A Cheatsheet for Automatically accumulating Funds for Future Repeat Purchases

Note – This is a guest post by Ajay. He has already written quite a few thought-provoking articles like wealth accumulation through SIP, lumpsum investing in mutual funds. Sometime back, I collaborated with Ajay for doing a detailed comparative analysis about investing in Real Estate Vs. Mutual Funds. The post was well received and became widely shared over the social media.

So over to Ajay for another interesting analysis…

In last 15 – 20 years, our lifestyles have changed dramatically. I am sure that even 10 years back, no one would have imagined that our lives would become slaves to gadgets like mobiles phones, iPads, etc.

Whether this lifestyle is correct or not is a question best left for another day.

For a person who belongs to the previous generation and typical middle class family, important life goals were pretty well known:

  • Complete your education
  • Get a decent job (preferably government job)
  • Have a regular monthly salary
  • Live a contented life within the limited salary
  • Bring up your kids nicely
  • Before retirement, get yourself a house
  • And live a retired life dependent either on your pension or on your kids

Plain and simple. Any deviation from this, and you could easily be termed as being the odd one out. 🙂

Now during those good old days, the concept of credit cards, EMIs, Zero down-payments was not there at all. And that was because when we compare those times with current one, the desires and requirements of previous generation were very limited.

For a moment, imagine your life without the following:

  • Smart Phones
  • Computers / Laptops
  • Tablets
  • Smart LED TVs
  • Music Systems
  • Air Conditioners
  • Refrigerators
  • Kitchen Equipments
  • Home furnishing
  • Two Wheelers
  • Four Wheelers
  • Multiple Four Wheelers 🙂

I know. Its tough to even think about a life without these. Life would be so difficult. Isn’t it?

Some of the these products have long lives and don’t need to be replaced frequently. But for others, regular replacement is advised (atleast by the manufacturers). For example, you might want to upgrade your smart phone every 3 years. On the other hand your desktop PC might need a replacement after about 7 years. Same for television and refrigerator.

Another reality is that once we get used to the comfort and convenience provided by these gadgets and their subsequent upgrades, it is not easy to simply go for a product that offers reduced comfort or features. And even if you do decide to do it, you might not feel very comfortable about it socially. For example, if you have been an iPhone or iPad user, it is highly unlikely that you will start using a basic smart phone.

Just to deviate a little, this shows the strength of the moat that Apple has been able to create over the years. The high social and emotional cost of switching to competitor products. And this indeed is the real reason that Apple is trading at a Market Cap of more than $700 Billion. You might like reading an article where Dev evaluates the biggest company of India and how small it actually is when compared to Global biggies.

Now here comes the important part.

Money For Future Repeat Purchases

If one observes carefully, it can be deduced that the prices of these products generally reduce over their lifetimes. But due to technological advancements, newly launched products offer additional comforts and features. And therefore, one is keener to buy an upgraded and superior product – which ofcourse comes at a higher price.

Now lets be honest…

We will always buy improved and upgraded products even though it might cost us more. Isn’t it? Under normal circumstances, our aspirations and needs are ever-increasing.

These days, the trend is too simply go and buy whatever you want.

How to pay for it? Use your credit card. Find it tough to pay your credit card bill? No worries. Convert it into EMI.

That’s it. Life is easy.

Credit is easily available for even very small purchases. And what is the justification for these increased credit-funded purchases? One is instantly able enjoy the benefits of product, without waiting for years. It is another matter that significant amounts are paid as interests, processing fees and insurance charges, even before you start using the product. Not to mention the continuous mental pressure of making the payment on time.

But if you are young, then you might not have many responsibilities and buying the product on credit may still not be a very big issue for you.

However when you have to repeat your purchases in future, say after 10-15 years, you would have additional responsibilities like higher family expenses, child education, medical expenses and so on. At that time, you might not be in a position to forego that comfort and may even have to pay much more to buy a superior product.

The question then is that how should one fund these repeated product purchases, without straining the regular cash flows?

I take television as an example for this study. This product is a perfect fit for the category that has undergone numerous technological advances.

So while the price of the old product has come down significantly (and some have become obsolete), there are other superior products available at much higher prices.

Also it is a kind of product you tend to replace after quite a long time, say 10 to 15 years (I used my last CRT TV for 15 years without any trouble before switching to a larger Smart LED TV).

In 1999, the cost of a 21-inch CRT television was approximately Rs 20,000.

In comparison, a full HD Smart 32-inch LED television costs Rs 44,000 today (in 2015).

As for the old tech 21-inch CRT television, it is still available at some places at a price as low as Rs 8500. But I am pretty sure that almost everyone these days will prefer buying a LED or LCD television and not the CRT one.

Now if given a choice, everyone would prefer to live a debt free life. But that is only possible if either you have loads of money; or if you can meticulously plan for most of your purchases in advance.

In my opinion, one should opt for loans and EMI only for buying the first house for self-occupancy – which also provides tax benefits. All other items bought for comfortable living and luxury, should be funded through savings and investments through proper planning.

In this case study of television, I have assume its useful life to be about 15 years. Lets see how we can fund the repeat purchase after 15 years.

Cost of CRT television in 1999 – Rs 20,000

Cost of LED Television in 2015 – Rs 44,000

Now here is the hypothesis. After buying the television in 1999, if a small percentage of the initial purchase value is invested in an investment option, whose ideal maturity period, matches that of the remaining time left for the repeat purchase, then it will automatically fund the future repeat purchase.

Sounds lovely? Automatically funding your repeat purchase? Read on…

Let’s say that 10% of the TV purchase amount (i.e. Rs 2000) was allocated for future repeat purchase. And this was invested in a financial product, which matched the expected duration of the repeat purchase.

In this case, the repeat purchase is expected after 15 years. Let’s see whether the purchase could have been funded automatically by this investment or not?

Since the investment duration is 15 years, the obvious choice of investment option is Equity Mutual Fund.

Let’s analyze by investing 10% amount (Rs.2000) in Franklin Prima Plus Fund on 01-Jan-1998. Rs 2000 Invested on that date, would have grown to Rs. 88,608 and would have easily funded your repeat purchases for not one but two televisions.

Lets pick another fund…

If Rs 2000 had been invested in Reliance Growth Fund, it would have grown to Rs 119,220 –good enough to fund almost 3 such televisions.

But for sake of being unbiased, lets choose another fund. And this time, lets pick up a fund that is not known to be a great one.

Lets take the worst performing fund of last 5 years in its category.

So now if the amount of Rs 2000 been invested in Sundaram Growth Fund, it would have grown to Rs 31,142. Agreed that it would not be good enough to fund a new 32-inch LED Smart TV. But it would still have been sufficient to buy a 32-inch regular LCD TV.

The point that I am trying to make here is that, by investing even a very small % of the actual amount spent on the initial purchase, you can more or less fund the repeat purchase of the item in future. And that too very easily.

For a moment lets assume that you are not able to contribute this 10% (for future repeat purchase fund) at the time of initial purchase.

No problem at all.

Divide the amount (Rs 2000) by 12 (~ Rs 200) and start a SIP for the divided amount for next 12 months.

Contributing Rs 200 monthly would not have been a problem for someone who is spending Rs 22,000 for buying a TV in 1998-99. Even this approach of breaking the amount into a small SIP would have yielded almost the same result.

Lets come back to 2015 now…

Now even today, if you are buying a LED TV for Rs 44,000, then contributing a small amount of Rs 600 per month for next 12 months should not be a very big issue.

But what if you don’t want to wait for 15 years to change your TV?

Suppose you want to change it every 7 to 10 years.

Even then, the suggestion would be to go for equity mutual funds. But since the expected duration is less (i.e. the time remaining in the next repeat purchase), your percentage contribution of the initial purchase value needs to be increased to say 20% to 25% as per the duration.

Lets take another example…

In year 2005, the cost of Honda Activa was Rs 44,000. And in 2015, the cost of same vehicle is Rs 58,000 approximately.

Now if one had invested Rs 16,000/- (in a fund for repeat purchase) in a diversified equity mutual fund in 2005, the money would have sufficiently grown to fully fund your new vehicle in 2015. And just to share some numbers, Rs 16,000 invested in Sundaram Growth Fund in July-2005 is now worth Rs 58,300. The same amount invested in Franklin Prima Plus Fund is now Rs 1,19,539.

Its quite understandable that as when you buy a vehicle for Rs 44,000, it is very quite tough find additional Rs 16,000 for something, which is to be bought 10 years later. But even if you cannot afford a one time investment, you can again divide this amount into small parts and do a SIP of 1 or 2 years.

But it is also possible that you don’t want to wait for 10 years. You want to buy another similar vehicle in 5 to 7 years. If that is the case, then it’s recommended to go for Recurring Deposits.

As a conclusion to this already long post, I would say that in order to maintain or improve one’s life style, one has to make some provisions for future. Proper, sensible planning….combined with investing a portion (10% to 20%) of the initial purchase value, will go a long way in giving you the financial comfort and also help you avoid getting trapped in loan-EMI cycle. In addition, it will not strain your regular cash flows during your middle ages, when there are other expenses that take precedence over these lifestyle related expenses.

Do let us know how you make provisions to fund future repeat purchases of necessary items.


Mailbag: Should I take a Loan to Invest Now? (because Markets are making New Highs everyday)

This is going to be a short post. It’s more of a warning for those who have questions like one in title of this post….in their mind.

Yesterday, I received a mail from a reader asking me the following question:

My portfolio has moved up almost 50% in last 3 months. Some shares of small companies are up more than 100%. Do you think it is a good time to invest more? I don’t have lots of spare cash to put in markets but I am thinking of taking a personal loan to invest. A loan would cost me around 15% and that is much less than what can be easily made in these rising markets.

I replied to this reader’s mail instantly and without any hesitation.

But I felt that right now, there would many people thinking on similar lines. And that is because in recent times, markets have been moving in just one direction. And that is upwards. And this gives a perception that it is very easy to make money in stock markets.

My personal interaction with people tells that they have now started feeling that Fixed & Recurring Deposits offer just 8% in one year….whereas some stocks can give that kind of return in a day. True. It is possible. But can we be 100% sure about this? Can we be 100% sure that we will be making 5% to 8% every day kind-of-a-return on regular basis in stock markets?

The answer is no. I can’t do it. I am pretty sure nobody I know has done it. And neither have people like Warren Buffett done it. And since we are not sure about the returns, it would be a big mistake to borrow money for investing. 

It’s possible that when you take a loan and put that money in markets, your expectation is that markets will move up, like they have been doing for a while now. And probably in a year’s time, you will make much more from your investments than 15% interest that you need to pay on your personal loan.

But what if markets do not rise as expected?

What if returns are less than 15% in one year?

What if markets just stay at same levels after one year?

And what if markets fall…say by 15% in one year? What will you do then?

I hope you are getting what I mean here. 

Market returns are unpredictable. You can never be sure of returns or losses which come your way in markets. But if you take a loan, your EMIs would be predictable and fixed. You can be quite sure that you will have to pay around 15% every year for the loan.

I have seen people make this mistake in 2008 during Reliance Power’s IPO. People took loans, liquidated FDs to invest in the hottest IPO of that time. And what happened after that is known to everyone. Everyone lost money. Those who borrowed to invest lost much more than just money. They lost their sleep and faith in markets.

So, please understand that its not wise to borrow and invest in markets.

Even if you are 100% sure that markets will go up, please don’t borrow money to invest. If you do, I think it would be the biggest financial crime you can ever commit.

Note – Some months back, someone asked me just the very opposite question. I have a loan. Should I pay it back before investing? 

Seems like the question of this mailbag post is a side-effect of a bull market 😉


WTF… Wrist Watch On EMI??

Either I am getting old or there is something seriously wrong with the way our generation has decided to manage their finances. Just last night, I was taking a stroll with my wife in South Mumbai when I saw a board outside a shop –

Wrist watches on EMI
A Ticking (Financial) Bomb On Your Wrist

This shop was selling wrist watches of some good medium-to-high-end brands. And it provided the customer an option of purchasing these wrist watches on EMIs!!
Now I am not saying that this is wrong. But seriously, isn’t it simple common sense to use loans to buy assets rather than wrist watches??

I am sorry that this post is short and a little aggressive. But I could not stop myself from sharing my agony at seeing such a financial crime being committed by young people. I don’t say that one should not indulge in buying what one likes. But there are other ways of buying a watch. Instead of taking a loan and paying EMIs, one can delay the purchase a few months and save money in a Recurring Deposit(or even a simple savings account) and then buy the product. Its that simple.

And this wrist watch thing was not just one-off case. My wife told me that now-a-days, even lady’s handbags are available on EMIs!!!!

I have nothing more to say. Period.