questions and let the app decide your risk profile.

The assumptions they make in calculating various reports like the insurance cover required should also be clear to me. I would like to know the assumptions they make for all their calculations. I guess the fee based plan will give me that clarity.

Conclusion:

I really like this application and hope more and more people will use it. There’s the free version to start with. And if you can pay, I’m sure you would find value in your interaction with a trained consultant. (Okay, this is a general statement and I’m not recommending InvestmentYogi’s Consultants. Just recommending trained financial planners)

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I found the “Rosenberg Dozen” in that newsletter and I am sharing that with you.

David Rosenberg, Chief Economist at Gluskin Sheff, has the following economist’s dozen of rules :

1. In order for an economic forecast to be relevant, it must be combined with a market call.
2. Never be a slave to data, they are no substitute for astute observation of the big picture.
3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
4. Fall in love with your partner, not your forecast.
5. No two cycles are ever the same.
6. Never hide behind your model.
7. Always seek out corroborating evidence.
8. Have respect for what the markets are telling you.
9. Be constantly aware with your forecast horizon – many clients live in the short run.
10. Of all the market forecasters, Mr. Bond gets it right most often.
11. Highlight the risks to your forecast.
12. Get the (US) consumer right and everything will take care of itself.

Interesting, No?

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My Aunt is a successful Doctor and seeing me, she immediately offloaded her burden of understanding the product to me.

Even though I hate ULIPs, I pretended to be another uninformed customer. I listened to their articulate description of the benefits, their customer service policies, their ethics, etc. They said that the product will no longer be available after a week and they were interested in getting a good deal for their valued/high networth clients!

Impressed, but I did have a question for them. What were the charges?

The Branch Manager continued his rhetoric. Unlike other insurance companies they charge 0% premium allocation charge, he thundered.

He gave me the pamphlet detailing other charges like policy administration charges, surrender charges, etc.

I was intrigued by the 0% premium allocation charges and which normally ranges from 15-40% for other companies. I looked deeper for the fine print and here’s what I found.

The policy administration charge which is normally Rs 60-100 for other companies was given in %age. The pamphlet said that for a premium band upto Rs 25000/-, it would be 2.50% per month of the ATP.

ATP, I came to know was Annual Target Premium.

What it meant was that 2.5*12=30% would be shaved off your investment as policy administration charge.

So the marketing savvy private insurance company has been innovative in redesigning their product so that the noise about the premium allocation charge is addressed. And at the same time, adding back the charges in a new form!!

Interesting, No? That’s why you need to be alert all the time. Do read Manish’s Top 10 tricks of mis-selling.

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I have wondered why people avoid money management before.

But this post is about the visible and the hidden components of money management. In other words, the iceberg theory of money management.

Iceberg Theory of Money Management

As I said, knowledgeable people make financial mistakes too. This happens because despite knowledge they may not have the right skills or the attitude towards money management. Other characteristics like confidence, values they have learnt from their parents, fear of numbers,etc.

The Visible:We can see our knowledge level as well as our skills level. It’s about reading up blogs, dailies, magazines and upgrading your knowledge. Also about keeping your records tidily, operating the accounts like the demat, broking accounts, etc.

The bad news is that the visible part is only 10-15% of what it takes to manage your money.

The Hidden: My take is that 85-90% of your money management depends on your attitude and other characteristics. Like there’s laziness, greed for extraordinary returns, fear of numbers, fearing the markets, etc.

Some of us are benefitted with the values we have learnt from our parents/influencers. For some, the parent/influencer effect is a handicap.

Conclusion: Money management expertise has four components. 1. Knowledge 2. Skills 3. Attitude 4. Characteristics like confidence, values.

Just reading up a blog/magazine won’t help you with your money management. You need to be aware of your attitude and various other self concepts, values to make improved financial decisions.

Update: Ideasmithy has another example of the Iceberg model in her post Just Chemistry. She writes:

Good sex is a little more complicated – a combination of attraction, talent and emotions. The first, we’ve already established is plentiful. The second, talent, is slightly harder to come by. Yet, like some slightly expensive things, with some effort, it can be discovered and earned.

But the last, emotions, that’s the tricky bit. Emotions are that vital ingredient, the salt in a receipe.

I guess, attraction is the visible part & talent and emotions is the hidden elements. What do you say?

Do you agree? Disagree?

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A jury sifts through the numerous blogs that are openly nominated by the fellow bloggers, to contend for the title of the Best Indiblog in each of the 17 categories. An open vote is then conducted to pick out the winning blog from the nominations.

This Blog has been nominated in the Best New Indiblog category. It feels special to be nominated and will be really thrilling to win the award.

I write this blog to share what I know with my readers. I attribute the nomination to my readers as they have always motivated me to blog. And I guess, it’s you who should decide the winner too!

Do hop on to the voting page and give me a vote.

Please Vote

I am also happy to see some very interesting blogs on the nomination list that I follow and I also request you to vote for some of them. They are:
Gauravonomics under Business category
The Ideasmithy under Personal category
Digital Inspiration under Technology category
Domain Maximus under Humorous category
Vimoh’s Twitter page under Microblog category

Please Vote. Thanks

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However, SIP (systematic investment plan) investors would have earned returns in the range of 25% to 28% during the same period. That too by investing in the same funds!

So what makes all the difference is this – lump sum investors would have invested at only one level of the market. In this case, it would be 13,680 on the Sensex as on November 23, 2006. Their investments would then have subsequently gone through a rollercoaster ride of dips and surges.

For SIP investors though, they would have invested at regular intervals during this entire period. This would have ensured that they took advantage of the low market levels each time the markets went down. Thus automatically and effortlessly doing something even fund managers could not do!

Sounds good, No?

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Extracts:

….. organises information, of course, on personal finance, while claiming to increase the reader’s financial intelligence quotient. On visiting the site, you can access sections like insurance, mutual funds and stocks, to name a few.

The site hosts seven different calculators catering to various personal finance needs such as monthly budgeting, financial freedom, loan comparison and taxes. Using the calculators is uncomplicated and just requires patience, as they are a bit detailed.

The financial freedom calculator is especially remarkable as it helps you run a reality check on how long your current savings will last.

All in all, the site is user-friendly but lacks visual appeal. It looks rather dull and dowdy at times.

The website link And it also talks about RupeeManager.

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I admit that it seems too difficult thing to do. You cannot change the status quo just like that.

And it’s not that the financial services industry is immature or fragmented. It’s a mix of seasoned, professional people as well as snake-oil sellers. There are very good financial advisors as well as the agents mis-selling for their own self interests.

Somehow I get a feeling that we get the financial service we deserve. Part of the blame of getting lousy financial service lies with us.

However there are a few common pain points with the financial services industry which is not being addressed in totality. This brings me to my three components model of managing money. Take a look.

Lights-camera-action

Learn, Focus and Manage

The Three Components
To my mind, the Financial Services industry is not addressing all the three components of the above model. Let me explain what I mean.

Lights or Learn
The industry has a responsibility to spread greater financial awareness among the buyers. But the information asymmetry present in financial services is huge. Maybe it’s because of the buyers own reluctance or old habits. But I think there’s a good opportunity for someone to come up with a business focused on this education vertical. There doesn’t seem to be any competition (+) or big money making (-) right now. But who knows!!

Camera or Focus
After you get the knowledge, you need to translate it into action. But not before you start using the tools for such actions. Measuring your money would be the first steps towards managing your money or taking concrete action.

In India, the tools available for managing your money are not very popular or easily available. I know a few efforts (including mine). Again, I guess the perceived lack of market/potential or money making opportunity is responsible for not many efforts in this vertical.

Action or Manage
This is where the action (pun intended) lies. It’s a huge market where every Tom, Dick and Harry makes a mark for himself with a little bit of effort. So, as I said earlier you can get a very good advisor and a equally bad one! In any case, everyone is after your cheque and not bothered about your needs (Knowledge, aka Learn) or (Tools, aka Focus).

And as I write out this post, I realize that:

• The financial service provider has an incentive to get the cheque out of you. So he’s only bothered about the third component (Manage). That’s a given.
• You, as a financial service receiver have an incentive to learn more and use tools to manage your money. This means you must focus on the first and second component (Learn & Focus).

In any case, it takes all the three wheels (Light, Camera, Action!) geared together and work in tandem to manage your money in a holistic manner. Half baked efforts at doing one/two of them at a time wouldn’t make a good picture!!

Reminder to self: कार्य कठिन है , इसलिए करने योग्य है

What do you think? Agree/Disagree?

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