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Saving for Short Term Financial Goals

Short term Financial Goal Planning

I keep telling everyone that for long-term goals, it’s best to have an investment plan that has a major equity component. But what about the goals that are not decades away and rather just a few years away?

What are the saving and investment options for such short-term financial goals?

Before we proceed, we need to define what short term is.

What exactly is Short Term?

There is no standard definition. Everyone has their own.

But you can say that financial goals that are less than 5 years away can be considered to be as short-term goals. Many of you may feel that period of 5 years is too long to be categorized into short term. If that’s the case, then maybe you can accept 3 years as a reasonable definition of the short term. Happy? 🙂

Even within this 3-5 year period, not all goals are alike. Some are NEEDS and some are just DESIRES. Some are critical and some are good-to-achieve. (Here is a solid post on finalizing your financial goals and a free excel sheet for financial goal planning.

So the approach to save for different short-term goals may differ (if you are willing to do it diligently). Or else, one can always justify keeping things simple.

But for the sake of bringing more clarity to your short-term goal identification and prioritization, you can map your goals in the below grid:

Short term goal planning

As might be clear from above grid, once you identify and grid your goals as above, you can adopt different investment plans for each if need be.

Now since we are talking about short term investments, you cannot afford to take huge risks by investing all your money in assets like equities, etc.

For critical goals that you can neither delay nor downsize, taking risk can be stupid. For example – the goal of paying for your house downpayment after 1.5 years. But for good-to-achieve goals (like foreign trip after 3 years), you can still take some risk if you feel comfortable with it. But even then, taking too much risk is once again…stupid.

One important thing to understand is that when it’s about short-term goals, it means we are concerned about just a few years. So a small difference in returns (earned by taking higher risks) may not be too beneficial, as the power of compounding doesn’t work much in small periods. So why take too much risk??

The idea mainly is to save and invest in a way that there are little to no fluctuation in returns and absolutely no loss of capital. Any loss of capital that happens (if a risky investment is made) has very less time to recover. This is the reason why equity is not suitable for short term goals.

Saving & Investment option for Short Term Goals

So let’s see what are some of the useful saving (investment) options for short term goals:

Bank Fixed Deposits

This is the obvious choice for most people.

The interest rates are typically 6% to 8% per year. FD rates in India vary from one bank to other, but not by a lot. So do check out which bank is best for fixed deposits. It’s another matter that you don’t want to end up opening relationships with several banks every year in search of best FD interest rates. 🙂

But the interest on FDs is taxable and hence, pre-tax and post-tax returns for fixed deposits are different. Post-tax FD returns will generally not even beat inflation. These are best suited for periods less than 3 years. It’s also good for parking some money as an emergency fund.

Recurring Deposits

RDs are also very popular and do not need any special introduction.

If you are a conservative saver and do not have the lumpsum amount to put aside, RD can come to your rescue. It allows regular periodic savings. But like FDs, the interest on RD is taxable and lowers your post-tax returns. It’s still good for saving up for near-term goals systematically.

Now that was briefly about FDs and RDs.

But what about the alternative to fixed deposits FDs? What are other possible options if you wish to save (or invest) for short term? Are there better investment alternatives than fixed deposits that offer better returns than FD?

Ofcourse there are. But they come with their own set of risks. Let’s see these options.

Debt Funds

Debt funds are slightly riskier than bank deposits but allow you to take a shot at somewhat higher returns. In good years, top debt mutual funds can do quite well.

These debt funds come in various varieties like liquid funds, ultra-short term funds, short-term debt funds, etc. But each one is best suited for a different purpose.

Generally, liquid funds are best suited for parking money for few months. Ultra short term funds are good for upto a year or near abouts. For more than that, short term debt funds are good enough.

Debt funds are fairly safe but some risk is always attached while investing in these type of funds. Do not expect bank FD type zero-volatility here. That is the major difference between debt funds and fixed deposits. Liquid funds are least risky among these. Then come ultra-short term funds and then short-term debt funds.

Debt funds though more tax-efficient than FDs, aren’t tax-free. If redeemed before 3 years, capital gains tax has to be paid. If held for more than 3 years, capital gains tax is applicable but with indexation benefits. And this is where debt funds win over fixed deposits if you check out any FD vs debt fund calculator. But debt funds can be looked at for even less than 3 years. Ofcourse choice and category of debt fund will matter.

I must say here that debt funds are gaining popularity these days. And rightly so. But FDs too are decent enough for periods like less than 3 years (ofcourse you need to consider interest rates). But for many, peace-of-mind is more important than post-tax returns. 🙂 And to be blunt here, most people give unnecessary importance to tax saving where there are other bigger financial decisions to get right.

I suggest that you do not go big bang into using debt funds if you do not have an idea of how volatile they can be. Slightly lower returns in FD (that too not everytime) is still fine as the period in question is small.

Corporate Fixed Deposits

With bank FDs giving low returns, many people get attracted to high-interest corporate FDs. These are just like bank fixed deposits but the difference is that you are parking money with a corporate and not the bank. Also, for the additional risk that the saver is taking, corporate FDs offer higher interest rates than bank FDs. Usually, company FDs offer 2-3% higher than bank FDs.

So for people who are unable to look far beyond bank FDs (and have no experience of debt mutual funds), corporate fixed deposits do offer an attractive investment option.

But do not ignore the risks just because these FDs are offering higher interest. Always scrutinize the credentials, credit rating (stick with AAA types) and repayment record of the company before handing over your hard earned money to them.

Don’t be too adventurous in your greed to earn a percentage point more here or there. There have been cases of defaults by companies offering FDs too. You don’t want money planned to be used for your short-term goals stuck up anywhere. Isn’t it?

Debt Oriented balanced Funds

If you want to be adventurous (and most people shouldn’t be) and are investing for not-so-critical goals that are more than 3 years away, you can even consider investing a small part of the money in debt-oriented balanced funds.

These have a small exposure to equity so there is a possibility of getting little extra returns. But I assume you know the risks with equity. It can even go against you and at times, returns might be lower than fixed deposits too!

Want to Earn More (by taking More Risk)?

This is not advisable for most people.

But:

  • If you insist, and
  • You are aggressive (even though the time horizon is not suitable for aggressiveness), and
  • Your goal is more than 3 years away

then, you can take slightly higher risk. I repeat this may not be suitable for everyone.

For short-term goals and where you are willing to take higher risks as the goal is not very critical, you can take some equity exposure (like 20-30%) and stick with debt options for the remaining 70-80% of the investment amount. But as the goal day approaches, you should reduce your equity exposure.

In a way, this approach is similar to investing in debt-oriented balanced funds. But it allows for more control as you can control the amount of equity that you wish to get exposed to.

What about Recurring Short term Financial Goals?

There are some short-term goals that are recurring in nature. Like saving for travel (holiday), school fees or electronic purchases.

Obvious and natural reaction to such goal is to go for Recurring deposits. But one can also consider some varieties of debt funds for such goals too depending on the frequency of goal recurrence.

What to do when Long & Medium term goals become Short term goals?

This is bound to happen one day or the other.

Suppose you began investing for a goal that is 15 years away. Initially, you took 70% equity exposure. Now let’s say 10 years have passed. So what should you do?

A theoretical approach would be to reduce your equity exposure continuously:

  • 5 years left (11th year since investing): 60% Equity + 40% Debt
  • 4 years left (12th year since investing): 40% Equity + 60% Debt
  • 3 years left (13th year since investing): 30% Equity + 70% Debt
  • 2 years left (14th year since investing): 10% Equity + 90% Debt
  • 1 years left (15th year since investing): 0% Equity + 100% Debt

The actual plan might differ depending on the goal type, market conditions and many other factors.

But in general, when long-term financial goals start becoming medium and short-term financial goals, you should slowly start de-risking your investments and reduce exposure to risky assets like equity. (Do read how real goal-based investing works to help you achieve your financial goals).

That’s it.

Traditionally, FDs and RDs have been the popular choice for short-term savings. But as you have seen, there are several other alternatives to fixed deposits that offer potentially higher tax-efficient returns than FD.

But I would still caution you: and say that the investment option that you chose for short-term goals should be such that you don’t end up taking unnecessary risk just for the sake of slightly higher returns. It may not be worth it as the goal is just a few years away and your life won’t change dramatically if you earn 1 or 2% more for just a couple of years.

Think about it.

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Accept Mean Reversion & follow your Asset Allocation

Mean Reversion Asset Allocation

Asset Allocation and Mean Reversion – If you understand the real essence of these two concepts, you will do better than 99% of the investors.

More importantly, if you are already utilizing these two concepts in your active investing, then you don’t need to read any further. You already know how important these two are. 😉

But if by chance you are still not aware of these concepts properly, then I am afraid that a theoretical explanation will at best, seem theoretical to you. 🙂 and you may really not realize how powerful these two ideas are.

Still, you should try to understand as much as possible about them.

I am not going into details here and… and you can find more from Google (or maybe I will write in detail someday).

But generally, the idea of mean reversion is that if an asset experiences years of above-average performance, chances are that it will become overvalued eventually. It’s natural. And once that happens, the direction would change and the prices would start falling to more reasonable levels again.So the periods of above-average performance will inevitably be followed by below-average returns. Similarly, periods of below-average performance will be followed by above-average performance. Mean reversion ensures assets return to ‘fair value’ after moving on either side.

So the periods of above-average performance will inevitably be followed by below-average returns. Similarly, periods of below-average performance will be followed by above-average performance. Mean reversion ensures assets return to ‘fair value’ after moving on either sides.

This is mean reversion for you in plain words.

And for lack of a better phrase, I think mean reversion is one of the most powerful laws of financial physics. And I am not exaggerating. 🙂

Different Assets follow Different Paths

You already know that all assets don’t perform alike. They just cannot!

In some years, equity would do well. In others, debt might do well. In some others, the winner would be gold or some other precious metal.

No one can correctly predict (one after other for several years) which asset will be the best performing one in a given year.

Take a look at the annual returns of stocks for last 15-20 years and you will know that it’s not necessary that stocks will do well every year… even though the average equity returns are better than all other assets. An average annual return of 15% in 10 years might mean that there wouldn’t even be one year with exact 15% returns even though the average of ten years would be exactly 15%. 😉 Averages can fool investors like the 6-ft tall man who drowned in 5-ft average depth river.

Good returns in last few years may give people the impression that volatility is nothing to worry about. But remember that equity is not a bank FD. It will move both ways. That is the price we pay for the potential to earn higher than risk-free rates of return.

So the fact is that in the ranking of annual returns, the leaders keep changing.

Reviewing historical asset performances teach us that mean reversion does and will happen over time. But you cannot predict when. The winners will become losers and losers will become winners some day.

And since most people cannot predict (correctly) when the tide will turn and which asset will outperform others in near future, it is futile to be completely in or completely out of the equity markets.

So simply say NO… to 100% equity or 0% equity. That is not for most people.

Instead, find out what is the right asset allocation for yourself and your financial goals and stick with the chosen strategy.

Deciding on the asset allocation for a financial goal is in itself very important. You can read more about it here.

One or the other asset in your portfolio will perform better than others. That’s perfectly normal. And that also doesn’t mean that you should sell all other less-performing assets and put money into the best performing one.

But you don’t need to turn a blind eye too.

When one asset starts getting ahead of long-term averages by far, then the mean reversion becomes imminent. At that time, a disciplined rebalancing strategy can help manage investments smartly and strategically. Rebalancing is the best practice for most investors because it enables better control of risk and more importantly, allows investors to take advantage of the phenomenon of mean reversion.

But you may ask…

How often to Rebalance your Portfolio?

It is not always clear what is the optimal level of rebalancing. But it can be done in following ways:

  • Rebalancing on a fixed date – Calendar based Rebalancing – You rebalance your portfolio your original asset allocation once a year
  • Rebalancing based on Percentage (or some other Trigger) – You rebalance every time the asset allocation tips beyond a certain trigger point.

So let’s say you begin with 60-40 allocation between equity and debt.

  • Now in the first approach, you will rebalance the portfolio back to 60-40 on the first day of the calendar year. So if after a good year, equity component becomes 68%, then you will bring it back to 60%. Or if after a bad year it has gone down to 48%, you will bring it back to 60%.
  • In the second approach, you will rebalance every time the allocation moves 5% away from original 60-40 allocation. Or at every 10% (it can differ from strategy to strategy).
  • For smaller portfolios, rebalancing can also be achieved to some extent by managing the new contributions in such a way that it helps restore the asset allocation to originally targeted levels.

I totally agree that most people will find it difficult to rebalance as it seems counter-intuitive to sell a ‘winning’ asset in favour of a ‘losing’ one. It might even seem plain stupid!

But trees don’t grow to skies and bull markets don’t last forever. Mean reversion is a powerful force and it does happen…always. It can be delayed but cannot be avoided.

It seems difficult at first (as you need to monitor and need time). But it can be done as you don’t need to rebalance every time an asset overshoots your allocation by 0.1% or 1%. Taking the calendar-based rebalancing (like once a year) is fine too and doesn’t need much effort from you. Or if you want to be more tactical or opportunistic, you can take advantage of volatility and valuations and go for threshold-based rebalancing. (This seems attractive and glamorous but such active strategies can be challenging if you don’t know what you are getting into).

It’s up to you or your advisor how you wish to strategize your investment plan.

Infact, there are endless possibilities for boosting the returns of a portfolio using rebalancing strategy. But they come with higher risks which may not be suitable for everyone. You need to be willing and capable of assuming higher risks than the average investors when seeking higher returns.

But enough about rebalancing.

What holds the key is getting your initial asset allocation right.

So spend some time and find out what asset allocation is suitable for you. Once that is decided and implemented, the best option for most investors is to keep rebalancing their portfolio to ensure its risk and return characteristics remain consistent over time in all market environments.

State of Indian Stock Markets – September 2017

This is the September 2017 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

P/E Ratio (on last day of September 2017): 25.43
P/E Ratio (on last day of August 2017): 25.62

The 6-month trend of P/E has been as follows:

Nifty 6 Month PE Trend

Historical P/BV Ratios – Nifty 50 (Monthly Average)

P/BV Ratio (on last day of September 2017): 3.35
P/BV Ratio (on last day of August 2017): 3.49

Historical Dividend Yield – Nifty 50 (Monthly Average)

Dividend Yield (on last day of September 2017): 1.17%
Dividend Yield (on last day of August 2017): 0.94%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500 (Monthly Average)

P/E Ratio (on last day of September 2017): 29.58
P/E Ratio (on last day of August 2017): 29.63

Historical P/BV Ratios – Nifty 500 (Monthly Average)

P/BV Ratio (on last day of September 2017): 3.18
P/BV Ratio (on last day of August 2017): 3.32

Historical Dividend Yield – Nifty 500 (Monthly Average)

Dividend Yield (on last day of September 2017): 1.03%
Dividend Yield (on last day of August 2017): 0.89%

You can read the last month’s update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much returns you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

Interview – A Financially Independent Entrepreneur

Interview Financially Independent Enterpreneur

This interview is of a person who has already achieved his Financial Independence and FIRE (What?).

In his previous avatar, Ram Medury has worked as a CIO in IT and Financial sectors. Currently (and after achieving his Financial Freedom), he is busy building his startup. You can connect with him on LinkedIn here.

I thought it would be interesting to learn from his journey of Financial Independence.

So here is the interview where Ram answers my questions about how he managed to exit from the dreaded race and started living a more fulfilling life.

Dev – Tell us something about yourself (background, professional life, etc.). How did you reach where you are.

Ram – I come from a South Indian middle-class background and have spent my teens in the North. This helped me gain a cosmopolitan outlook. I had a carefree childhood, was interested in computers since then and picked up my graduation in Computer Science which was followed by an MBA.

When in college, I got a chance to interact with the founders of Infosys. After that meeting, I made up my mind that I would join that company when I pass out of college.

My love for computer programming (i.e. seeing logic take shape as code and in turn solve big problems) and the pursuit to do different things led me to different countries and different roles at Infosys.

After spending 13 years there, my first switch was when I joined ICICI to head their general insurance company as a CIO.

I continued in CIO roles for 7 years before finally deciding to start a company that uses technology to solve real problems for common people.

Dev – When did you start taking personal finance seriously?

Ram – As a child I never experienced lack of money as my family gave a good upbringing. I guess being from a family of modest means helped us in meeting our needs and limiting our wants. For example, we rarely went out for dining, or travel for vacations. But that in no way made us feel that we were missing out on something.

This habit helped a lot once I started earning money.

In the initial years, I did not have a meticulous plan on how to save money. Neither did I define any goals. I would simply save in post office schemes, PPF and VPF.

I liked to see money compound and keep adding up in the passbook. 🙂

Expenses were moderate and I would spend on travel, books and music. I would travel like crazy. Exploring places around Bangalore first, then Japan, US, Europe, etc.

Around the time we had our first child, I started taking stock of my finances – income, expenses, cash flows, etc. and started taking investing seriously.

Dev – How were you managing money before that and after that?

Ram – I have already covered the ‘before’ in Q#2 above.

After that, things became a bit more structured. I would have an excel sheet tracking all the things I did in terms of cash flow.

Since I was in the US at that time for some months, tools like Quicken really helped in this. Later my excel took over as we then did not have any such tools or apps. But soon enough and due to my regular tracking, I had a good picture of what my needs were, my financial goals and where my investments were.

I added some equities and mutual funds to my portfolio after the initial years. This helped increase the pace as is the case with equity. When direct mutual funds were launched a few years ago, I promptly switched my holdings from regular to direct plans which further accelerated the journey.

Dev – I am sure the idea of FI didn’t come on day 1. But what made you think about FI in the first place?

Ram – The idea of FI was in the back of my mind – not as an end in itself, but as a means to do things without fear. Without fear of family needs not being met, or fear of failing if I started a business.

There is this romantic notion of retiring by 40 (Early Retirement) that I used to read and hear about. But it was not a goal for me – or so I thought.

But in my mid-thirties, as compounding started to help my investments, I started to wonder if it was possible.

Dev – And how did you plan for it? Give details and how long did it take to achieve it after you had decided to aim for it?

Ram – I guess I was enjoying the journey of saving and investing, without necessarily charting out the destination. I already had major goals listed in my excel sheet and I could see that I was being able to meet them.

As I realised that I was getting there, the first reaction was “Am I really there?

And then… “Did I err in my math”?

So I would ask some of my good friends and senior colleagues on what they thought Financial Independence meant and what kind of numbers they would be comfortable with.

It seemed strange to me that I was kind of there and some of them were not.

Then I had this question: What is stopping me from doing what I really wanted to do?

This process took about 12 months as I was nearing 40. I then used the biological clock as a trigger to finally quit the corporate career. It was a tough decision as I was doing quite well and giving up a very lucrative salary.

But the call I had to take was: Am I working in a job only for the money?

  • If yes then I am not being true to my values and aspirations I had.
  • If NO, then what the Hell… 🙂 Go for it!

So this is like the coin toss made by Amitabh Bachchan in movie Sholay. Any which ways, FI-RE was the way forward for me. 🙂

Dev – There are easy thumb rules for people looking for FI. Like 25x or 30x of annual expenses. Did you incorporate some in your planning?

Ram – I read voraciously about everything available on the internet on this topic. Basic search threw up sites like MMM (Mr. Money Mustache) and ERE (Early Retirement Extreme) which helped me clearly see that there are practical tools out there.

It was very reassuring since the FI movement in India was and is still nascent.

The rule of 25x appealed to me a lot. Adding some conservative buffer to it by jacking it up to 30x makes one feel safer.

The other important aspect is planning for the non-retirement goals.

The main one being children’s education. There are some parents who wish to ‘go for the best’ – say an Ivy League education for the child and spend a lot. If $50-60k p.a is required then we are talking about half a million dollars for two children, which can make attaining FI tougher for many people.

This is a tricky topic but I wish to be open-minded about this.

If the child is really deserving and needs some help (financially) to get into a particular school then fine. But one doesn’t know as the child is still very young. If the child is deserving anyways, he or she could get a scholarship; education loans are also available easily. It puts the onus on the child to ‘fight’ for what he or she wants, and repay any student loan if required. If the child is not so deserving, then why give the child a sense of entitlement, early on?

The point here is to be realistic about the amount required for the education and understand how it relates to your FI calculations. And not to stress over it.

Put a definite number and if you fall short then other options are anyway there.

Dev – In our conversations, you mentioned about how frugal living helped you achieved your goal. Talk us through that.

Ram – We know how much we spend as a family and are comfortable in that. This includes occasional eating out, annual vacations – we usually spend a week or two in the High Himalayas.

There are so many ways to enjoy life without having to indulge in excessive spending.

I often prefer to bike to work (one of the benefits of doing a startup is you get to decide where you work from). The commute is something that costs a lot – not just in terms of fuel, car expenses, but also in the time it takes and the toll it takes on health.

Dev – I am sure your spouse had a major role to play in your journey. How did she support you in your journey?

Ram – Fortunately my wife and I share similar views on how to spend and how to make the most of whatever we spend.

She is a good critic… so that my half-brained ideas shape up well. 🙂

Once an idea takes shape she is there to help in the follow through.

Dev – Before achieving the target corpus, I am sure you used to track various things. What were they and how did you track them?

Ram – Tracking expenses was a must to know that we were on the right path. Without knowing the asking run rate, how can you win a cricket match while chasing? Isn’t it?

Tracking the portfolio and how it is growing, the asset allocation mix is also critical. I track it usually once a month and try not to look at it each day.

Then I tracked readiness for the essential financial goals of life like childrens’ education and marriage. And the retirement corpus using a thumb rule like 30x.

Dev – What about other financial goals? I know people who in a hurry to reach FI, end up putting less money for other goals. And that doesn’t work well. How did you balance that?

Ram – For me knowing that the other goals are well taken care of was a must. Without that, I would not have the peace of mind to start my next big project.

So I picked only a few goals other than retirement plan – childrens’ education and my startups 2-3 years capital and focused on them. And added a 20% buffer for that extra peace of mind.

The fact is that retiring at 40 doesn’t mean idling away the next 20 years. While the startup will guzzle capital initially, it has to start making revenues after some time. While making a lot of money is not the focus (why would I quit a ‘big’ job then), there will be additional income coming in as you deliver value to your customers. So that adds (or will add) to the ‘buffer’.

More than the numbers this is a journey of knowing oneself, being very comfortable in one’s skin and not be swayed by ‘comparisons with the Joneses’. It requires a certain degree of Stoicism of which I am a big fan. A certain poise, very similar to a comfortable and steady Yoga asana!

Dev – Share your emotions of the big day – when you finally decided to call it a day.

Ram – It was a steady journey that eventually culminated in the decision.

I cannot recall the exact day. Incidentally, I was going through a phase of life when I was meditating very regularly up to 1 hour daily for almost 3 months. Then decision happened sometime in that quarter.

But of course, when I put in my resignation after working in corporate jobs or 18 years, it was a moment of trepidation. I knew that it was a new phase of life, no going back. So I was sandwiched between ‘mustering the guts to quit’ and the excitement of embarking on something new.

There was a lot of fear and in hindsight, I now realise that I was able to overcome the fear of fear itself. Most of the anxiety comes from fearing something ‘fearful’ that never materialises.

Dev – I am sure it was not just hunky-dory all the way. What were the challenges you faced in this journey?

Ram – With the 20-20 hindsight wisdom that I now have, I can say that I could have done this earlier. Maybe 5 years if not earlier. If I had drawn a clear path and stuck to it by investing in equities in my 20s the goal of financial independence would have been reached much faster.

In fact, I now have built a small heuristic that if one saves 50% of the salary and assuming that the investment grows at 10% and salary also increases by 10%, then one can ‘break free’ in just 7 years!

Tweak the returns up, and it could be faster. Add some buffer (after all one gets married and has kids in this phase!) if you wish, and the timeframe should not exceed 10 years.

Dev – Achieving FI at a young age is fine. But it’s equally important to have a plan for after-FI-life. How do you manage your money and time now?

Ram – I am 3 times busier now with the startup and enjoying doing everything hands on from business strategy, marketing, product management to coding, setting up the servers etc. Bumming around is the last thing on the mind 🙂

This particular phase is not the time for me to sit back and travel the world, though I can afford to do it. Once the startup settles into a rhythm, then maybe I can balance things better.

Yes, the children are growing up and I make sure that I do spend adequate time with them. I remind myself that this time won’t come back, and time is much more valuable than money.

Having been CIO at large organisations before, I also get calls from industry folks for advice on their business-technology plans. I have no plans as of now, to do a full-time IT Strategy Advisory but I do get many such opportunities.

Though I have declared FIRE, I have not yet found the time to delve deeper into my longer term aspirations: Yoga, Spirituality and Vipassana – given the projects I have started. And there will be a definite time for that in future.

I also have a sky-high reading list and hope to catch up on that some day.

Just these things can keep one fully occupied 24×7. Basically, I have better things to do that are keeping me really busy. Things more important than ‘making more money’

The point is that if one has a few passions, then after-FI life is one of great opportunity and immense fulfilment. That would be the real life – not just hanging on to an identity derived from one’s profession or job or upbringing.

Dev – What do you think holds people back from achieving financial freedom?

Ram – Several things – many think it is not possible and don’t make any attempt. Many are stuck in the rut and cannot imagine a life beyond their standard job.

Some are scared of what it means, what will they do after FI. They cannot imagine the immense possibilities.

Many live their entire life running towards more and more possessions, stuck in debt servicing the loans taken to buy them. And doing all this doesn’t make them happier either because they are always chasing the next thing. No redemption for such folks who live on this hedonic treadmill.

Some may have an interest but may not have the discipline to invest diligently and smartly. Some are stuck in high-cost investment instruments or altogether wrong investment products like ULIPs, traditional insurance policies, etc. All these mistakes add up and delay Financial Independence almost up to the age of their retirement!

So to pull it off it requires a lot of things: confidence in oneself, conviction to not do what the herd does, being stoic enough to live well within your means, ability to manage your money & enjoy the number journey, and finally the badassity (as MMM says) to see it through.

Dev – People feel saving a lot (which is necessary for FI) means sacrificing today for an unknown tomorrow. What do you have to say on that?

Ram – I disagree that saving today means denying your tomorrow.

Life is too vast to define it in narrow terms of currency.

There are enough studies to show that happiness and money are not correlated. Beyond a basic minimum number, money has limited ‘marginal utility’. Bill Gates himself despite his billions said:

“Once you get beyond a million dollars, it’s still the same hamburger”.

You can spend smart and still enjoy your today.

  • How about having friends and family at home over a nice dinner, instead of a dinner at a high-end restaurant? The money saved will be in thousands of rupees and the fun will be 10x.
  • How about going for a hike near your city outskirts vs visiting a shopping mall? Money saved will (again) be in thousands and health gained and a lot of family time.
  • How about using a bicycle to commute instead of splurging on an SUV?

I can give hundred such examples.

More than money, these are lifestyle choices and if chosen well they give you much better health and happiness. Besides being far more planet-friendly. FI actually becomes a nice byproduct.

Much of modern life (post Agricultural Revolution) is sheer nonsense and after Industrial Age, we have managed to both wreck ourselves and this one Earth that we have.

Equipped with these choices, you enjoy the journey and before you realize, you would reach the FI destination. The beauty is that life is great even after FI.

Dev – Any influencers whom you tracked during your journey to FI and that helped you stay motivated?

Ram – None in particular, as I was enjoying my journey.

Yes, had I discovered some of the online resources 10 years before or even earlier, my ‘desitnation’ would’ve been reached 5-8 years earlier.

Dev – What’s your advice to the people who seek financial freedom and early retirement?

Ram – Firstly one should design a great life around things they are passionate about. These will give great pleasure in your journey, and could also become post FI business ideas. Examples could be farming, blogging, crafts, music, building a business etc.

This is important to envision a life beyond a 9-to-5 job or the next company switch.

Secondly, one should track ones spend carefully and target a realistic savings rate – for some it could be 50% and for someone else 20%. If one likes to spend on certain things in life and enjoys it, then include it in your spend – don’t deny yourself. But please be realistic.

Third, one should invest in a simple portfolio with an asset allocation that meets their risk profile. The portfolio should meet their own financial goals and be primarily invested in instruments like PPF, SSY and good Mutual Funds.

In a nutshell, keep things simple, design a great life, grasp the simple match of FIRE (required savings rate and portfolio returns) and before long you will reach your destination!

Dev – That’s all from my side. Thanks a lot for answering my questions. It was wonderful to have you share your insights.

Ram – Thanks Dev!

Mutual Fund SIP Return Calculations – How much Wealth is Created?

SIP Mutual Fund Maturity

Do you wish to know how much your monthly SIP investments in mutual funds will grow over a period of 5 years, 10 years, 15 years, 20 years, 25 years or even 30 years?

Then you will find answers to all your SIP returns and monthly investment growth amount-related concerns here. And you don’t even need a SIP calculator as I have already done the hard work for you.

SIP investing can create tremendous wealth for you and to know is how much your money can grow when investing via monthly SIP in good mutual funds, simply click on any of the links or image below. All links take you to individual detailed posts that tell about the final value of the chosen SIP amount and model MF portfolios:

Or click on the images below:

Invest 10000 month SIP

Invest 15000 month SIP

Invest 20000 month SIP

Invest 25000 month SIP

Invest 50000 month SIP

Invest 1 lakh month SIP

Using the above links, you will have clear idea how your SIP investments will grow when you remain invested for 5 years, 10 years, 15 years, 20 years, 25 years or even 30 years!

Investing via SIP in best mutual funds for long-term is one of the best ways to begin your wealth creation journey. And since most common people are unable to big lump sum investments, SIP makes it very easy for such people to make small regular investments every month using their monthly salaries without feeling burdened.

To convince you further, here is a Real Life Story of how one person accumulated Rs 3.7 crores via SIP investments over long-term. Or read how investing Rs 1 lakh a year for 20 years can create a wealth of Rs 90+ lakh without much fuss.

But wealth creation is not the only benefit of SIP…

You can even use mutual fund SIPs to do your financial goal planning + invest regularly to achieve them. Saving for goals like children’s education, children’s marriage, retirement planning, saving for your house purchase, foreign trips, etc. can be done easily and profitably through systematic investment plans of mutual funds.

Here is a FREE (Downloadable) Financial Goal Excel Worksheet that you can use to plan out your financial goals.

As a professional investment advisor, I do help investors create goal-based financial plans to achieve their real financial goals. If you wish to get yourself a solid financial plan that tells you how much to invest, where to invest and for how long to invest for your financial goals, you can contact me for professional advice.

Here is how to contact me:

  • Go through the Services Page to see how I create your financial plan and use the form (at the end of the page) to contact me
  • Contact me directly using this form

So if you still haven’t done it, it’s time to start a SIP in Equity Mutual Funds.

I can assure you that over the next 5-10 years, you will create a lot of wealth and it will easily be one of your best financial decisions till date.

Invest 15000 month SIP

Invest Rs 15000 per month SIP Mutual Funds

Invest 15000 month SIP

Do you wish to know where and how best to invest Rs 15000 per month?

Then you are at the right place.

Investing in mutual funds is one of the best ways to begin your wealth creation journey. And if you have already decided to invest 15000 per month in mutual fund SIP, then its all the more better.

Why do I say so?

Because it’s well proven; I have benefited from it greatly myself and also because I can share a real life proof of how one person used SIP investing to create a portfolio of multiple crores.

SIP or Systematic Investment Plans are simple – invest a fixed sum in mutual funds at a regular frequency (generally monthly). Since most common investors are incapable of making big lump sum investments, SIP makes it easy for such people to make small regular investments every month using their monthly salaries without feeling burdened.

Once you have decided to invest a sum of Rs 15000 every month regularly, I am sure that you would be curious to know how much money you will have when you invest Rs 15000 a month in mutual funds for several years?

Right?

So let’s do some basic calculations:

Value of Rs 15000 per month SIP

Historical SIP returns of good mutual funds have been between 12-18%. The actual returns might differ for different investors. But for this discussion, let’s be conservative and assume the average SIP returns in 10, 15 or 20 years to be 12% per annum.

Here is what a Rs 15000 per month SIP in mutual funds can do over the years:

  • 5 year SIP of Rs 15000 monthly = Rs 12.8 lakh
  • 10 year SIP of Rs 15000 monthly = Rs 35 lakh
  • 15 year SIP of Rs 15000 monthly = Rs 75 lakh
  • 20 year SIP of Rs 15000 monthly = Rs 1.4 crore
  • 25 year SIP of Rs 15000 monthly = Rs 2.7 crore
  • 30 year SIP of Rs 15000 monthly = Rs 4.8 crore

Wow!

Those are some big numbers…atleast towards the end. And the picture becomes clearer when you compare these figures with the actual investments made:

  • 5 year = Rs 15,000 x 12 x 5 = Rs 9 lakh
  • 10 year = Rs 15,000 x 12 x 10 = Rs 18 lakh
  • 15 year = Rs 15,000 x 12 x 15 = Rs 27 lakh
  • 20 year = Rs 15,000 x 12 x 20 = Rs 36 lakh
  • 25 year = Rs 15,000 x 12 x 25 = Rs 45 lakh
  • 30 year = Rs 15,000 x 12 x 30 = Rs 54 lakh

The route of SIP investing can create a lot of wealth for you.

And just notice this – If you invest Rs. 15,000 per month via SIP for 10 years, you are actually just investing about Rs 18 lakh. But return you are getting is around Rs 35-36 lakh. It is double of what you originally invested over the 10-year period. And the longer you keep investing, the better the returns get!

So just imagine the kind of wealth you can create if you start investing early on in your career (let’s say at age 25-30) and continue till 60. Your monthly investments of Rs 15,000 in equity funds can grow into Rs 4.8 crore in 30 years! This is the magic of compounding at play.

Compared with other options like fixed deposits, PF, etc. (where you won’t get more than 7-8% returns), equity funds are great for real inflation-beating wealth creation.

And at the cost of sounding repetitive, I would say that starting early is unimaginably important. Here is something (very detailed) I wrote about the huge cost of delay in investing. It’s about two friends who start investing at different ages of 25 and 35. You will be shocked to see the difference in the final corpus they create. Do read it!

Real Example – SIP of Rs 15000 in Good Mutual Funds

The calculations shared above were done using simple SIP calculator (using fixed average returns of 12%). But in reality, the returns fluctuate and neither stock markets nor mutual fund NAVs move in straight lines.

So let’s use some real life SIP examples instead.

Let’s see what would have happened if you would have started investing Rs 15,000 every month via SIP in some good mutual funds years back:

Note – The choice of fund(s) or fund house is just for sharing the concept. It should not be construed as an investment recommendation.

Starting January 2000, if you had invested Rs 15,000 per month in HDFC Top 200, HDFC Equity and HDFC Prudence, your actual total investment in each would have been about Rs 31.6 lac (up to July 2017).

And the value of your investments would be…

….hold your breath….

  • Rs 2.61 crore in HDFC Top 200 Fund
  • Rs 2.79 crore in HDFC Equity Fund
  • Rs 2.44 crore in HDFC Prudence Fund

Read those figures again. 🙂

We often think it’s difficult to get rich. The above examples prove otherwise.

Investing in mutual fund SIPs can make you a SIP crorepati even with a normal income! No need for a rich father. J How to get Rs 1 crore in 20 years? The answer is to invest 10000 every month. How to get Rs 1 crore in 15 years? The answer is to invest Rs 20000 every month.

So now you have answers to your questions like how to become a crorepati by SIP. 🙂

But…

Don’t you feel something is odd in this discussion till now?

There is. And let me highlight it for you –

There is absolutely no need to keep investing just the originally decided amount of Rs 15,000 per month for 20-30 years. Your income would increase every year. So your investments too should increase accordingly. Isn’t it?

A Rs 15000 per month investment for 17 years resulted in Rs 2.4-2.8 crore. Just imagine what would have happened if you had decided to go for a Step Up SIP? An SIP that increases every year in line with your income. So for example, it can be Rs 15,000 in the first year, followed by 17,000 per month in next year, 19,000 per month in 3rd year and so on…. (i.e., increasing SIP by Rs 2000 every year).

If you want to start a SIP, always keep in mind that you can create ‘more’ wealth if you are able to increase the SIP every year.

Now ofcourse I have chosen funds that help me prove my point. And there have been several other bad funds too where a systematic investment strategy would have resulted in much lower SIP returns. But I am trying to highlight the potential of serious wealth creation here. And if you believe in the power of equity, then for most common people, the best way to invest regularly in equity is to do it via mutual fund SIPs.

Model SIP Mutual Fund Portfolio

If you wish to create a portfolio of mutual funds by investing in a SIP of 15000 per month, it’s suggested not to have too many funds. Going for just 2-3 funds is more than enough.

Depending on one’s risk profile, some possible combinations are:

  • Rs 7500 each in two Large Cap funds
  • Rs 5000 Large Cap fund + Rs 10000 Balanced fund
  • Rs 10000 Large Cap fund + Rs 5000 Mid&Small Cap fund
  • Rs 7500 in Large Cap Fund + Rs 7500 in Flexi/Multi Cap Fund
  • Rs 7000 Large Cap fund + Rs 5000 Balanced fund + Rs 3000 Mid&Small Cap fund
  • Rs 5000 Balanced fund + Rs 5000 Mid&Small Cap fund + Rs 5000 Large cap fund
  • Rs 10000 Index Fund + Rs 5000 Balanced fund

There can be an infinite number of combinations. Suitability of SIP portfolio will differ from one investor to other. If you are not sure about where to invest or are looking for the best SIP for Rs 15000 per month, it’s better to take help of an investment advisor (you can contact me too).

Note – It’s assumed that if investing Rs 15000 in equity funds, you have already taken care of debt investments (via PF, PPF, etc.) in accordance with your asset allocation based investment plan. It is also assumed that you wish to invest for at least 5 years. Anything lower (like 2-3 years) and you should go for debt options or have a very small percentage in equities.

SIPs are really helpful when it comes to investing in equity without much effort or stress. But SIPs can be helpful when it comes to goal based investing too.

I have already written at length as to how setting goals can help better manage investments.

It is always advisable to attach a goal to your investments. It helps keep you motivated and stick with the investment plan for long enough. And this is exactly how the remarkably powerful goal based financial planning works.

You can easily use SIPs to plan for all your goals (Download FREE Financial Goal Excel Worksheet here) and then invest regularly to achieve them. Goals like saving for children’s education, children’s marriage, saving for your house purchase, foreign trips, etc. can be done easily and efficiently through systematic investment plans of mutual funds.

And why leave the biggest financial goal of them all?

You can even do retirement planning or early retirement planning using mutual funds. In addition to the mandatory savings you do for your retirement (via EPF or PPF), you can use SIPs to create a good retirement mutual fund portfolio. Investing in mutual funds for retirement is a no-brainer if you don’t want to run out of money before you die.

Need Help?

As a professional investment advisor, I do help investors create goal-based financial plans to achieve their real financial goals. If you wish to get yourself a solid financial plan that tells you how much to invest, where to invest and for how long to invest for your financial goals, you can contact me for professional advice.

Here is how to contact me:

  • Go through the Services Page to see how I create your financial plan and use the form (at the end of the page) to contact me
  • Contact me directly using this form

As you must have realized, just knowing where to invest Rs 15,000 every month is not enough. You need to know how much to invest in SIP to achieve your financial goals and then, invest in a more structured goal-based manner to live a financially fulfilling life that takes care of all your financial goals.

I will end this post now.

But before I do, let me tell you something important – SIP is no magic that will solve all your financial worries. Also, it does not guarantee high positive returns. But if you understand and believe in equity and the real power of compounding, I can assure you that taking the SIP route is your best bet to earn high returns offered by equity and that too in a limited monthly income that most people have. You have a real chance of getting very rich over time. And you don’t want to miss that. 🙂

Also please, don’t be under the impression that SIP is only for small investors. You can invest much more than just doing a SIP of 15,000 per month.

You can go for (click links below for details):

Or if you wish to invest a smaller amount, you can even check the below link:

By investing regularly via SIP in best mutual funds for long term SIP investment, you can create a solid portfolio that earns inflation-beating returns without any hassles.

So…

Are you still thinking whether or not to start a SIP in equity mutual funds?

I would suggest you stop thinking and start acting now.

You have all the answers now… and don’t need to wonder what would happen if I invest 15000 a month in mutual funds.

You know exactly how much wealth your small regular systematic investments can create. So start investing if you still haven’t; or increase your SIP investments if you are already investing Rs 15000 per month in mutual fund SIP. Over long-term, you will do incredibly well.

Is a Rs 50 lakh or 1 Crore Life Insurance Enough?

50 lakh 1 crore life insurance

Rs 50 lakh or Rs 1 crore – these don’t seem like small amounts.

But whether these amounts are enough (for life insurance) or not is another question.

Most people are unable to calculate the right insurance amount. To be honest, many people don’t even see the need to do it… as sadly, they buy insurance just for tax-saving!

There are quite a number of ways to calculate the right insurance amount. I have discussed one such approach earlier in an article titled How to Find the Right Insurance Amount. Another option is to go for thumb rules like ‘having a cover of 10-20 times your annual income’. But the first method is preferable.

But if you were to go by the thumb rule, then if you have an income of Rs 5 lakh, then maybe Rs 50 lakh to Rs 1 crore cover is fine. But if you have an income of Rs 15 lakh, then maybe it’s not enough. Ofcourse there are other factors too. But instead of lazily deciding that Rs 1 crore cover is fine for you, I would suggest you put some effort and find out the right life cover amount.

You might still feel that a Rs 1 Crore Term Life Insurance cover is big today. But remember that you are not going to die today. And when you do die, let’s say (and hope not) after 15 years, just think of the real value of that Rs 1 crore that your family will get? At 7% inflation, it might be worth just Rs 33 lakhs. That would surely not be enough for your family then – if the new breadwinner is still not up on his/her feet properly.

I am not saying that buying a Rs 50 lakh cover or Rs 1 crore insurance plan is wrong. I am just saying that it might not be enough for many people.

And don’t even think about buying such large covers using endowment or money back policies. You will be shocked to see the premiums.

Here is a sample:

Endowment Plans (LIC)

To get a life cover of Rs 1 crore for 30 years (when age of the insured person is 30), the total annual premium comes to around Rs. 3-4 lakhs

Moneyback Plans (LIC)

To get a life cover of Rs 1 crore for 25 years (when age of the insured person is 30), the total annual premium comes to around Rs. 4-5 lakhs

Term Plans (LIC)

To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 20-30,000

Term Plans (Private Cos.)

To get a life cover of Rs 1 crore for 30 years (when the age of the insured person is 30), the total annual premium comes to around Rs. 10-15,000.

(I took these figures from various company websites)

I don’t have anything else to say. 🙂 The difference in premium says everything.

Term insurance is the cheapest way to buy a large and adequate life cover.

Many people don’t feel like buying term insurance, even when it’s so dirt cheap – just because they get nothing in return for the premiums they pay when they survive the policy term.

Since they are 100% sure that they would not die early, they want to invest in insurance 🙂 policies that offer something on maturity. I don’t know what to say. I have written about it already in detail here. Hopefully, such people would realize what is right before it’s too late.

Then there are many people who are actually surprised as to how and rather why the insurance companies pay Rs 1 crore when they are only giving Rs 10-15k as premium annually? They seriously feel that if such policies are being offered, then that means that insurance companies are fools.

But No… the companies are not fools. They are simply using the law of averages to run their insurance business. If 100 people take a term plan for 20 years and pay premiums regularly, not all will die in this 20-year period. Right? In fact, it’s possible that just 3-4 people would die. So the insurance amount (death benefit) is to be paid for just those few people, whereas the premiums are being paid by everyone! That’s how insurance works and that’s why it’s so profitable (ask Warren Buffett and you will know how he built his empire using insurance money.)

Coming back to premiums, there is a way to further reduce premiums.

By creating life insurance ladders – it’s a way of splitting insurance based on requirements like expenses, tenure of financial goals, outstanding loans, etc. But that’s not what I generally recommend. But still, it’s an interesting discussion. I will write about it some other time.

So that’s it from my side.

Do not hesitate in buying a Rs 50 lakh or Rs 1 crore insurance policy if you don’t have that kind of cover right now. Just ensure that it’s a term insurance policy. And better still, do use this method to find out your correct insurance requirement. After that, you can decide what you want to do.

Also, if you wish to create a corpus of Rs 1 crore by saving regularly, you can use the below links to see how it can be done: 

  1. Saving Rs 1 crore using PPF (PPF Crorepati)
  2. How much to invest in mutual funds per month to get Rs 1 crore in 20 years?

5 People. 1 Story. Reality of the Indian Real Estate

This is a guest post by Shyam Shenoy. A software engineer who is passionate about value investing. He believes that one of the major reasons for the real estate prices reaching unrealistic levels is the Indian IT economy.

You may or may not agree to that, but he has an interesting story to tell you.

So over to Shyam…

_______________

Reality Indian Real Estate

There is absolutely no doubt that Housing is one of the 3 basic needs of life. You need a house. I need a house. And for all practical purposes, we all need a house.

Thousands of articles have already been written about why owning a house makes sense. And even if you don’t read such articles, people around you will try to ‘somehow’ convince you that it does make a lot of sense.

Now housing is a need. And every need… costs.

And for regular people like us, every cost… counts.

Having said that, the cost of a house is probably the single biggest expenditure that a person incurs in his lifetime.

So there needs to be a solid thought process behind the decision to purchase a house.

Now Stable Investor is a site about investments. So here, I am talking from the perspective of prudent money utilization and not from house-is-a-basic-need-so-we-should-buy-it perspective.

In this post, I want to share a story with you. The standard disclaimers apply. 🙂

Disclaimer: Any Resemblance to Actual Persons, Living or Dead, is Purely Coincidental

 

The Story of 5 People

There were 5 people in a small town:

  • Ajay an IT engineer
  • Bob the builder
  • Charan a corrupt Government Employee
  • Daniel a banker
  • Edward who was engaged in small businesses

All of them had close to zero money to start with.

Now a businessman named Peter (who owns a big IT business) comes by and offers Ajay (the IT engineer), a job for Rs 15 Lac per annum.

Immediately, Ajay has levelled up and is going to be rich. And the other four people take notice.

Bob (the builder) now sees an opportunity here.

He approaches Ajay and lets him know that he could build a house for him for a price which he would let him know later. Ajay agrees to it in principle, as he is still not committing anything.

Bob gets down to work. As per his calculations, it would cost him about Rs 30 Lac to construct the house. If he adds his profit of Rs 10 Lac, he can sell this house to Ajay at Rs 40 Lac.

Charan (the corrupt government babu) has years of experience in dealing with approvals and permits. For lack of a better phrase, he can smell money in this transaction too. Being aware of Ajay’s new found income source and about Bob’s construction plans, he tells Bob that he will give approval for his construction project only if he gets his cut. A cut of Rs 20 lac in a suitcase so that he can ‘legalize’ and ‘approve’ this construction.

To sweeten the deal, he assures that he will also bring in Daniel (the banker) and influence him to grant loan for construction.

As you might have guessed, Bob is forced to add Rs 20 Lac more to the selling price. The house will now cost Rs 60 Lac. Adding more for registration costs, stamp duties and other miscellaneous items, the final price for Ajay comes to around Rs 70 Lac.

Bob lets Ajay know that the price of the house would be Rs 70 Lac – ofcourse in a combination of black and white 😉

Daniel (the banker) is ready to offer Home Loan to Ajay at 10% per annum.

Ajay feels that luck is favoring him again with these good deals. After all, it was him who found a job that pays an annual salary of Rs 15 lac whereas other four people still don’t get much.

He accepts Bob’s offer and takes a home loan from Daniel.

If you are aware of the mathematics of home loan, then you would agree that for a long-term home loan of Rs 56 lac (assuming 20% downpayment by Ajay from some other source – may be from his father’s retirement corpus), what Ajay is probably tying himself to is a loan repayment schedule where principal + interest would be around Rs 112 lacs or Rs 1.12 crore (approx.).

But that is Ajay’s headache. 🙂 Let’s move on.

Edward (the 5th person) sees all this and does his own biddings…. starts a school, hospital, shopping Mall and what not…

So what is the current situation?

Bob certainly makes a profit of Rs 10 Lac. Charan gets his ‘black’ Rs 20 lac. And banker Daniel gets his Rs 56 lac interest on the home loan. There is no real estimate as to what Edward is making. No one except Charan is doing anything illegal (maybe Edward too is doing something as he got huge investments to build those hospitals and schools etc.)

However, Bob, Charan, Daniel and Edward have cleverly exploited the situation.

The money ‘travelled’ from Ajay’s hands to others and Ajay is at maximum risk.

Bob and Charan have already made the money and left. Edward obviously is stinking rich and can afford to sit and wait for things to work out.

Now comes the interesting part…

Try imagining thousands of Ajay(s) and other fours. This becomes the case of an exponentially growing city. Now imagine lacs of such people and it becomes the situation of the entire economy.

Now suppose that Ajay has four friends (colleagues) – Amit, Ashok, Ali and Antony.

They come to know that Ajay has bought a beautiful house. Now, these friends get into the herd mentality. They feel that since Ajay has bought it, it must be good. They too want to buy a house (obviously loan funded).

The opportunities for Bob’s construction business are plenty. So other builders, bankers and establishments also join the party. All are happy. Since people like Charan (the corrupt government official) have very few competitors, more and more people like Ajay and his friends make him richer and richer.

If you see the bigger picture, it’s a clear case of a mad rush to make money at the expense of people like Ajay and his friends.

As more builders enter the fray, Bob is facing stiff competition. He starts making houses out of substandard/inferior raw materials. He also engages real-estate agents and brokers to whom he pays a small cut – to bring more and more unsuspecting buyers to him. Some of the builders like Bob have already started absconding without even completing their projects.

Charan starts approving all the projects blindly. Lands near city dumps, toxic lakes, far away places, agricultural lands, lake beds, flood plains, encroached spaces and lands with no clear titles. Charan is busy signing approval papers and has no interest whatsoever in construction standards, roads or infrastructure.

Daniel is giving out loans like never before. All which can and might turn into NPAs. But he is too busy to see all that. He has undercover and shady links to loan recovery agents.

As for Edward, he starts raising prices of the services he is providing through his schools, hospitals and malls. Prices everywhere are going skywards.

Obviously, this cannot continue forever. The flip side starts showing up slowly but certainly.

Depleting land leads to land mafias. Depleting sand leads to sand mafias. Depleting ground water leads to water mafias. There are no proper waste management systems and nearby rivers are being filled with lakhs of litres of polluted water daily. There are laborers pouring in from all around the city and living in slums with a desire to get employed in this fast growing town.

Can the situation be reversed back?

Almost impossible.

Even if Charan suddenly decides to turn into a good man and stops accepting illegal money. Why would Bob reduce his price from Rs 70 lac to Rs 50 lac all of a sudden? His competitors will not be doing so. No one will quit as long as the party goes on. The houses already constructed cannot be demolished, given the scale of constructions that have taken place.

_______________

So that was the story.

But in spite of me claiming it to be an imaginary one, even you know that it’s not completely fictitious. 😉

Now I am not arguing in favor or against the idea of purchasing of real estate. It all depends and differs from one person to another.

Buying a first house (your primary residence) is sensible. But investing more money into real estate is another question (read this). And remember, you need to consider many other things:

  • Are you really getting your money’s worth when you are investing in property?
  • Is the quality of the house reasonably good? Do you know it or you are just assuming it?
  • Most of you will take a home loan to buy the house. Are you fine being chained to the loan repayment cycle for life (ok not life but a decade or two) and thereby compromising other financial goals to a larger extent?
  • Have you considered how you would pay EMIs in situations like job loss, health deterioration, etc.?
  • If it’s an investment, do you feel you will really find a buyer at the price that you wish to dispose of your flat in case of an eventuality?
  • Now, this is not an easy one to digest. Aren’t you enriching other people with your money by buying houses at exorbitant prices? If so, don’t you think it makes sense to stay in a rental house?

Think about it.