The Best Route to Building Wealth

Best Route to Building Wealth - The title sounds like one of those Spam Emails we keep getting in our inbox with lofty claims about making us millionaires, isn’t it?

No, I am not one of those guys and I can assure you that this article is not a get-rich-quickly articles. However, one thing I can assure you is that, this article is going to give you pointers on how you can actually build wealth. That is not going to happen overnight. Slowly but surely you can achieve your dream of being wealthy..

Are you curious?

So, What is a Sensible Way to Build Wealth?

If you talk to some random guy to find out ways to build wealth you may get any or all of the following ideas:

1. Invest in Property
2. Speculate in Stocks
3. Find Get Rich Quick Schemes
4. Start a Business
5. Play the Lottery
6. Switch to a Better Paying Job
etc...

Let’s take a moment and think about these ideas - Are they sensible? Except Switching to a Better Paying Job, the other ideas are either purely based on luck or require a huge capital investment.

So, What is the Possible Alternate?

Investing in the Equity Markets on a regular basis is the best way to build wealth.

Quick Trivia:

You may be wondering why I have put "Speculate in Stocks" as item no. 2 in the list above but say Invest in Equity Markets in this section, aren’t you? Speculating means buying some random stock and praying to god that the stock price goes up. Investing means, doing proper research, identify a good stock and then investing in it with a timeframe in mind...

What Prevents us from Being Good Investors?

Everyone would like to be good investors but unfortunately things are not that simple in the Investing World. Some of the most common problems we face are:

1. We all have a full-time job
2. Plus, we spend the remaining time (beyond our office hours) with our friends and family
3, Time Required to acquire knowledge about Equity Markets is pretty high
4. Understanding the Equity Markets is complicated and requires dedicated effort (which points us back to problem no's 1 & 2)
5. Ability to come up with lump sum capital amounts to invest in options like Real Estate or Starting a Business

Are you one of those people who will fall under many or all of the problems listed above? If so, this article is going to give you a simple solution to overcome this problem...


So, What is this Best Route to Build Wealth?

The best route I would say is to start a "Systematic Investment Plan" on either a good Index Mutual Fund or an Index Exchange Traded Fund

Why the Systematic Route?

As I have said numerous times in this blog, investing on a regular/monthly basis is great for two important reasons:

1. The Monthly Outflow of funds is not huge. You can start with amounts as small as Rs. 1000/- per month
2. You have the ability to average out your investments in the long run irrespective of market volatility

Benefits of Starting an SIP in an Index Mutual Fund or Index ETF:

The Following are the Advantages of following the above said option:

1. You get wide diversification in a single package
2. ETF/Index Funds have low operating expenses
3. ETF/Index Funds have low internal trading expenses
4. ETF give you control of your exposure to the specific asset classes you want
5. When you buy an Index ETF, you know what you are getting, the performance of an index
6. You will most likely get average returns
7. You won’t have to worry about monitoring the performance of a fund manager
8. The rebalance is automatic without you worrying whether by selling, you will miss out on a manager’s "hot streak"

What kind of returns can you get?

The thing about equities is that you won’t know whether you will be getting 3%, 6% or 9% in future. That is why all stock market investments come with the mandatory disclaimer that says "Past Performance may or may not be sustained in future". However, if we take history as a yardstick to predict future performance, we can conclude that in the long-run regular investments in the Equity Markets can out-perform all other investment classes - Always.

For Ex: If you had Invested in an Index Mutual Fund or ETF that is based on the Nifty (National Stock Exchange) Rs. 5000/- every month starting 1st January 2002 (Almost 12 years ago), as on date your investment would be worth over 1.5 crores. The amount you invested over the past 12 years would work out to Rs. 7,05,000/- at the end of last month.

As you can see, your money has more than doubled in 12 years, which is great, isn’t it?


Will you lose money?

Let us be realistic here. Stock Market Investments are really risky and you may end up losing money if you want to stay invested only for a short duration. For ex: If you had invested a lump sum of Rs. 10,00,000/- in Jan 2008 your investment would have been worth around 8.5 lakhs in May 2008 and less than 5 lakhs in December 2008. Even now, your investment would be only worth around 9.5 lakhs as of today.

Whereas if you had invested Rs. 5,000 every month starting 1st January 2008, your investment would be worth 4.2 lakhs as on date while your investment would have been 3.5 lakhs. Even though the profit is only Rs. 70,000/- over the past 5 years, you were able to average out your losses because you stayed the course and invested every month. If you continue to do so, for another 5 years or so, your investment would definitely be worth a lot more.

To Summarize: Chances of Not Losing Money increases with TIME

Do ETF's and Index Mutual Funds Pay Dividends?

Yes, they do. As Index Mutual Funds and ETF's only invest in the most profitable and large corporations in the country, there is a good chance that these companies declare good dividends every year. Index Mutual Funds and ETF's declare Dividends on a regular basis depending on the dividends they receive from the companies they hold stocks in. Remember that this dividend is at the discretion of the fund manager and will only happen if the economy is doing well. For ex: During the crisis between 2008 to 2010 most ETFs did not declare dividends but the past couple of years, they have declared decent dividends.

What Other Benefits Does Investing in Index ETF or Mutual Funds have?

India is an emerging market. Our economy is growing. As our country progresses, newer conglomerates come into the picture. When the country does well, the underlying companies that support the country do well too. When new companies replace old ones in the Index because of their growth, you don’t have to worry about the same because your ETF or MF automatically does the replacement and you get the benefit. For ex: In 2011, Coal India and Sun Pharma replaced Reliance Communications and Reliance Infrastructure in BSE Sensex. You can read the article I wrote at that time "By Clicking Here" to learn the why part. Since Coal India and Sun Pharma were better prospects, switching to them was a good idea for the Index and would have been a good idea for the investor too.

Some Final Words:

Building Wealth is a time taking activity and you need to invest regularly and religiously for at least 10 or 15 years in order to accumulate and build Wealth. That is exactly why I suggest this route because these funds are not dependent on one fund manager’s brilliance or ability to pick winning stocks. These funds move along with the country's economy. For a country like India which is still in growth mode, this idea is all the more impressive.

At the end of the day this investment comes with a risk. If you are willing to take the risk this is a wonderful opportunity.

Before I wrap up, let me say that if you feel investing in the stock market is not your cup of tea due to the risk, at least start a monthly "Recurring Deposit" with any bank for whatever small amount you can afford every month. Just let the money accumulate for 5 or 10 years and you are sure to save up a good amount of money.

Happy Accumulating Wealth!!!

How To Plan Your Childs Financial Future and Do It Well!!!

Today is Vijaya-Dashami, a day that is considered auspicious for all good things for our future. So, todays aim is to start planning for something that is most important and crucial for all of us...

Becoming a parent is a great step forward for any couple. It brings in tons of joy and happiness to not only the couple but also to their parents, relatives, friends etc. However, along with this happiness comes a great deal of responsibility and financial burden that has to be prudently planned. A Parent who does not plan for his/her children’s future is similar to a batsman entering the pitch to bat against Shoaib Akhtar or Brett Lee without Helmets, Pads, Elbow Guard etc. Eventually they will end up getting hurt, unless of course they get out first ball.

Analogies apart, being a good parent is not only about being affectionate and caring on our kids, it is also about planning for a safe financial future for our kids and making sure that we stick to the plan over the next 15-20 years when our kid will actually need the money...

Why Plan for our Kids Future?

This is the million dollar question. Every parent dreams of their kids to have the best education, to go to the best college etc. For parents of the girl child in India comes the added responsibility of planning for their daughter’s wedding. All these goals that you set in your mind about your children require money and a lot of it. Unless you start planning now, there is a chance that you may face a budgetary constraint many years down the line when your kid is ready to go to college or is ready to get married.

Are you thinking?

My kid's college or wedding is so far away. I will definitely save up money for it by then...

This article does not doubt your commitment or love towards your kids. Instead this article is about starting the thought process that will help you save up the kind of money you need, in time for the big spend...


How To Calculate The Future Money Requirement?

Now that we have established that you are a responsible parent and are going to save up money for your children’s future, the next step is to plan and identify how much money you actually need. For ex: The fee in a reputed Engineering College these days in Chennai works out to around 50,000 to 75,000 per year. So, for a 4 year education including special fee, exam fee and all those unknown fees colleges rip us off, the total fee for education would work out to approx. 5 Lacs.

The next step is calculating when your kid will be joining college. Let us say your kid is 1 year old now and will join college when he is 19 years old, you have 18 years to accumulate this money.

Lastly, you need to take into account inflation because when I studied Engineering a decade ago, my fee per year was approx. 20,000 whereas the fee now has almost doubled in just 10 years. Who knows what will happen 18 years from now? But, for simple calculation purposes let us assume Inflation will be at 10% per year.

Now, we have all the requisite information to calculate the "How Much" part. The formula for that is:

Amount * (1 + Inflation Rate %) ^ No. of Years.

So just plug in your numbers and you get:

5,00,000 * (1 + 10/100) ^ 18

500000 * 1.1^18

27,79,958.66

So, at the end of 18 years, you will need almost 28 lacs for an education that is costing 5 lacs today.


So, How to Accumulate the money?

Once you know how much money you need, the next step is to start accumulating the corpus. You have two options - Either do one time lump sum investments or make monthly contributions. Let us take our earlier example where we need 27.8 lacs for our kids’ education.

One Time Contribution: If you put 5 lacs today into a Fixed Deposit that pays you 10% interest which is compounded every year once, you will end up with exactly this 27.8 lacs that you need for your child's education 18 years from now. So, if you have surplus in your hand and want to ensure that your kid gets the best education, just put the money into a fixed deposit for 18 years and just forget about it. When your kid is ready for college, so will the money to fund his education.

Formula to calculate the Maturity Amount is: Amount * (1 + Rate of Returns %) ^ No. of Years.

Monthly Contributions: To accumulate this much money, you would need to invest 5000 rupees every month for the course of the next 18 years into an investment that pays you at least 9% returns per annum. Doing so will accumulate 27 lacs at the end of 18 years

This formula is a little bit complicated, so I suggest you use the SIP Returns Calculator Widget embedded in our Retirement Planning Home Page. Click Here to view the page.


So, What Next?

You now know how to calculate the future value required for a certain event and how to calculate the investment required to achieve it. The next step is to make sure we cover everything. Two of the key events in our kid's future which will need a big influx of cash are:

1. Higher Education (Degree, Post-Graduation, Masters etc.)
2. Marriage

If you want to plan for anything else, you can always include the same into your financial plan for your child.

Step 1: Calculate the Target Timeline. Ex: Higher Education - 18 years, Marriage 25 years etc.

Step 2: Calculate the amount required for each event. Use the formula in the section above

Step 3: Calculate the amount you need to invest every month (This is much easier than one time lump sum investments). But, if you have surplus, don’t think too much, go ahead and invest it.

Step 4: Keep track of your investment every 3 months and make adjustments if required...


Points to Remember:

The following are some points you need to remember while planning for our children’s future...

1. One of the biggest mistakes people do is dipping into this kind of corpus every time they need money. This will significantly deplete the final maturity value. As we are trying to save money for our children’s future, let us take a decision that we will not be touching this unless it is a real life & death kind of emergency. If you want to go for a cruise or get that luxury car, don’t even think about touching this corpus...

2. Proper Asset Allocation is vital. During the initial stages of the saving plan, you can try an Aggressive approach and keep a healthy allocation towards Equities because in the long run, they are the best asset class. As your target goal comes nearer, start shifting your assets slowly towards a Balanced approach and when your goal is just a couple of years away, go in for a conservative approach.

For ex: If I were starting an SIP for Rs. 5000/- every month for the next 15 years for my Sons education, I would choose a Diversified Equity or a Large Cap Mutual Fund Initially. After 8 years I will switch over the corpus into a Balanced Fund and continue my SIP. After 12 years I will switch over to a Debt fund or start up a FD for the full corpus as-on-date and start up a Recurring Deposit with the bank. This way, am ensuring that my overall corpus does not get affected by the short-term stock market volatilities.

3. DO NOT get carried away by fancy financial products especially ULIPs. Read the details carefully, analyze the pros and cons before you make any investment decisions. Remember that the Insurance Agent is getting paid to sweet-talk you into buying those products. You are the one who will be affected if the product does not do what it is supposed to. Remember an article titled Financial Resolution No. 3: I will not blindly trust my Insurance or Investment Advisor? Please Read it once...

A TIP for the Parent Who is Extremely Busy:

Most of the children’s future themed ULIP Products have great advertising campaigns with lots of Insurance Agents and Banks selling them aggressively. The catch here is that, these are just standard ULIP plans which have been sugar coated with the key-word "Children" to appeal to the parents of today. If the products were that amazing in protecting our children’s future, the agents and banks need not have to get paid a hefty commission just to sell these to you and me.

Anyways, if you are someone who cannot spend so much time into deciding on Investment options, Asset Allocation etc., then, these ULIP options are good provided you are willing to incur the cost of the advertisement campaign, the commission paid out to the person who sells you the policy etc. However, this is obviously much better than doing no planning at all...

Some Last Words:

On an average, if someone actively tracks & manages his/her portfolio even if it is just Bank Fixed Deposits or Mutual Funds, they will probably make at least 2-3% more in profit when compared to someone who selects a ULIP scheme that invests in the same category. This is not because the people who manage those ULIP schemes are incompetent. They are obviously more competent than you and me but the fees and charges they end up paying to all the parties involved is just so much higher that it eats into the profits from the investors perspective...

But, as long as you are able to do some sort of planning for your kids future, that would be a great start..

Happy Planning & Investing!!!

List of Miniratna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have Miniratna Status.

We have a total of 53 PSU's that come under the Category I Miniratna Status. They are:

1. AIRPORTS AUTHORITY OF INDIA
2. ANTRIX CORP.LTD.
3. BALMER LAWRIE & CO.LTD.
4. BEML LTD.
5. BHARAT DYNAMICS LTD.
6. BHARAT SANCHAR NIGAM LTD.
7. BRIDGE & ROOF CO.(INDIA) LTD.
8. CENTRAL COALFIELDS LTD.
9. CENTRAL WAREHOUSING CORP.
10. CHENNAI PETROLEUM CORP.LTD.
11. COCHIN SHIPYARD LTD.
12. CONTAINER CORP.OF INDIA LTD.
13. DREDGING CORP.OF INDIA LTD.
14. ENGINEERS INDIA LTD.
15. ENNORE PORT LTD.
16. GARDEN REACH SHIPBUILDERS & ENGINEERS LTD.
17. GOA SHIPYARD LTD.
18. HINDUSTAN COPPER LTD.
19. HINDUSTAN NEWSPRINT LTD.
20. HINDUSTAN PAPER CORP.LTD.
21. HLL LIFECARE LTD.
22. HOUSING & URBAN DEVELOPMENT CORP.LTD.
23. INDIA TOURISM DEVELOPMENT CORP.LTD.
24. INDIAN RAILWAY CATERING & TOURISM CORP.LTD.
25. IRCON INTERNATIONAL LTD.
26. KIOCL LTD.
27. MAHANADI COALFIELDS LTD.
28. MANGALORE REFINERY & PETROCHEMICALS LTD.
29. MAZAGON DOCK LTD.
30. MISHRA DHATU NIGAM LTD.
31. MMTC LTD.
32. MOIL LTD.
33. MSTC LTD.
34. NATIONAL FERTILIZERS LTD.
35. NATIONAL SEEDS CORP.LTD.
36. NHPC LTD.
37. NORTH EASTERN ELECTRIC POWER CORP.LTD.,THE
38. NORTHERN COALFIELDS LTD.
39. NUMALIGARH REFINERY LTD.
40. ONGC VIDESH LTD.
41. PAWAN HANS HELICOPTERS LTD.
42. PROJECTS & DEVELOPMENT INDIA LTD.
43. RAILTEL CORP.OF INDIA LTD.
44. RASHTRIYA CHEMICALS & FERTILIZERS LTD.
45. RITES LTD.
46. SECURITY PRINTING & MINTING CORP.INDIA LTD.
47. SJVN LTD.
48. SOUTH EASTERN COALFIELDS LTD.
49. STATE TRADING CORP.OF INDIA LTD.,THE
50. TELECOMMUNICATIONS CONSULTANTS INDIA LTD.
51. THDC INDIA LTD.
52. WAPCOS LTD.
53. WESTERN COALFIELDS LTD.


We have a total of 16 PSU's that come under the Category II Miniratna Status. They are:

1. BHARAT PUMPS & COMPRESSORS LTD.
2. BROADCAST ENGINEERING CONSULTANTS INDIA LTD.
3. CENTRAL MINE PLANNING & DESIGN INSTITUTE LTD.
4. EDCIL (INDIA) LTD.
5. ENGINEERING PROJECTS (INDIA) LTD.
6. FCI ARAVALI GYPSUM & MINERALS INDIA LTD.
7. FERRO SCRAP NIGAM LTD.
8. HMT (INTERNATIONAL) LTD.
9. HSCC (INDIA) LTD.
10. INDIA TRADE PROMOTION ORGANISATION
11. INDIAN MEDICINES PHARMACEUTICAL CORP.LTD.
12. MECON LTD.
13. NATIONAL FILM DEVELOPMENT CORP.LTD.
14. NATIONAL SMALL INDUSTRIES CORP.LTD.,THE
15. PEC LTD.
16. RAJASTHAN ELECTRONICS & INSTRUMENTS LTD.



List of Navratna Companies in India

List of Maharatna Companies in India

List of Navratna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have the Navratna Status.

We have a total of 14 PSU's that come under the very well respected Navratna Status. They are:

1. BHARAT ELECTRONICS LTD.
2. BHARAT PETROLEUM CORP.LTD.
3. HINDUSTAN AERONAUTICS LTD.
4. HINDUSTAN PETROLEUM CORP.LTD.
5. MAHANAGAR TELEPHONE NIGAM LTD.
6. NATIONAL ALUMINIUM CO.LTD.
7. NEYVELI LIGNITE CORP.LTD.
8. NMDC LTD.
9. OIL INDIA LTD.
10. POWER FINANCE CORP.LTD.
11. POWER GRID CORP.OF INDIA LTD.
12. RASHTRIYA ISPAT NIGAM LTD.
13. RURAL ELECTRIFICATION CORP.LTD.
14. SHIPPING CORP.OF INDIA LTD.,THE


List of Maharatna Companies in India

List of Miniratna Companies in India

List of Maharatna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have the most respected Maharatna Status.

We have a total of only 7 PSU's that come under this Maharatna Status. They are:

1. BHARAT HEAVY ELECTRICALS LTD.
2. COAL INDIA LTD.
3. GAIL (INDIA) LTD.
4. INDIAN OIL CORP.LTD.
5. NTPC LTD.
6. OIL & NATURAL GAS CORP.LTD.
7. STEEL AUTHORITY OF INDIA LTD.

List of Miniratna Companies in India

List of Navaratna Companies in India

Different Categories of Public Sector Companies in India

Are you one of those folks that hear the term Navratna or Maharatna being used while referring to large government owned public sector companies and do not fully understand what that means? I am one among those individuals and that is why I started searching the Internet on what each of these terms mean. After detailed research, I was able to narrow down on the most important details reg. these classifications. The idea behind this article to explain the same...

What are these Categories?

The Government of India categorizes our Public Sector Companies based on their size into 3 main categories:

1. Maharatna
2. Navratna and
3. Miniratna

Let us take a look at them one by one in ascending order of size...

Miniratna Public Sector Company or Miniratna PSU:

Miniratnas are those small to mid sized public sector enterprises that are making good profits and have started building a reputation. Because of the sheer number of companies that come under this grouping, the government has gone a step further to classify companies as Miniratna Category 1 and Miniratna Category 2.

1. Category I companies should have made profit in the last three years continuously, the pre-tax profit should have been Rs. 30 crore or more in at least one of the three years and should have a positive net worth.
2. Category II companies should have made profit for the last three years continuously and should have a positive net worth.

In addition - These companies should not have defaulted in the repayment of loans/interest payment on any loans due to the Government. Also, these public sector enterprises shall not depend upon budgetary support or Government guarantee for their functioning.

To view the list of companies that fall under this Miniratna status - click here

Navratna Public Sector Company or Navratna PSU:

Any PSU that is already in the Miniratna Category 1 group can get Navratna status if the company can score at least 60 points out of 100 in the following performance parameters combined:

Performance Parameters	Maximum Points
Net Profit to Net Worth Ratio	25
Manpower cost to cost of production or services	15
Gross margin as capital employed	15
Gross profit as Turnover	15
earnings per Share	10
Inter-Sectoral comparison based on Net profit to net worth	20
Total	100

Trivia:

This Navratna Status was originally granted to nine PSU's that were extremely large and were making great profits. That is how the "Nava" part of the name came in and over the years many more companies have joined this exclusive club.

To view the list of companies that come under this Navratna status - click here

Maharatna Public Sector Company or Maharatna PSU:

Any PSU Company that is already in the Navratna Status and meets the following additional conditions can be categorized as the most elusive Maharatna Company...

1. Listed on the Indian stock exchange, with a minimum prescribed public shareholding under SEBI regulations
2. An average annual turnover of more than Rs. 20,000 crore during the last three years
3. An average annual net worth of more than Rs.10,000 crore during the last three years
4. An average annual net profit of more than Rs. 2,500 crore during the last 3 years

The performance of Maharatna CPSEs would be reviewed annually by the Inter-Ministerial Committee, and thereafter by the Apex Committee headed by the Cabinet Secretary which will recommend continuation/divestment of Maharatna status. The review will focus on the eligibility of Maharatna CPSEs vis-à-vis the criteria laid down for grant of Maharatna status, and their performance during the previous year(s).

There are only 7 Companies in our country that can boast of this status of being a Maharatna Company. To view the list of companies that come under this Maharatna status - click here

Is Your Take Home Salary Much Lower Than Your Salary Package???

Are you someone who wonders where all my on-paper salary goes when your salary gets credited every month? Did you think that the salary package offered by your employer was good when you actually signed the offer and regret it now because the take home salary doesn’t reflect the salary raise? If so, read this article carefully. The purpose of this article is to understand why our take home salary does not match up to our offer letter and what we can do to handle it...

Before we Begin - What is CTC?

These days, most private companies combine all salaries and benefits offered to its employees using a blanked term called "Cost To Company" a.k.a CTC. This CTC includes all costs that the company incurs in order to retain you as an employee.

Why is my Take Home Salary SO LESS in comparison to my CTC?

As I just said, CTC includes all monetary expense the company incurs on your head, not just your actual monthly salary. Unfortunately, many of us fail to realize the fact that, not all components of our CTC salary directly translate to "Take Home" salary. That is why your take home salary is so less in comparison to what is printed out on your offer letter (or CTC)

So, How Does our Employer Accomplish this?

The following are some commonly used ways by which employers boost your CTC in your compensation letter. This list is in decreasing order of impact on your take home salary:

1. Including Variable Components as part of CTC

A Variable component in your salary package is something that is not guaranteed. The compensation letter clearly states that this variable component will be paid out at the end of the year depending on your individual performance as well as the company's performance as a whole. Technically, this is not part of your monthly take home salary and you will get it in lump sum at the end of the year.

So, if your annual CTC is 12 lacs and this variable component is Rs. 15,000/- per month, your actual CTC for calculating the Take Home Salary is only 10.2 lacs. The remaining 1.8 lacs is variable salary which you may or may not get at the end of the year.


2. Including Transport Facilities, Insurance etc. as part of CTC

Most companies these days offer Transportation Facilities and Insurance coverage to all of their employees.

For ex: If the company offers you free Transportation pick-up and drop to office, they assume a notional expenditure of some amount (Say Rs. 2000/-) per month and add that as part of your CTC. This 2000 rupees is added to your salary for CTC purposes but this is something you will never get in your hand. Similarly, if the company is offering health insurance to the employee and his immediate family, they happily include the insurance premiums into the overall annual CTC.

Technically speaking, the company actually incurs expenditure in providing transportation or insurance to the employee. By adding an assumed value for the same, they hike up your CTC which reflects badly when you get your salary at the end of the month.

These are just two commonly used examples. Any other benefits like food coupons, shift allowance etc could also be clubbed up with your overall pay package to make the CTC seem much higher than it actually should.

3. Adding Employer EPF & EPS Contributions as part of CTC

In India, every company is expected to contribute 12% of the employee's basic salary into EPF and EPS schemes. For an employee whose basic salary is Rs. 10000/- the company has to shell out an additional Rs. 1,200/- for this. Remember the article titled Employee Provident Fund Demystified where we had covered the detailed breakup of the money that goes into the EPF and EPS schemes?

12% of the basic salary is contributed by the employee and another 12% is contributed by the employer. So, technically speaking 24% of your basic salary is not part of your take home salary. The company will include their 12% share as part of your overall CTC.

Is this list - Exhaustive? Actually No. These are the 3 biggest means by which company's inflate our CTC and we end up heartbroken when the salary actually gets credited into our bank account...


Is this Illegal?

No. What our employer is doing is perfectly legal. All he is doing is, just including all of your monetary benefits in one package and calling it "CTC". If they mention that the variable component will be paid out 100% in the offer letter and give you only 80%, that is illegal. But, if they clearly mention that the amount paid-out will depend on company performance, it is perfectly legal...

So, what can I Do?

If you are already working for some company, chances of re-negotiating your salary package is almost impossible. However, if and when you actually switch jobs in the future, remember to do the following:

TO-DO No. 1: Don’t Go Blindly by CTC/12. Your Take Home Salary will never be that much...

In the first page of the offer letter, the company will quote a notional figure as your annual CTC pay package. Your actual monthly take home salary will never and I mean never equal that number divided by 12. DO NOT accept an offer just based on that number. Go to the breakdown section and see what are the actual components that get paid out every month. Add them up and see if this number is a reasonable or acceptable raise in comparison to what you are earning now...

Real Life Trivia:

In my first job, my pay package had 3 variable components - One based on my performance, One based on company performance and One based on my Business Unit performance. Almost 30% of our salary went into these 3 buckets. So, technically my CTC was a healthy number but my take home was not so healthy.

TO-DO No. 2: NEGOTIATE...

DO NOT and I mean DO NOT accept an offer without negotiation. If you feel some components are too high (for ex: Variable components) talk to the hiring HR Manager and ask them to reallocate the numbers so that a bigger chunk falls into the fixed salary components. If they give you this standard statement that says - we usually pay out around 2 months’ salary as bonus and adds that 2 months into CTC, tell them that this bonus is not part of the guaranteed pay-out and hence you cannot consider than as motivation enough to take up the offer...

Real Life Trivia:

When I switched from my 2nd Job, I was offered a healthy 20% raise from a CTC to CTC Perspective. When the HR called me up with the number I was pretty impressed and asked them to send the offer letter. When I opened the offer letter I saw that around 15% of the actual raise was on company performance based variable components and technically my hike was only a couple of thousand rupees. When I called up the HR Manager she was like, your current company doesn’t offer performance bonus but we do. We usually pay 2 months bonus and blah blah blah, I just said that the offer was not good enough and refused to accept it.

Care to venture a guess on what happened after that?

The Lady called me back the very next day with an offer that was significantly higher than what was offered initially with around 80% of that raise going into the monthly fixed salary...

At the end of the day, it is our pay package and we have the right to negotiate as well as refuse the offer if we do not like it. Please note that all this negotiation is only possible until you sign the offer letter. Once you join the company your salary structure is fixed/frozen and you cannot negotiate any more. So, make sure you do all the negotiations up front, otherwise you will end up repenting your decision to switch to a new job...

Happy Negotiating!!!

Is a Mutual Fund House Consolidation On the Cards?

Remember an article titled “Top Mutual Fund Houses in India by AUM” in Feb last year in this blog? We had seen the top 25 and the bottom 5 fund houses in the country by “Assets Under Management”. We have more than 40 fund houses in our country and the stock market regulator SEBI is thinking about some new regulations that might make investors happy. At the same time, this might spell bad news for the small mutual fund houses and schemes. Gone will be the days when fund houses can happily flout some new fund scheme and forget about it soon after. The idea behind this article is to go over these recent developments and how this might affect the fund houses in our country.

New Development No. 1: Revised Net Worth Requirements for Fund Houses

The current requirement for any Fund House to start is 10 crores. SEBI is planning to raise it to 100 crores.

Why: The idea behind this rule is to restrict cash-strapped entities from flouting their own fund house and starting a mutual fund scheme to attract investor funds.
Impact: As of end of last quarter (Sep’13) all the fund houses in our country are more than 100 crores by size. The smallest fund house Daiwa Mutual Fund has 131 crores worth of funds in its corpus. So, this scheme might not impact any of the existing fund houses but it might prevent newer entities from entering the fray.

New Development No. 2: Sponsors Need to Invest in their own Funds

As of now, there is no requirement for fund houses and the sponsors to invest their own funds into the mutual fund schemes they flout. SEBI may ask sponsors to invest in its own New Fund Offers (NFOs) to the extent of 1% of total amount raised through a new fund or Rs 50 lakh whichever is higher.

Why: The idea behind this rule is that, if the fund house has its own funds invested in a scheme, it will give them additional motivation to perform better. If they don’t manage their funds properly, they will end up with losses themselves.

Impact: This would only impact the NFO’s of fund houses but still, this will force fund houses to be more prudent in their decisions to ensure that their capital is preserved too. If I were managing a fund that has 50 lakhs worth of my money, would I be reckless in my investment decisions?

What Does This Mean for Fund Houses?

Smaller Fund Houses might be forced to stay cautious and smart in order to survive. If they are unable to meet the minimum requirements set forth by SEBI they may be forced to sell their businesses. This may result in consolidation between fund houses with smaller ones shutting down shop and selling their assets to larger and more established fund houses.

What Does This Mean For Investors?

As Investors our first and foremost priority while selecting a mutual fund house is that, they will make the best choices with respect to our investments. If the fund sponsor is putting his own money into the fund, which will increase the probability of the fund manager making the best investment decisions. So, as investors we stand to win – big time…

My Thoughts:

As someone who has been following the Indian stock market for many years, there is a very good probability that there will be a mutual fund house consolidation in the near future once these guidelines are enforced.

At the end of the day - these new guidelines by SEBI will be good news for investors.

Happy Investing!!!