26 Feb 2021
Money, Money, Money! - What wrong products to avoid?

Chapter: 12 | Money, Money, Money! – What wrong products to avoid?

“What a great shot, AK. You seem to be fully energised today morning. Are you on the way to a bloody Eagle!!” Gp Capt Pranav Gupta (“Pranav”) applauded his long-time friend Col AK Singh’s (“AK”) flawless drive on this Par-5 hole.

“Pranav, you know me well. Chip and Putt have now become my nemesis while my drives soar me high,” lamented AK.

“No issues AK. It is the same as in investing also. Some of our investments do well while others negatively compensate for it! You remember yesterday, I was so near to the hole in my very first shot and still ended up being 2-over par in that Par-3 hole! Life’s like that,” Cmde Rajesh Lal (“Rajesh”) chirped in.

Later, while having their morning breakfast at the café, Pranav again brought up this subject.

“When we are investing, it is not only important to invest in the right things, it is equally important to avoid the wrong ones. In fact, the latter could be more important at times,” Pranav said.

“Fully agreed Pranav,” added Rajesh, “Like we were discussing about property. At this age, when we are retiring and have our own comfortable houses to stay, if I go ahead and invest even a portion of my retirement corpus in some house, land, shop or office, I’m only inviting trouble for myself. What I now need is a good and happy lifestyle and meeting my obligations towards my children’s education and marriage. Locking it in a property and taking on the headaches of getting a paltry rent, tenant and property maintenance hassles, and absolute illiquidity of my money when I need ready money for a good lifestyle, is the very last thing I should do.”

“I now agree with you Rajesh. You know what a die-hard real-estate guy I have been all my life. But after our long discussions on the subject, I realise that, not only should I not have any more of it, I should actually sell off all the ones that are surplus to my personal requirements. You know, currently my property holdings indicate where all MS Branch has posted me during my career!” said AK, as if he’s become very light after saying it.

“You know, actually there’s no right or wrong investment avenue as such,” Pranav continued, “It is just whether it is right for you or not at the time you are investing and what road you wish to travel in the future. We talked about Gold. To buy Gold for personal wear or for ceremonies or even gifting, it gels with what we want to do. But buying a lot of Gold and hoping that it will be the star performer of the portfolio, could result in a shock later. It may not even preserve the purchasing power of our money and while we hold it, it may fluctuate so much that it may be bad for our heart!”

“Pranav, even though you are the Money-Guru here, I will still differ with you on one aspect now, when you say there is no right or wrong investment. The huge army of insurance agents who are all the time selling these investment products, masquerading as life insurance policies, will always be a wrong investment for everybody. I have seen them being sold to 80-year-olds, for newly born babies and to people on solid emotional pitches like for retirement, children’s marriages, building a house, and even for taking a loan in future!” Rajesh commented with a lot of emotions.

“I agree with you Rajesh. Such policies neither provide any worth-while insurance cover nor provide even inflation-beating returns. Ultimately, they end up giving the worst of both, insurance and investment, to the people. They only enrich the agents and the insurance companies. And people still don’t understand this simple logic,” lamented Pranav.

“Few days back, a MNC bank guy came to my office and tried to persuade me to buy such a complicated product that it took me about 45 minutes to understand it. I was thoroughly convinced with his arguments because of the colourful graphs and so-called back-testing data put forth by him. Fortunately, I did not say ‘Yes’ at that time only because I remembered Pranav’s advice not to buy anything which is too complicated to understand. Later a more-financially-savvy colleague told me the flaws in the product. He had also taken a similar product from the same bank years back – they extended its maturity period because it was in deep-red even years later, and finally matured it recently almost at the purchase price only because of the recent stock market run up!” AK added.

“We’ve also talked about Portfolio Management Schemes (PMS) and cryptocurrencies like Bitcoin few days back. PMS might be a good way to diversify for somebody who has already catered for his future requirements, is ready to take the large risks that PMS managers take by taking concentrated bets in small stocks, comfortable with the high fees charged and has the minimum Rs 50 Lakhs required. How may faujis fit in this criterion, especially when retiring or retired, I do not know?” Pranav replied and continued, “Same is the case with Bitcoins. Very volatile and highly risky even to the risk of losing a large amount of your capital, but potential for great returns also. On the risk scale, the Person-to-Person (P2P) lending platforms also can be talked about here, though much lower down on risk scale than cryptos. P2P will always have some defaults due to the way they operate but a good platform will structure it correctly so that the defaults are minimised and kept tiny – are you Ok with such an investment? Simply everyone’s personal call.”

Rajesh said, “Pranav, I think it is largely the safe products like Senior Citizens Savings Scheme (SCSS), good debt mutual funds, Govt bonds, good corporate FDs and some perpetual bonds of good banks that I should take with my retirement corpus. Of course, some stock market exposure is compulsory to preserve the buying power of my money but getting into direct stocks and shares should be a No-No. I should take equity mutual funds with good fund managers and established past track record.”

“You’ve summarised it so well Rajesh. Now I also agree with it,” AK said, putting his stamp of approval on it.

“But friends, the devil is always in details. How much of what, is the real question? That is where two very important things come in – your future requirements and liabilities which is called the ‘financial goals’, and of course, your risk-taking attitude and aptitude. If you do not factor these in, you are likely to go very very wrong. In fact, good financial advisors will always start with these two aspects before investment products are even looked at. And do not at all forget about the Emergency fund of about Rs 5 Lakhs that you are to keep in small bank FDs or liquid mutual funds,” Pranav emphatically stated.

“Great Pranav. I feel so very empowered now to take the right decision with my life-time earnings that I will get shortly. And I also know what to do with my property dotted across the country now!” AK said gratefully.

“This is not the end-all-and-be-all, AK. There are a few more things we should discuss which will truly wrap up the fabulous discussions we’ve had so far. So, more good golfing and some more retirement financial planning to come folks!” said Pranav cheerfully, gulping down the fresh orange juice which had replaced the coffee in their breakfast today.

Gyan Collected

  • When we invest, it is important to invest in the right things, but it is also equally important to avoid the wrong ones.\
  • Very few things like ‘combining Insurance with Investment’ are wrong for everybody. But most others depend on the context in which investment is being done. Something ideal for somebody may be absolutely unsuitable for somebody else.
  • High risk products merely give you a higher probability of getting high returns. High risk does not translate automatically to high returns– if it were so, they would not be called high risk products then!
  • Own risk profile and future financial goals should be the main criteria for deciding the kind of products you should go in for.
22 Feb 2021
I want to Break Free - Off-beat financial products in the market

Chapter: 11 | I want to Break Free – Off-beat financial products in the market

The series of discussions over the past few weeks had made AK and Rajesh totally load up on money and investment knowledge. And since it proceeded so gradually, they themselves did not realise that both of them were now discussing it with others and preaching to their own families on this subject that once seemed completely alien to them and a personal taboo!

These discussions also had an unexpected impact. AK and Rajesh’s grown-up children also got involved in such discussions in the house. This resulted in money ideas being discussed among the young and some of it reached their parents too. One of them was asked about Peer-to-Peer Lending (P2P Lending) while the other was asked for his views on the new rage of Bitcoin and cryptocurrency investments.

Naturally, these topics showed up on the WhatsApp group between the trio. Pranav simply said that it would be better to discuss these subjects in person, and not just on chat, since there were many issues involved, other than mere high returns.

As expected, the youngsters were armed with arguments and their fathers carried the same arguments forward to the Golf course coffee discussions.

“I am surprised you did not discuss cryptocurrency and Bitcoin in our previous discussions,” AK began, adding that even the Supreme Court has vacated the ban imposed by Reserve Bank of India on trading of cryptocurrency and its facilitation in India. He went on to sing praises of Bitcoin as it had recently witnessed a massive rally in prices, where the early investors’ investment has already multiplied several times in a matter of months, and more seems to be on the way.

Rajesh, on the other hand, seemed to be more curious about Peer-to-Peer lending as it gives returns upwards of 10% comfortably while their new-age fintech platforms also provide you with analysis to decide on who you should or should not lend based on their AI (artificial intelligence) logarithms.

Pranav listened to all of it and started his comments by reminding AK and Rajesh that no investment is free from risks. In some investments, the risk can be seen upfront while in others, it could manifest itself much later. “Did you know that the same Bitcoin, had crashed by 80% from $17,500+ to less than $3500 in a matter of one year from Dec 2017 to Dec 2018?,” he said, looking at AK.

The problem with such instruments or investments is the unpredictability and unreliability, he said. “Bitcoin is not the only cryptocurrency out there now. There are thousands of them and each one has its own set of complicated rules and calculations. While it sounds fancy from the side-lines, actually dabbling in those waters can be quite risky. I understand that stories of money getting multiplied several times in a few months sounds very enticing, but unfortunately, you have not yet heard the reverse stories, that are equally true,” he said.

Similarly, on Peer-to-peer (P2P) lending, he said, “It is quite likely that the banks do not want to lend money to those people due to their creditworthiness not being up to the mark. Why else would they borrow money from you at an interest rate of 15-21%, when a personal loan from a bank only costs 12-14%? While there could be genuine cases of people borrowing from such platforms for different reasons, including the long time that banks take to disburse loans or somebody not wanting to go through the long process for borrowing a small sum, but in general the principle remains that high reward comes only with high risks.”

“I know these options sound exciting. But in my honest opinion, we are not at a stage to expose ourselves to these options extensively when we are retiring now and really don’t know much about them. At best, a small amount of investment, say, not exceeding 10% of your total investments, can go into these alternate investment options. If you gain, that would be great. If you lose, at least you won’t lose your sleep along with it,” Pranav said.

While AK and Rajesh only raised the two options, Pranav went on to extend the explanation to other options too which are not mainstream. “You might also come across offers to invest in start-ups with promises of massive returns when the start-up becomes successful. Then there are also officially recognised services called Portfolio Management Services (PMS), wherein a fund manager manages your investments by investing in different avenues. None of these bring to the table the safety that we need with our money, especially when it is our lifelong savings.”

Some of these options come with an entry barrier of either high investment amount right at the beginning, or a high fee. “The start-ups and PMS fall in one of these categories. Some people, knowing that you have a large amount of money which you do not know how to invest, may lure you for funding a start-up which may not have much to show on ground. Please do not become their ATM. Similarly, PMS buy high risk stocks to get higher returns due to intense competition in the crowded PMS space and the minimum investment there is Rs 50 Lakhs – do your own due diligence, and an intense one at that. So, you may either gain a lot, or put a mighty lot at stake,” he said.

Rajesh now butted in more confidently in the discussion, “As an investor, it is important that the investment fulfils a few basic conditions. I should be able to understand how a particular thing works. If it is too complicated, it is a potential red flag. Bitcoin and cryptocurrency fall in this category. The second test is if something is too good to be true, it probably isn’t true. Start-ups, PMS etc fall in that category. There would be some caveat somewhere which you should know before going ahead.”

“Moreover, you must also be completely aware about the very high fee you would pay to the PMS service provider. In case of start-ups, it is very likely that you will be a passive partner with no say in the business at all. It is suitable for High-Net-Worth individuals because they adequately diversify to cover the risks arising out of such options,” Pranav explained.

“Yes, now I also understand,” AK said, “Time and again, one or the other such products keeps coming up in the discussions, especially among the young. The core difference to understand is that, at their age, they have a much higher risk-taking ability. Many times, the products and services being discussed haven’t evolved or haven’t gotten refined to be used by an everyday regular retail consumer. Like the other day, a foreign bank person approached me with something called a Structured Product which sounded too good to be true, seemingly with no downside at all. A neighbour in my native place keeps asking me to start participating in his chit fund, which I do not know anything about.”

“While ignoring all such products without even finding out anything maybe an extreme step, it is better to keep gaining knowledge and become aware. If you understand the nuances involved and are comfortable with it, then taking a small exposure would be fine. However, we should always remember the guiding principles. The higher the reward, the higher is the risk. If you remember this, half our problems will be over,” concluded Pranav finishing off the last pakora and the sumptuous coffee to move over to the car park.

Gyan Collected

  • The financial markets have a plethora of financial products – some easy to understand, others not. It is incumbent upon us to understand each and everything that we wish to invest our hard-earned money into.
  • We often hear of only the positive stories of risky investments while the much-bigger negative stories never get circulated.
  • If something is too good to be true, it probably is not true. Don’t fall for stories or manipulated ‘back-tested’ results. Never invest without completely understanding any product.
  • Higher the risk, higher the probability of reward. Conversely, higher the promised reward, higher is the risk to your capital.
  • There is nothing wrong with going in for new-age products like crypto currencies, PMS, P2P lending platforms or even putting in money into somebody’s start-up. But make sure you fully understand what you’re getting into. Never put more than 10% of your investible corpus into such ‘alternate’ avenues.
19 Feb 2021
Hotel California - Real estate to avoid

Chapter: 10 | Hotel California – Real estate to avoid

By now, the safety of investments and its importance was pretty much ingrained in the thought process of AK and Rajesh. The previous discussions on investments, particularly the ones on safe investments and gold had an eye-opening impact on them. However, as Pranav had been observing, AK was struggling with his own dilemmas due to convictions built up over time, right or wrong.

The slew of real estate investments by AK over the years had made him very biased towards this asset class. Moreover, his personal historic experience, even though dated and largely perceptional, made him question Pranav’s wisdom on real estate investments time and again. He discussed it repeatedly within his family, but the social echo-chamber of family members and others biased in favour of real estate kept him hooked on this avenue as an investment.

Still, surrendering to the displayed financial wisdom of Pranav, for once, he decided to have a heart-to-heart discussion on it in the morning coffee session after the round of Golf. After all, real estate had only been discussed in passing till now in recent discussions.

When he brought it up the next morning, Rajesh was quick to respond. “You are still stuck on that? Hey, C’mon AK!”

Pranav was less surprised. Every time he had mentioned real estate in the past, even if just as a passing reference, he had observed a spark in AK’s eyes. The questioning gaze was evident, as AK had put almost all of his life’s savings in real estate.

Pranav calmly agreed, “I will be happy to discuss all things threadbare. But you will have to promise to me that you will listen to it with an open mind even if you do not agree with it,” he told AK.

AK was already determined to face his personal demons on the subject of personal finance, and hence, readily agreed to this. “Let us start with your basic premise about low returns that you spoke about the other day,” he said.

“No. We will first start with what kind of life do you expect to lead when you are fully retired. I would say that it should be a financially comfortable life where you can go and visit places with your family and friends, attend course mates’ bash-ups, play Golf to your heart’s content, dine in good places etc. For all this, you need ready money availability. If you have money locked in long term assets, you are violating this basic definition of a Golden Retirement”, Pranav said with clarity.

“Yes, no doubts about this. I want to have a good life after retirement. What use is money lying locked up somewhere in real estate if it is going to appreciate many years later? I take my life time to be, say, 85 years. Taking out last 10 years of that as inactive years of life with very less requirements, I want to kick up life in the retired years till about 75 years of age. I don’t want any real estate to block my dreams,” replied Rajesh very conclusively.

AK opined, “But Rajesh, I have got very good returns from my real estate investments and I can sell them whenever I want. In fact, real estate prices rising more and more will only make me richer and richer and help me live life like a king.”

Sensing AK’s discomfort, Pranav came in, “I know what you are thinking, AK. There certainly could be exceptions. The best way to determine the true value of your real estate is by listing your property for sale, and observing the offers that you receive. In my experience based on similar discussions with others, this, unfortunately, results in bursting the mental-bubble for many real-estate owners,” he said.

Pranav continued, “There are basically three myths associated with real estate.

Firstly, that it will always increase in value. While that was true for quite some time in the past, the bubble burst around 2013. There is such a huge over-supply of constructed and under-construction residential, commercial and office space all over the country now, that it will take a long time before the current meagre demand can absorb it.

Secondly, that rentals are a good way to earn income. Residential rentals give 1.5-2.5% returns on the current capital value while commercial may, at best, go up to about 6% taxable. The large capital employed to get a property and their illiquidity does not justify such small returns, which even a safe bank FD with instant liquidity can also match.

Lastly, that the tax saving on home loans means one should buy a house to save tax. Even if you are in the highest tax bracket, you save, at the most, 30% of the interest as tax saving. Rest 70% interest has to be paid for. Hence, one is paying an interest of additional 70% to save 30%!”

AK was surprised with this revelation by Pranav. “Do you mean to save that I should just have one house to stay and nothing else?”, He was incredulous.

“Why do you need more than one house at this stage when you are retiring, have almost fulfilled all your responsibilities and just want to lead a great life. If you need money for any situation, where will you keep running to sell your properties? If you have the same money in liquid assets like bank FDs, mutual funds, or even gold for that matter, at least it can be sold quickly, that too at transparently known market rates,” This time it was Rajesh who butted in.

AK seemed to be in deep thought. “This has been very helpful, Pranav, especially the fact about tax saved being far less than net interest outgo. Never thought about it like that. I will certainly try the experiment of listing some of my properties for sale to get a clearer picture,” he positively said, thanking Pranav with a smile.

Gyan Collected:

  • We only need one house to stay in our retired years. The hassles associated with managing more properties coupled with their low returns makes them a poor investment choice in retired years.
  • Returns from real estate are quite poor compared to other safer options.
  • The tax saved through home loan is always much lower than the net interest outgo. If it is not your first house, this might not be a wise choice to save taxes.
  • Liquidity is all that matters after retirement and determines what kind of a lifestyle will you have in your retired years. Do not let real estate block your dreams