Mental Accounting-Are you suffering from it?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

In today’s post I will try to explain you about the meaning of “Mental Accounting” and how it can affect your financial life. Mental Accounting is basically a concept of “Financial Behavior”.   Which explains human tendency towards money during special situations. Investopedia defines it as   “Mental Accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. According to the theory, individuals assign different functions to each asset group, which has an often irrational and detrimental effect on their consumption decisions and other behaviors.”

How to identify that you are suffering from Mental Accounting?

A) You dont think that you are spending more, but trouble in saving or investing.

B) You have savings in your account, but uses credit card for purchase and end in paying hefty interest and penalty.

C) Even though having cash in bank, your credit card bills not paid or you still have outstanding loans.

D) You spend without any plan on your unexpected money.

To simplify this theory I will use few examples which makes you clear.

1) Suppose you decided to go to movie and bought the ticket too by paying Rs.500 and when you are about to enter the movie hall, you lost the ticket. Will you still purchase one more ticket and watch the movie?
In the another scenario, you stand in line to purchase the movie ticket. But before you purchase ticket you found that you lost Rs.500 cash somewhere in middle before purchasing ticket. Will you cancel to watch the movie as you lost Rs.500 which is equivalent to movie ticket?

As per study, in first scenario most people decide not to buy one more ticket. But in second scenario they will purchase the ticket and watch!!! Interesting right? Reason is, in first case they thought that instead of Rs.500 you are spending Rs.1,000 to watch one movie. But in second case, you separate the lost money with movie expenses. Hence you decide to go for movie.

2) You are about to purchase LED TV which may cost you around Rs.1,00,000. But when you enter show room, salesperson tells you that the price of the TV you selected raised and it is now costing you Rs.1,02,000. Will you purchase still? Study shows people compare Rs.1,00,000 with Rs.2,000 which is negligible and they go with purchase. But they not think that Rs.2,000 may be worth of buying 50% of your monthly grocery.

3) You saw one add in newspaper where Shopping Mall declared 60% off on purchase of items worth of Rs.10,000. People rush to encash that offer. End up with purchasing few items which you neither thought to purchase nor it may be useful item for you. The prices listed on store shelves are thus constantly compared against our expectations and biases. Therefore, when an item is spotted at a price substantially lower than we are used to seeing, we can be tempted to buy it for that reason alone, whether or not we had any desire to buy that item beforehand. Malls and Shops uses this tendency of mental accounting to increase their sales.

4) It is always human tendency to spend recklessly when they receive money unexpectedly by the ways of Bonus, lottery winning or cash gifts. But they never think that with the money they received, if used properly can be of huge financial leverage in future or atleast can solve their bad debts. Best example to give is, they shy away from purchasing Term Insurance for their life risk which may cost them around Rs.500 monthly. But they never think twice to spend Rs.500 on bad movie or some health hazard related habits.

5) You want to purchase one single bed sheet which is worth of Rs.150. But you saw discount offer in one shop where they are selling double bed sheet to Rs.200.  Will you buy single bed sheet or double bed sheet? Mental Accounting force you to buy double bed sheet as it is cheaper than the actual price. You end up with purchasing double bed sheet by paying Rs.50. But you purchased the unwanted thing and ended in loosing Rs.50 too.

Hope above few examples made you clear about Mental Accounting. Now few tips to fix this problem.

1) Behave with the money as your earned money in whatever form it reaches you.

2) When you are spending with unexpected cash, think twice whether you spend like same way with your earned money?

3) Money is money. Hence either you save Rs.500 or Rs.2,000 in whatever way, do the mental accounting to your advantage.

4) Act yourself consciously with every purchase is it worth and compare with every other purchase you made.

4) Record keeping of each expenses- It makes you to stick to your basics related to your expenses.

Hope above lines made you to come out of Mental Accounting and will focus on your true requirement and spending. Happy Saving !!!

Interest free Loan or Concessional Loan from Employer-Is it worth to take?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

It is always believe to be a good option to take Interest free loan or concessional loan from employer. But before going for this facility check the taxability aspect  too. Interest part of that loan is chargeable to tax as Perquisite. It is taxable on the following basis.

Step 1. Find out the “maximum outstanding monthly balance” (i.e., the aggregate outstanding balance for each loan as on the last day of the each month).

Step 2. Find out rate of interest charged by the State Bank of India (SBI) as on the first day of the relevant previous year in respect of loan for the same purpose advanced ( Housing Loan, Car Loan, Two Wheeler Loan, Educational Loan or Personal Loan) by it.

Step 3. Calculate interest for each month of the previous year on the outstanding amount mentioned in Step 1. at the rate of interest given in Step 2.

Step 4. From the total interest calculated for the entire previous year under step 3, deduct interest actually recovered, if any, from the employee during previous year.

Step 5. The balancing amount (i.e. Step 3 minus Step 4) is taxable value of the perquisite.

Will show you with one example which will make you clear on above steps. Suppose Mr.X took loan of Rs.8,00,000 from his employer  in the beginning of the year and the rate of interest chargeable for the same loan from SBI is 8%. But Mr.X is going to pay 7% as interest to his employer. What will be his taxable perquisite? Below table will clarify the method.

Interest will be calculated according to the method given above. No other method is allowed.

But below are the two exceptions for not consider this facility as taxable, which are as below.

1) If a loan is made available for medical treatment in respect of diseases specified in rule 3A (the exemption is, however, not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme).

2) Where the amount of original loan (or loans) does not exceed in the aggregate Rs.20,000.

Hope above few lines made you clear about the taxation part of Interest free loan or Concessional Loan from employer. Now think and decide is it worth??

Swing STP (Systematic Transfer Plan)-New Facility by Mutual Funds

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Today I will make you familiar with the new option launched by one of leading fund house of India called “Swing STP”. It is actually a way of investing in Mutual Funds by following the concept called “Value Cost Averaging”.

In normal SIPs which is also called “Rupee Cost Averaging” you invest fixed amount each month without bothering about the market condition just targeting the concept of “Rupee Cost Averaging” but in case of “Value Cost Averaging” you will invest more when the market is low and less when market is up to achieve your target amount.

In “Swing STP”  you need to invest lumpsum in Debt Funds and the minimum amount is Rs.12,000.  Each month money  will get transferred from this Debt fund to Equity Fund (only Growth option). But amount is not fixed. It is depend on market condition. Will see with one example.

Suppose Mr.X invested Rs.12,000 in Debt fund and opted one more fund for investment using Swing STP facility then in the first month Rs.1,000 will get transferred from his Debt Fund to Equity Fund. Next month suppose the market grown and his first month value grown to Rs.1,200 then only Rs.800 is transferred  to Equity fund making target amount for second month as Rs.2,000.

Now if the market grown high in the third month and your money grown to Rs.3,500 then excessive amount of Rs.500 of third month targeted amount is get transferred to your Debt Fund, making Rs.3,000 as your third month target. Instead if  in third month your money grown just Rs.1,800 then Rs.1,200 is get transferred  from your Debt Fund. So money transfer from Debt Fund to Equity Fund is not fix. It depends on market.

Now in case the amount to be transferred is not available in Debt Fund then the residual amount is transferred back to Debt Fund and Swing STP is closed. Existing exit loads will be applicable for each swtich out. This facility will make sense when the market is bullish.

Retirement Planning-Read fully before neglecting

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Today I want to discuss with you one of the must have plan of your life and most neglected goal of all. To our younger generations who are around the age of 25-35 yrs of age, when someone speaks about Retirement Planning, their first reaction is “ha ha….retirement planning at this age? who knows how many years I survive? My Grandparents lived upto 80-90 yrs of age, my parents around 65-75 yrs of age then what is the need to think about me? May be I may survive till the age of 55-60. Then is it necessary to plan for that????…”

But think twice before neglecting this goal of your life. Indian and World’s Population data showing alarming signs of life expectancy ratio. You may notice that in below chart clearly.                                                                              

It shows that Life Expectancy of Indian population is growing rapidly. Hence before neglecting and thinking that you may live upto to the age 55-60 yrs, think twice!! Today it is at 68, what will be the situation when actually you reach the age of around 55?

Reasons for this upward trend also shocking!! Death Rate of India is decreasing in the same manner. Which you can notice in below chart.


Hence what you can notice is, Life Expectancy growing and Death rate is decreasing. Reasons are more like health facilities, food and caring for your health etc. Now think and decide, is it still worth to neglect your Retirement Planning?

In my future post I will discuss about the best way to prepare and build your retirement corpus. Hope you understood the importance of Retirement Planning. Happy Saving!!

(Graphs Source:Index Mundi)

Mutual Fund-How to select it?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

When you thought to invest in mutual funds and try to search for fund then you may end up into 1000 of  funds. Which makes you into dwindle position in choosing funds.

So, I thought to help you in this regard and try to make you familiar with few new terminologies too. When you decided about the tenure of your investment and type of fund like Equity, Debt or Liquid funds then the last thing you need to do is to compare which one is best fund to invest for. For example when your tenure is for long term and want to invest in Equity-Large Cap oriented funds then you may end up with so many choices of funds. But how to judge the fund performance? Below are the few basic things you must know.

1) Each fund have it’s own logic of investment and targeted customers. Hence first check whether it’s investment style matches with your goal or not.

2) I will not say “Never invest in NFOs (New Fund Offer-means new funds entering into market)”. But try to avoid utmost as you may not have any historical  data to judge it’s performance. Also when so many choices are available to choose from existing and old funds then why need to take risk in investing NFOs.

3) Fund must be oldest with consistent well performer. Hence better to choose the Fund House which is oldest one instead of new entrants. Few funds may perform well for shorter tenure. Hence dont judge by the short term well performance of the fund. Instead choose the fund which has given good returns since long.

4) Check for it’s AUM (Asset Under Management), because fund expenses are inversely related with expenses.   Hence larger AUM means lesser expenses.

5) After those few points, you need to search for few technical performance of the fund which I will discuss below.

A) R-Squared-It is a statistical measure which indicates how much is the movement of fund in line with the Index. High R-Squared means it is highly matching with the Index performance which it is following.

B) Beta- It indicates the volatility of fund with respect to market movement. Suppose beta of fund 1 means it is exactly following market. Less than 1 means less volatility than the market. Hence more than 1 beta means high volatility which may give more return but with higher risk too.

C) Alpha- In simple terms to explain it is “A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under performance of 1%.”

D) Standard Deviation-It is again the measurement of volatility of fund. Suppose high standard deviation means high volatility where as less means less volatility .

E) Sharpe ratio- This is very important thing to judge whether the fund returns are due to smart investment decisions or due to excessive risk of fund manager. The greater a fund’s Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the fund being analyzed.

The above mentioned few points are basic things you need to look for before choosing the funds. I hope these points will help you in choosing a better fund for your investment. Happy Saving!!!

Bank FDs-Is your Bank have Deposit Insurance and Credit Guarantee(DICGC)?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

In India each person have at least few thousand rupees as investment in Bank FDs. Because this is treated as safe heaven of investment since history. But have you ever thought what will happen if your Bank become bankrupt? Who will pay you back and how much you get?

To protect depositor, RBI came up with insurance and credit guarantee facility. Which is called as DICGC-Deposit Insurance and Credit Guarantee Corporation. It protects the depositors in case when banks bankrupt. So, we will look into the features of this investor friendly facility.

1) Banks covered under this facility-Commercial Banks: All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC.

Cooperative Banks: All State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories which have amended the local Cooperative Societies Act empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank are covered under the Deposit Insurance System. At present all co-operative banks other than those from the States of Meghalaya, and the Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli are covered under the deposit insurance system of DICGC.

Primary cooperative societies are not insured by the DICGC

2) What does DICGC covers?

In the event of a bank failure, DICGC protects bank deposits that are payable in India.
The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits.
(i)  Deposits of foreign Governments;
(ii) Deposits of Central/State Governments;
(iii)Inter-bank deposits;
(iv) Deposits of the State Land Development Banks with the State co-operative bank;
(v) Any amount due on account of any deposit received outside India
(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.

3) Maximum amount Insured-Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

4) How to know whether my bank is insured by the DICGC or not?

The DICGC while registering the banks as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks. In case of doubt, depositor should make specific enquiry from the branch official in this regard.

5) Who will pay the cost for this insurance?

Banks will pay this cost. Hence investors are no need to worry.

Now we will look how we can get maximum benefit of this facility.

1) Dont put all your money in same Bank. As the maximum cover is Rs.1,00,000 including the money you kept in the branches of same bank. Hence it is better to diversify it.

2) Maximum Insurance cover includes both Principal and Interest. Hence it is better to check out how much is your balance in each Bank.

3) Suppose your deposit crosses the maximum insurance cover then instead of holding it on single make it joint holding. Example-If you want to park Rs.2,00,000 in a single bank then better hold Rs.1,00,000 in your name and remaining Rs.1,00,000 in a joint account mode either with your wife or parents.

Single holding (As per RBI)-If an inpidual opens more than one deposit account in one or more branches of a bank, e.g. Shri S. K. Pandit opens one or more savings/current account and one or more fixed/recurring deposit accounts etc., all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and maximum insurance cover is available upto rupees one lakh.

Separate holding (As per RBI)-If more than one deposit accounts (Savings, Current, Recurring or Fixed deposit) are jointly held by inpiduals in one or more branches of a Bank say three inpiduals A, B & C hold more than one joint deposit accounts in which their names appear in the same order then all these accounts are considered as held in the same capacity and in the same right. Accordingly, balances held in all these accounts will be aggregated for the purpose of determining the insured amount within the limit of Rs.1 lakh.

However, if inpiduals open more than one joint accounts in which their names are not in the same order for example, A, B and C; C, B and A; C, A and B; A, C and B; or group of persons are different say A, B and C and A, B and D etc. then, the deposits held in this joint accounts are considered as held in the different capacity and different right. Accordingly, insurance cover will be available separately upto rupees one lakh to every such joint account where the names appear in different order or names are different.

So by knowing about the features of this facility you can have sigh of relief about your deposits or money you have in your Bank accounts. Happy Saving!!

LIC’s Jeevan Anand-My favorite plan

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Today we will look into the features of LIC’s Jeevan Anand Plan. I will let you know why it is one of my favourite plan from existing LIC’s Plans. Before proceeding further we will first look into the features of it.

Suppose Mr.X whose current age is 30 Yrs, he want to invest in Jeevan Anand policy for the tenure of 20 yrs and the Sum Assured he chosen is Rs.10,00,000. Then his annual premium will be Rs.54,274. Now from the beginning of the policy till it matures (20 Yrs) yearly he has to pay the premium and his life risk will be Rs.10,00,000. Suppose within that 20 Yrs period, if any untoward incident happens with his life then his nominee will get full sum assured+accrued Bonus immediately and policy closes their itself.

But if he alive till the maturity period of 20 yrs then he will get total SA+Bonus. After that Jeevan Anand’s features start. Means he still have life risk of Rs.10,00,000 till his last breath or Rs.20,00,000 life risk in case accidental death within his age of 70Yrs. So, without paying a penny he is getting his life risk after the maturity of the policy!!! One more best feature with this policy is, he can surrender the death claim amount which he is getting after his death in advance. Now I think you got a fair idea about the features of policy.

Now, we will look into the returns on investing in this policy and is it worth to invest for. Just dont go blindly on the brand name LIC have and it’s publicity. So, look into it as any other product like how much you are investing and in return how much you are getting as benefits.

Suppose Mr.X survives till the policy period of 20 years then he will get around Rs.18,60,000 (Rs.10,00,000 SA+Rs.8,60,000 Bonus at current rate of Rs.43 Per Rs.1000 SA per year)+if any final additional bonus at the time of maturity. Hence Mr.X invested in the whole tenure of policy is Rs.10,85,480 and he got Rs.18,60,000 as return. Hence return on your investment will be around 5.5%. So, you may say is it worth when today Bank FDs are offering around 9% interest rate?

Yes, still it is worth for Mr.X. I will show you how it is. As I told above, he will get around Rs.18,60,000 after the maturity of 20 yrs. But Jeevan Anand provided one more option to surrender the life risk he will get after the maturity period till his last breath into cash. Suppose he waited for five more years and surrendered his life risk he may get around 60% to 70% of SA i,e around Rs.6,00,000 to Rs.7,00,000. (Exact figure of this surrender value not known. Even I tried to get the information from LIC, but invain). So return after using this option is around 7.5%.

Now with the kind of return 7.5% and life risk of around Rs.10,00,000 till his 50 yrs of age is good or not? Yes it is good but as the rule, he can divert his debt portfolio of investment into this policy instead of investing in Debt Funds or in any non risky product. Hence, I will recommend you this plan to the tune of your investment amount of Debt. Not more than that.

Hope you understood what I am pointing. But as a thumb rule, dont invest all your savings in such low yielding products. But need to divert some portion in such plans as the benefit of Life Risk with Returns.

PE Ratio-Useful tool to follow your equity investments

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Today I am going to share with you, how PE ratio is related to sensex movement. Also how we can interpretate the relation between the two. Before proceeding further want to make you comfortable with PE ratio.

PE ratio is nothing but Price to Earning ratio of stock or Index. Hence formula to calculate it is, Price of Stock/EPS (Earning Per Share). Earning Per Share can be calculated usually on quarterly base as companies declare their Earnings on Quarterly base. EPS can be calculated as Net Profit of the Company/No. of outstanding shares. In the same way Sensex, NSE or any Index have their own PE ratio which shows values of underlying stocks.

PE ratio usually indicates how much it is overvalued or undervalued. Suppose PE of Stock X is 20 means, investors are ready to pay Rs.20 for each rupee earning of Stock X. Hence low PE usually considered as best undervalued stock. Now I think you are familiar with PE ratio.

We will now look into the relation between PE ratio and Sensex movement of last 21 yrs.

Sensex movement from 1991 to 2012

PE Ratio of Sensex from 1991 to 2012

By comparing the above two charts you can just see how PE is actually followed Sensex and indicated whether Sensex is over valued or undervalued. Usually Sensex is considered overvalued whenever PE is above 25. Middle path is from 25 to 15 and undervalued when it is below 15.

Now to give you clear idea how PE showed sensex valuation is  in below table.

It may not be the only indicator to judge market, but definitely history shows that PE has given us opportunity to invest in Equity market when it is low.

Hope you got the point what I am stressing at this juncture of market. Happy Saving!!!

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