Wish you a Happy Diwali ...

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Diwali, the festival of light, is when Hindus perform a Laxmi pooja. What are we asking for when we pray to Goddess Laxmi? We ask for prosperity, not just money. There is a difference between the two. In order to understand the same, let us look at the photo of the goddess we use for the pooja.

One of my favourite Diwali posters is one that shows Goddesses Laxmi and Saraswati along with Lord Ganesh. It is not for no reason that these three are shown together.  
 

While we all need blessings of Goddess Laxmi to be successful in life and grow, she must come in our life flanked by Goddess Saraswati – the goddess of knowledge and Lord Ganesh – the god of wisdom. If Laxmi comes along with these two, it stays and brings bliss in life. And that is true wealth – not mere financial wealth.

Trying to earn more and more money without proper knowledge and wisdom can lead to ruins. Money may come but that would not bring bliss in life.

The difference between “knowledge” and “wisdom” also must be understood at this juncture. “Knowledge” is to know something – to be aware of something – to understand and being able to explain it. “Wisdom” is intelligence – it is about being able to judge – to use discretion – being able to separate the good from the bad – the right from the wrong.

First, let us address the knowledge part. It is critical to know what one is doing. “Look before you leap” is not just a proverb; it’s a great advice. Whether it is income, expenses, loans or investments, it is important to know.

Questions on income:

·       How sustainable is the income?

·       How stable is the source of income? This is especially critical for self-employed persons and small business owners. However, in the present times, even jobs are also not guaranteed.

·       Do you understand the taxes on the income?

Questions on expenses:

·       Know the monthly budget – the expenses you incur

·       How much of the monthly budget is spent on necessities and how much on luxuries? Which of the luxuries can you cut down?

·       Is it possible to reduce some expenses through finding alternatives?

·       Have you kept provision for these expenses in case there is an emergency, e.g. health issue or loss of job?

Questions on loan:

·       Have you understood the terms of the loan?

·       What is the interest rate on the loan? Is it too high or too low? If it is too low, is there a catch?

·       What are the various penalty clauses?

·       What are the flexibilities?

·       Can you terminate the loan earlier without any penalty, in case you get funds suddenly?

·       What is the security required by the lender?

Questions on investments:

·       Have you understood the terms of the investment?

·       What is the (expected) rate of return?

·       Is it too high or too low? If it is too high, is there a catch?

·       Is the risk too high? Understand the risk involved. If you do not understand the risk, please avoid the investment. Every investment carries some risk.

·       Is there a lock-in or is the investment liquid?

·       At what rate would the earning be taxed?

This is not an exhaustive list, but only an indicative one.

Discretion is required both while earning as well as spending. Is the money coming in through the right means or are you taking some actions, which may be incorrect ethically or morally? Are you spending too much money for luxuries than fulfilling your responsibilities?

Wisdom and discretion must be applied to the assets and liabilities, too. Are you borrowing wisely? Is it really required? Is it a good loan? Are you investing smart? Or are you acting on tips without understanding the risks? There have been many instances when one has asked “Is it safe?” or “I hope there are no risks” in stead of asking “Please tell me about the risks present. And how do we manage those”.

So, this Diwali, make sure to pray for Laxmi to arrive at your place – but the right type and through the correct means. Pray to Goddess Laxmi to stay in your life forever. Make sure your life is worth for her to stay forever.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

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Can you get bank loan against your mutual fund units?

You need not upset your long term plans in case of a short term emergency requirement of funds. You can avail loan against your mutual fund investments. Amit Trivedi writes in Mid-day Gujarati edition today:

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The English translation is as under:

Most of the good quality investment advisors would advice an investor to focus on the long-term goals and not worry about short-term market movements. Incidentally, many of us have some goals to fund far in the future. For the purpose of the investment to deliver in line with expectations, the investment should be given time.

Now, two things are required for someone to hold onto the investments for long periods without worrying about short-term performance: (1) financial ability, and (2) psychological ability. We will not talk about the psychological ability here. However, the financial ability to stay invested can partly take care of the psychological ability.

The advisors and financial planners strongly recommend taking care of the short-term requirements through creation of a contingency fund. They also strongly recommend buying enough insurance cover that takes care of your family’s expenses in case an unfortunate event takes place.

Even after that, some emergencies may crop up – something unexpected and sudden. It could be a business loss or money required by a close friend or a family member. What happens when you have invested your money for meeting long-term goals, but there is an emergency requirement for a short while?

Well, this is where one may consider a facility offered by banks – loans against security. Banks allow one to borrow against various investments for a short period. This is an overdraft facility, where there are no EMIs to be paid and one may pay the entire sum (or part of it) back to the bank as per one’s convenience. The interest is charged only to the extent of amount borrowed (or outstanding, if part of the loan is repaid) and only for the period for which the same is borrowed. You may get a limit sanctioned from the bank, but use only what is required.

Mutual fund units are approved securities to borrow against, under this scheme. Banks lend money against the collateral of MF units. The process is simple: one needs to get the units pledged in favour of the bank. This can be done through filling up some forms and getting confirmation from the respective mutual fund companies. Debt and equity funds may be treated differently. You may check with your bank.

The benefit of such a facility is: you are able to tide over the temporary cash crunch without selling your long-term holdings. the cost of such a loan is also low as it is limited to the period of borrowing and to the extent of the amount used.

We have often seen that the cash crunch and market crash come together. In such a situation, if one has to liquidate the holdings (especially the equity funds), one may not get a chance to participate in the upside that follows. Consider this facility available from banks.

At the same time, please be careful. This is a type of loan; hence use your discretion. Do not make a habit of borrowing or using this limit for trivial reasons. Use it only when it is absolutely necessary and you have run out of other options.

Wish you all a very happy, healthy and wealthy 2016.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Should one use bonuses to repay loan or invest in equity?

Recently in an interview, an expert recommended that the Diwali bonus should be invested in equity instead of repaying the home loan. 

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