The New York Times now encourages you to walk away if you have an "underwater mortgage" on a house, that is, you owe more money on the mortgage for the house than its value in the current housing market. I find such analysis based on the negative equity of a house somewhat puzzling. It might make sense if you have bought a house purely for investment, but not if you call it a home that provides you protection against the elements. If you give up your house, you still have to find an alternative accommodation and very likely pay rent for it.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
2010-01-11
2009-06-21
Up and Down
Are you better off if your investment first gains 10% of its value and then loses 10% or if it first loses 10% in value and then gains 10%? Many of us immediately tend to think that we're back to where we started in both the cases, but a little thought would reveal that we have lost money in both the cases.
2008-08-19
Investment Basics for Indians
My colleague Ryan stumbled upon a nice guide that explains the basics of equity and debt investment for Indians. It is available via the web-site for the National Stock Exchange (NSE) as the study material for the "Financial Markets (Beginners)" module of its certification programme.
2007-07-11
"Finance, Investments 'n' Trading"
"Finance, Investments 'n' Trading" is a weblog by Shobhit that tries to bring some sanity to the general mania currently surrounding the Indian stock markets.
You should read his articles in chronological order (he provides a helpful "Table of Contents" article for this purpose). He might sound too pessimistic to some and I do not necessarily agree with everything that he says, but the articles are still a good and recommended read, particularly if you actively buy and sell stocks or are thinking of getting into it.
The Indian stock markets have been in a prolonged and an almost-continuous bull run for about three to four years. So many people have apparently made so much money with such ease that everyone from students and housewives to army men and retired government workers want to jump into the bandwagon for fear of being left out. It does not help that newspapers, magazines and TV channels provide a disproportionate coverage of the "excitement" surrounding the Indian stock markets as if it is a form of sport.
When caution and rational reason are abandoned in times of general euphoria, many people are likely to get their hands burnt (some times without even realising that they have made a net loss, taking inflation, taxes and trading charges into account). The only people who consistently make money in such situations are the stockbrokers (for example, read Warren Buffett's "Chairman's Letter" to Berkshire Hathaway Shareholders for 2005 (PDF) from page 17 onwards).
I don't think that investing in stocks is necessarily a bad thing or that the current bull run is not backed by a real growth in the Indian economy. I just wish that people think a bit more rationally, keep realistic expectations of returns and figure out how to calculate their real loss or gain from trading, before jumping in.
I wish that more people read and understand the advice given in Benjamin Graham's superb book "The Intelligent Investor".
You should read his articles in chronological order (he provides a helpful "Table of Contents" article for this purpose). He might sound too pessimistic to some and I do not necessarily agree with everything that he says, but the articles are still a good and recommended read, particularly if you actively buy and sell stocks or are thinking of getting into it.
The Indian stock markets have been in a prolonged and an almost-continuous bull run for about three to four years. So many people have apparently made so much money with such ease that everyone from students and housewives to army men and retired government workers want to jump into the bandwagon for fear of being left out. It does not help that newspapers, magazines and TV channels provide a disproportionate coverage of the "excitement" surrounding the Indian stock markets as if it is a form of sport.
When caution and rational reason are abandoned in times of general euphoria, many people are likely to get their hands burnt (some times without even realising that they have made a net loss, taking inflation, taxes and trading charges into account). The only people who consistently make money in such situations are the stockbrokers (for example, read Warren Buffett's "Chairman's Letter" to Berkshire Hathaway Shareholders for 2005 (PDF) from page 17 onwards).
I don't think that investing in stocks is necessarily a bad thing or that the current bull run is not backed by a real growth in the Indian economy. I just wish that people think a bit more rationally, keep realistic expectations of returns and figure out how to calculate their real loss or gain from trading, before jumping in.
I wish that more people read and understand the advice given in Benjamin Graham's superb book "The Intelligent Investor".
2007-06-23
Data Visualisation with Gnuplot
Visualisation of data using charts and other types of plots is immensely helpful in getting a feel for it without carrying out detailed analyses. Gnuplot is a freely-available tool for data visualisation that is also very simple to use. The article "Visualize your data with gnuplot" is a nice introduction to this tool. Gnuplot proved to be quite handy for me recently.
I wanted to find out whether the Unit Price of a particular fund varies in line with the popular equity market indices in India, the NSE S&P CNX Nifty and the BSE Sensex. The current values of these indices are always readily available in the newspapers and on television channels, while I have to use the web-site of the fund to get its current Unit Price. If the Unit Price of the fund varied in line with the values of the equity market indices, it would save me some effort in determining its current worth.
The portfolio of the fund in question is almost entirely based on equities. It holds the shares of some of the biggest and the most stable companies across a variety of industry sectors. It was therefore reasonable to suspect that its Unit Price would vary in line with the values of the indices. However, it is not as diversified as the indices and it might not have invested across sectors in the same proportion as that represented by either of the indices.
It was easy to obtain the historical closing prices of the two indices and the Unit Prices of the fund. To keep things simple, I only considered the current month for making this comparison. To simplify things further and to improve the visualisation, I normalised the first value in each series to "100" by scaling all the values appropriately. (This is a technique that I have often seen put to good use in The Economist.)
Using Gnuplot, I obtained the following chart:
This gave me the desired answer right away!
In case you're curious, here are the Gnuplot commands I used for creating the chart above:
By the way "Junk Charts" seems to be a blog devoted to criticising charts that appear in various magazines and web-sites in general and in The Economist in particular.
I wanted to find out whether the Unit Price of a particular fund varies in line with the popular equity market indices in India, the NSE S&P CNX Nifty and the BSE Sensex. The current values of these indices are always readily available in the newspapers and on television channels, while I have to use the web-site of the fund to get its current Unit Price. If the Unit Price of the fund varied in line with the values of the equity market indices, it would save me some effort in determining its current worth.
The portfolio of the fund in question is almost entirely based on equities. It holds the shares of some of the biggest and the most stable companies across a variety of industry sectors. It was therefore reasonable to suspect that its Unit Price would vary in line with the values of the indices. However, it is not as diversified as the indices and it might not have invested across sectors in the same proportion as that represented by either of the indices.
It was easy to obtain the historical closing prices of the two indices and the Unit Prices of the fund. To keep things simple, I only considered the current month for making this comparison. To simplify things further and to improve the visualisation, I normalised the first value in each series to "100" by scaling all the values appropriately. (This is a technique that I have often seen put to good use in The Economist.)
Using Gnuplot, I obtained the following chart:
This gave me the desired answer right away!
In case you're curious, here are the Gnuplot commands I used for creating the chart above:
# We want PNG output.
set terminal png
set output "plot.png"
# Specify how and where the key (legend) for the chart should
# appear.
set key bottom right
set key width 2 box
# Tweak the look of the chart.
set title "Fluctuations in Unit Prices Relative to Market Indices"
set xlabel "June 2007"
set ylabel "Normalised Value"
set grid
# The data on the X axis represent time values.
set format x "%d"
set xtics "01-Jun-2007", 3600*24
set xdata time
set timefmt "%d-%b-%y"
set xrange ["01-Jun-2007":"22-Jun-2007"]
set yrange [95:100]
# Plot the chart using data files normalising the values in
# each case.
plot \
'nifty.dat' using 1:($5)/42.9705 \
title 'NIFTY' with lines linewidth 2, \
'sensex.dat' using 1:($7)/145.7075 \
title 'SENSEX' with lines linewidth 2, \
'fund.dat' using 1:($2)*100.00/57.0337 \
title 'FUND' with lines linewidth 2
By the way "Junk Charts" seems to be a blog devoted to criticising charts that appear in various magazines and web-sites in general and in The Economist in particular.
2007-03-11
Investing For Retirement
(Note: This post might not be of interest to those not from India.)
Most of us do not even think about planning for retirement until we reach the age of 30. Some of us "live for the moment" and don't care for the future, some of us feel uncomfortable thinking about retirement and pretend like the proverbial cat that closing our eyes to the problem will make it go away and some of us just do not know how to assess our financial requirements three decades into the future.
Unfortunately for us, there is not much of a government-provided social security in India for old folks, we cannot realistically expect our children to take care of all our expenses, inflation constantly lessens the value of our savings and interests on assured-return investments (fixed-deposits, EPFs, etc.) keep falling. We must have some idea of our needs at the time of our retirement and know how much to invest now to be able to afford the same lifestyle that we are currently used to.
The good news is that we can use basic mathematics to calculate these figures. We will make use of two equations. The first equation (call it "E1") tells us the final amount "S" that an initial amount "P" grows to if it grows at a compounded rate of "r" over "n" years:
The second equation (call it "E2") tells us the final amount "S" that a regular annual investment of "P" over "n" years gives if it grows at a compounded rate of "r":
Note that since the rates are usually quoted as percentages, you need to divide them by 100 to get the value of "r" usable in these equations. For example, a quoted rate of 8% translates to "r" equal to 0.08.
Now assume that you are aged 30 years, plan to retire at the age of 60 years, have a montly expenditure of 20,000 rupees and the rate of inflation is about 5% on the average. Using E1, you can see that at the time of your retirement 30 years hence, your monthly expenditure would become about 86,438.85 rupees simply because of inflation! That translates to about 10,37,266 rupees in annual expenditure. With old age come many an ailment for which you would need to spend money - at about 1,00,000 rupees per year at today's rates, you would need about 4,32,194 rupees at the time of your retirement to meet medical expenses. So you would need an annual income of at least 14,69,460 rupees at the time of your retirement just to sustain your current lifestyle and cope with the inevitable medical expenses!
How will you generate an income like this at that time? It is very likely that your appetite for risk would have considerably diminished at that time and you would only be willing to invest for assured-returns and thus lower rates of interest, say, about 5%. This in turn means that you would need a sum of 2,93,89,200 rupees (5% of which is the amount you need per year) at the time of your retirement. You need to have raised about 3 crore rupees by the time you retire just to be able to afford your current lifestyle!
To raise this kind of money, you either need to invest a certain amount annually till the time you retire or do a one-time investment. If you assume an annual return of 8% on your investments, you either need to invest about 2,59,431 rupees annually for the next 30 years (using E2) or about 29,20,620 rupees at a single shot (using E1). If you assume a more aggressive (though riskier) annual return of 15% on your investments, the amounts change to about 67,601 rupees and about 4,43,867 rupees respectively.
If you had started at the age of 25 years, you would have had 35 years to raise the money. At a per-annum return of 8%, you would have either invested about 1,70,533 rupees annually or about 19,87,725 rupees at a single shot. At a per-annum return of 15%, these figures become about 33,352 rupees and about 2,20,680 rupees respectively.
If you postpone investing for your retirement by another five years, you would have 25 years to raise the money. At a per-annum return of 8%, you would need to either invest about 4,02,008 rupees annually or about 42,91,349 rupees at a single shot. At a per-annum return of 15%, these figures become about 1,38,112 rupees and about 8,92,774 rupees respectively.
So the earlier you start investing for your retirement, the better it is for you. The folks at Personalfn.com have a report titled "Retirement Planning and You" that provides a more detailed analysis of this situation as well as the available investment options suitable for retirement planning.
Of course, these are simplified calculations. They do not take into account the fact that you will very likely have to pay income tax on the returns from this investment. They also do not take into account the fact that because of inflation, you would need slightly more and more every year after you retire instead of the fixed amount assumed here. Hopefully the average rate of inflation for India for the next 30 years will be less than the 5% assumed here.
Most of us do not even think about planning for retirement until we reach the age of 30. Some of us "live for the moment" and don't care for the future, some of us feel uncomfortable thinking about retirement and pretend like the proverbial cat that closing our eyes to the problem will make it go away and some of us just do not know how to assess our financial requirements three decades into the future.
Unfortunately for us, there is not much of a government-provided social security in India for old folks, we cannot realistically expect our children to take care of all our expenses, inflation constantly lessens the value of our savings and interests on assured-return investments (fixed-deposits, EPFs, etc.) keep falling. We must have some idea of our needs at the time of our retirement and know how much to invest now to be able to afford the same lifestyle that we are currently used to.
The good news is that we can use basic mathematics to calculate these figures. We will make use of two equations. The first equation (call it "E1") tells us the final amount "S" that an initial amount "P" grows to if it grows at a compounded rate of "r" over "n" years:
S = P × (1 + r)n
The second equation (call it "E2") tells us the final amount "S" that a regular annual investment of "P" over "n" years gives if it grows at a compounded rate of "r":
S = P × ((1 + r)n - 1) / r
Note that since the rates are usually quoted as percentages, you need to divide them by 100 to get the value of "r" usable in these equations. For example, a quoted rate of 8% translates to "r" equal to 0.08.
Now assume that you are aged 30 years, plan to retire at the age of 60 years, have a montly expenditure of 20,000 rupees and the rate of inflation is about 5% on the average. Using E1, you can see that at the time of your retirement 30 years hence, your monthly expenditure would become about 86,438.85 rupees simply because of inflation! That translates to about 10,37,266 rupees in annual expenditure. With old age come many an ailment for which you would need to spend money - at about 1,00,000 rupees per year at today's rates, you would need about 4,32,194 rupees at the time of your retirement to meet medical expenses. So you would need an annual income of at least 14,69,460 rupees at the time of your retirement just to sustain your current lifestyle and cope with the inevitable medical expenses!
How will you generate an income like this at that time? It is very likely that your appetite for risk would have considerably diminished at that time and you would only be willing to invest for assured-returns and thus lower rates of interest, say, about 5%. This in turn means that you would need a sum of 2,93,89,200 rupees (5% of which is the amount you need per year) at the time of your retirement. You need to have raised about 3 crore rupees by the time you retire just to be able to afford your current lifestyle!
To raise this kind of money, you either need to invest a certain amount annually till the time you retire or do a one-time investment. If you assume an annual return of 8% on your investments, you either need to invest about 2,59,431 rupees annually for the next 30 years (using E2) or about 29,20,620 rupees at a single shot (using E1). If you assume a more aggressive (though riskier) annual return of 15% on your investments, the amounts change to about 67,601 rupees and about 4,43,867 rupees respectively.
If you had started at the age of 25 years, you would have had 35 years to raise the money. At a per-annum return of 8%, you would have either invested about 1,70,533 rupees annually or about 19,87,725 rupees at a single shot. At a per-annum return of 15%, these figures become about 33,352 rupees and about 2,20,680 rupees respectively.
If you postpone investing for your retirement by another five years, you would have 25 years to raise the money. At a per-annum return of 8%, you would need to either invest about 4,02,008 rupees annually or about 42,91,349 rupees at a single shot. At a per-annum return of 15%, these figures become about 1,38,112 rupees and about 8,92,774 rupees respectively.
So the earlier you start investing for your retirement, the better it is for you. The folks at Personalfn.com have a report titled "Retirement Planning and You" that provides a more detailed analysis of this situation as well as the available investment options suitable for retirement planning.
Of course, these are simplified calculations. They do not take into account the fact that you will very likely have to pay income tax on the returns from this investment. They also do not take into account the fact that because of inflation, you would need slightly more and more every year after you retire instead of the fixed amount assumed here. Hopefully the average rate of inflation for India for the next 30 years will be less than the 5% assumed here.
2006-06-23
Calculating EMIs
Most of the software engineers I know here in Bangalore have either already bought a house or are planning to buy one. The biggest incentives are perhaps the easy availability of home loans at interest rates far lower than that available to the previous generation and the tax-breaks one gets here in India on the principal and the interest paid on home loans. Our generation is also not averse to taking on a debt unlike the previous generation. In addition, many of us feel that it is better to take the plunge now and enjoy the comforts of your own house than to diligently save all the required money for years and then buy a house, only to find out that the dream was realised a bit too late in your life.
2005-06-01
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