What is the world’s largest prime number? Just kidding…this isn’t an article about math!

This is about RW Emerson’s quote: “Money often costs too much”; this is about the impact of the prime-lending rate (PLR) on the common man and its far-reaching consequences on the economic future of the country. To put it simply, this “prime” number is the interest rate that the central bank would charge for a loan that it lends to say, one of the banks.

Though the prime is an index measured in basis points, it’s a metric decided upon by the powers that manage the central bank, and it is adjusted every once so often. Barring economic casualties that seem to arise often of late, there is a specific schedule to evaluating and adjusting this rate.

There are various factors that go into how this rate is determined, and how it is altered, but that’s beyond the scope of this short article. When looked at a consumer’s perspective, the prime rate determines how the banks that deal with individuals (the ICICI’s and SBI’s of the country) go about lending money.

For example, if a private bank is aggressive at handing out loans, these loans might be offered to the customer at prime rate or just above it, with a marginal profit. This is where it all gets interesting – the banks in India currently don’t seem to distinguish between the individuals’ ability to pay off the loans and their past history at doing so, when doling out loans.

Of course, there is the lien that people need to provide and records of assets owned, etc to back up claims for loans at the higher priced housing levels, like those seen in the millions of rupees range. At certain lower levels like automobile loans or consumer purchases in the lower hundreds-of-thousands, there seems to be a near free-for-all eligibility to get hands on one of these loans.

There’s a very thin line that divides the consumers’ desire to upgrade their lifestyles with borrowed money and, to put it simply, the greed to not be able to distinguish between wants and needs depending on affordability.  The US economy, beginning with the sub-prime housing crisis, and now extending to credit difficulties caused by very poor liquidity at all levels imaginable, should be an important lesson for India.

As the saying goes, it is best to learn from the mistakes of others, and not repeat it oneself. The law makers need to encourage good, responsible behavior while at the same time make it difficult for people to stretch their economic freedom to levels where they can no longer sustain it. I am sure there are conflicting opinions between achieving rapid economic growth vs. sustained growth at slightly lower levels, by controlling credit, but this balance might be important to ensure the long-term health of the economy. This is where utilizing the “power of the prime” to ensure adequate liquidity levels becomes very important.

Unlike some of the developed Western economies, India doesn’t (yet) have a centrally reported “credit score” for every individual. To establish such a system, there needs to be a central database that pretty much tracks the “credit history” of every individual. This would mean tracking all transactions wherein there is not cash or an instant money transfer (debit purchases) involved. In other words, transactions that require borrowing of money would need to be reported by all the banks that offer credit cards or loans, to the central reporting / monitoring agency. This bipartisan agency would then come up with a ’score’ for every single individual based on his / her past record with loans and promptness in paying off debt. I hope this system is included as part of the e-governance transformation the country is undergoing.

Given a transparent setup that everyone has access to, the lending institutions wouldn’t fall over one another in doling out sub-prime loans (and then have people head over heels in paying off these loans), and banks would really understand the risks behind each loan made. This results in accountability getting built into the system at all levels.

More importantly, it is never too late to reward good behavior!

Image Credit: Woodley Wonderworks

Popularity: 12%

Diversifying a portfolio means, deciding on how to divide the money available for investment between various investment options like shares, bonds, fixed deposits, Mutual funds, fixed property, gold and cash to be retained in hand.

In your personal investment plan try to ensure that there is adequate diversity. A clever investor will never put all his money in one type of investment. Let’s see why we should diversify our portfolio.

Main reason for a well diversified reason is mitigation of risk.

You can even add insurance to this list. But it’s slightly a different investment option in the sense its benefits are not available to you but to your dependants.

Once you have arrived at the money available for investment, it’s important to decide the ratio to be invested in different investment options. Before investing it’s important to know the amount of risk and return associated with each investment option.

Time is Money:

If you think of making money in a very short span it’s not possible with any type of investment option. Every investment needs certain time to generate returns. Before deciding on an investment option we need to be clear about how long we can hold that investment and what would be the approximate return. You must be clear as to go for capital appreciation or a short term return or a combination of both.

For example, if we remain invested for long term in stocks and fixed assets like a house, there are very few chances of incurring losses. Long term means you should keep the investment for at least 5 to 10 years.

History tells that those who have invested in stock market for 10 years have maximum lost 1.5 % of their investment.

So longer the duration lesser the chances of losses. There is also scope for making tons of money. Those who have invested money in stocks and real estate or gold between 2003 and 2007 have made tons of money.

Every investment has a cycle and it repeats. It’s very important to identify the right type of investment that has started churning money.

We can see that in the last 6 months, stocks are out and bonds are the preferred choice of investment.

• If your goal is long term, invest in stocks and real estate, this is the right time to buy as the valuations are very attractive. Though we can’t exactly say the % of appreciation, it will definitely yield good returns for long term investors.
• If your goal is short term, invest in fixed deposits or government bonds.
• It’s also very important to decide on the timing of the investment. Early birds will always make maximum money. When everyone is making money, realize that some will soon start loosing. Don’t buy when the market is at the peak. It’s very important to time the market.
• Finally ensure that you always have some cash in hand to attend to any emergency or to put in any attractive investment option that presents itself before you.

Finally remember that risk and return coexist in any kind of investment option and it’s always possible to lose money in any form of investment. Now the question you should ask yourself is “How much loss will I be able to bear?”

If you are not in a position to take more risk, put more of your money in FDs and Bonds and minimum in stocks. If you are capable of taking more risk, put more of your money in Equities and Real estate and very little in FD or Bonds. Those who have household responsibilities or those who are paying quite a bit of their money as interest towards loans should always be careful about the kind of investments they make.

Here is a small principle for dividing your funds amongst various investment options.

Reduce your age from 100 and what ever is the number you arrive at, you can put that much of money in high risk – high return investments.

For example, if your age is 30, you can put 70% of your money in high risk/high return assets and 30% in low risk – low return assets. As your hair starts turning grey, reduce your exposure towards equity, and increase it towards debt securities.

Image Credit: SMN

Popularity: 22%

I often wonder when I read about the bailout packages dished out by Governments all around the world to aid banks and other financial institutions that are on the verge of bankruptcy especially the amount of money spent in bailouts in last couple of months is staggering. I am even surprised that there was not a single protest from anywhere and these financial criminals go unpunished. It is the common man who is going to bear the burden of additional tax and increased debt.

Why should tax payer’s money be used for bailing out greedy banks and corporations that have done business only with profit as motive and no concern for morals or ethics and absolutely no concern for the consequences for their acts. Putting public money in corporate coffers is just not acceptable. Financial crisis that has happened is a man made crisis done through substandard policies, deregulation and greed. I can understand putting in public money for natural disasters like earthquakes or folds. Governments all over the world have spent trillions of dollars on bailouts already

This kind of bailout is ABSURD!

We must collectively protest this .This is real money, my money, your money, our money which is hard earned paid in the form of tax.

Why should banks and financial institutions which never cared about the creditworthiness of people who lined up for loans or the soundness of derivatives business be rewarded. We should not allow government to write checks on tax payers’ account. This measure will increase the budget deficit by a significant amount, with no guarantee of recovering the amount and not holding anyone accountable for the misdeeds they have done.

What is the signal you are sending to the corporate world and investors through these bail outs? Do your businesses as you like and we will reward you for the blind errors you might commit. Is this the right way?

As far as I am concerned, there should be a thorough probe into the events that have led to this disaster and every CEO, Executive or Government who were part of this financial carnage should be jailed, their assets sold and put in a bailout fund.

It is time to wake up and realize that greed is the basis for all the financial disasters and find a way, may be strict disclosure norms, increasing the transparency in strategic decision making, making one responsible for his actions and

Few weeks back Finance Ministers of several Asian, Europe and Americas countries met and decided to act rapidly on the financial crisis

And now stock markets are being artificially manipulated by bailouts by governments.

When corporations see that the demand is coming down , it is natural for the stock to take a beating. But every other day we see CRR, SLR rate cuts which means our money is loaned back to us and the market stages a rally of any significance. FIIs and Badla traders slowly and routinely remove their money from our markets to invest elsewhere leaving the retail investor in a fix.

It is certainly not a good thing for a responsible, saving, taxpaying citizen, with no defaulted loans or credit card debt to compensate for the that Wall Street gamblers will go bust on their stupid and greedy bets, over-leveraged and poorly managed businesses with huge losses.

Let me tell you some interesting fact. Lehman has set aside $2.5 billion as bonus for their employees even as they went bankrupt for the great performance they showed in pushing the bank to bankruptcy.

What do you call this?

Popularity: 31%

Image Credit: jabr-woky

The legal documentation of the distribution of the Estate (Assets) effective after the death is called a WILL or ESTATE PLANNING.

It is very common that there could be lot of disputes while doing the partition of the properties among the children by the middleman/arbitrator in the absence of a ‘will’.

A will is normally prepared by a person when he crosses 55 or 60 years depending on his health conditions. While preparing a will, the following points should be taken care of:

List of Assets

Include all assets (all properties – both movables and immoveable, deposits, stock, bonds, Mutual Funds etc.). If this is not done properly, there is every chance that one of the children who knows about the excluded or omitted property may be inherited by him depriving the other children.

In some cases we find the other children, although they are aware about this unaddressed property, keep silent about this due to age, financial weakness, fear for straining the relationship etc.

This defeats the very purpose of the will

Care for caring child

Child taking care of the parents is eligible and should be given additionally in accordance with or proportionate to the requirements for his noble services, but at the discretion of the parents.

Understandable disparities

There could be a disparity while setting aside the properties between the son and daughter. When the parents feel that they have spent huge sum for their daughter’s wedding when compared to the son’s education etc., in such cases, the son’s portion should be greater than that of the daughter proportionately but again, according to the discretion of the parents. This has to be communicated to both children in advance inorder to avoid any ill feeling or discontentment.

Undesirable disparities

Supposing that one of the two children is doing very well (financially) in life and the other is leading a below average life as he could not come up in life, in such case there should not be any disparity while distributing the assets. In other words, the person should not be punished just for the reason that he is doing well in his life.

When we think of preparing a will, the same should be ‘fair and equivocal’. This could vary from one situation to another. The best option to make it fair and equivocal could be to seek the help of a Certified Financial Planner.

Happy Planning!

Popularity: 9%