Expect RBI to increase interest rates by around 25 bps

RBI is expected to increase the interest rates by ~25 bps in its review meet on June 16, 2011.
The move is expected on the back of rising inflation levels in the country. The Inflation levels reported are at an high of 9%, which is above market expectations of 8.5%.

The increase in the interest rates is primarily to arrest the rising inflation levels. Having said this, any rise in the interest rates higher than 25 bps could be considered as aggressive move by the RBI and also seems unlikely.

In the light of the above, the movement in the bond markets, specifically the 10 yr. G-sec paper could be worth tracking. However, we feel that if that if that if the rate hike happens to the tune of 25 bps than the bond prices should not be affected either ways substantially. In case if the rate hike is above the expectations, than we might see some movements in the bond prices and hence the yields.

Can you Multiply the number of apples you can afford over the years?

Well, if you are thinking what has an apple to do with financial planning, what is important is not “apples” but “to afford to buy more” apples as the time passes. This test would hold good not just with apples but also with anything ranging from a needle to a House property that has a monetary value. How does this work is what I propose to deal with in this article. As you go through, you will realise how important is Inflation to an investor and why is it important to consider inflation before picking up avenues of investment for parking your precious and hard earned wealth!

More than a decade back when I was just appearing for my 10^th grade in Schooling, I was very keen to know about the details of the investment advertisements of various kinds in leading newspapers. I use to chase my mother with the details such as “9.5 % returns” “Standard Chartered Bank deposits”, in the hope to persuade her to make accept some of my financial advice although it was more of an impulsive thought rather than an analysed one. As a very conservative family, She said : "Son, do you know that these are very risky instrument, and we cannot afford to lose any money at the end. The prices of Vegetables and other household items are rising and we have to be careful while making investment. What is the use if we cannot keep up with the shooting prices of vegetables and other utilities!" Same is the case with many of us who come across these advertisements. Probably there are many who have insufficient exposure to the way these investments grow. If you are one among them, do not stop till you have finished reading this entire article because this will throw some light on the meaning of “growth” of investments.

First and foremost, What is money? Money is not Wealth. Yes you heard it right!! Money is something that is used as a representation of wealth. This is because a term like wealth is more comprehensive which would cover financial as well as non financial aspects such as Food, Clothing and shelter, Medical and Educational needs. Can anyone eat money? Can anyone sit on money and go for a long drive – and the answer most obviously is no. Money can be used to buy these things which are necessary. So what is more important is to be able to afford these tangible things that support a human life. Now, Once you are clear with this concept of Money as a representation of wealth – most of the purpose of this communication seems to have been achieved.

The purpose of investment is to grow your wealth (Affordability of above mentioned tangible things). Now let me give an illustration to explain the investment: Let’s say you invested Rs. 100 at present for an year and make 10 % growth at the end of year. Does this mean your affordability has increased? Not necessarily. This decision cannot be taken in isolation from the element of inflation. For the affordability to increase there is a precondition here that the inflation rate be less than your investment return. If the apple that costed Rs. 10 is now costing Rs. 15, then this is how the picture would look like : The initial amount (Principal) of Rs. 100 that you invested would empower a purchasing power of 10 apples on you. At present the “apparently” grown investment worth (Amount) Rs 110 would give you a purchasing power of only 110/15=7.33, i.e. less than 8 apples. So you can see that actually your investment value has declined. If an year down the line, still you would have been able to buy same number of apples with the Amount, you have neither gained nor lost anything with respect to your investments. Work out the future affordability of money before you invest and make sure you afford more than today and that is precisely what growth would mean to me.

It’s your Money, so take care.. none else will!!!

It’s your Money.. so take care none else will!!!

Amit : Hey! How are you? It has been quite sometime now since we met.

Deepak :  Truly, have not got an opportunity to meet up with many of the friends since long. I have been busy .

Amit : So what is the news on your side? I have been busy as well with work and managing the household.

Deepak : I am busy with work and have been now quite seriously thinking about managing my personal funds for long term. With the investment market filled with scores of avenues. I am left confused as to how to strike a balance between a good growth in investment with reasonable risk. Though there are many persons giving a free idea as to where to invest, I feel  that these ideas are primarily driven by a feel good factor of the past experience rather than by a logic and applicability to me. All this stops me from relying on these advises.

Amit : Well Amit, you have taken the first step in planning your investments by unconsciously adhering to an important DON’T of planning your Personal Finances. And that indeed is the biggest mistake most of the people do! As the saying goes, “Practice before you Preach”, Most of the Idea Preachers are ones who will themselves never stick to their own ideas as far as managing their own investments is concerned.

Deepak : But what do I do now, as it is important for me to cater to my present and future financial needs. I want to see the growth with reasonable risk to cater to these needs of time.

Amit : Well Deepak, You have said it all! You have needs that are spread over a period of lifetime and you have idle and unused money at present in the form of funds for investment at a level of risk after meeting your expenditure. It is important to first understand these – Funds (Surplus), Time, Financial requirements and Risk apetite as these are the factors that would form the basis for the approach for your Investment decisions.

Deepak : Amit, unlike the others you have strengthened my thinking and indeed this will reduce the cacophony prevailing in my head!

Amit : Do you think that the free ideas that come to you are based on the these factors? Even if they were, how do they know what  your needs are and how much risk bearing capacity you have? How can they suggest to you something without even taking time to understand your finances and attitude. So the best is to stay away from such free advises, as the money is yours and none else!!!

J Importantly :-

• Ø  Know your Goals in life so that you can ascertain it’s monetary cost
• Ø  Do not take unprofessional advice. Seek information from a qualified professional.
• Ø  Start Early, Drive Slowly, Reach Safely!