Asset Sterilization

Most parents tech their kids finance by encouraging them to build up a piggy bank (Gullak). So the kid puts his pocket money into a container which they still own but cannot use. (Also known as Asset Sterilization)

Money does not multiply inside a piggy bank, hence no MBA school would recommend you this strategy of trading your liquidity for nothing. Yet the piggy bank strategy has been working for centuries. Simply because ones propensity to spend is directly correlated to the cash at hand. So often the only way to save is by setting aside some money.

A good friend of mine once said (in a very different context): “boys never grow up… they only trade their toy cars for more expensive ones”. A 15 year home loan, a 30 year insurance plan is a big boys version of a Piggy Bank which saps ones liquidity. EMIs forces the family to set aside its surplus for the rainy day and enforces a great deal of financial discipline.

If you never understood why people take so much pride in home ownership, think of it as one giant piggy bank where the family has been pouring each and every Rupee it could spare for the past 5-6 years.


Pension Funds in India

HDFC recently tried to sell me “Classic Pension Insurance Plan”

Here are some of the salient features of the plan:

It is a 30 year plan where for the first 15 years, I would have to shell 1Lakh rupees every year and after 30 years (Nov 2041), I can expect:

1. Guaranteed benefit of 2,488,809/-: Now that is not really a return because it works out a return of 2.135% I guess my savings bank account can deliver more.
2. Same can be said about life cover because the returns one gets a return of 6% on the investment irrespective of the fund performance.
3. If the fund delivers 8% p.a. returns then after 30 years you get a 4.8% return or 45Lakh.
4. If the fund delivers a 10% returns then after 30 years you get an 8.7% return or 109Lakhs.
5. There is a surrender value: You invest 3 Lakhs over 3 years and you get 1L guaranteed in the 4 year. Even if your fund delivers 10% returns, you get 2.8Lakhs. So basically there are severe penalties for premature withdrawal.

Here is my analysis:

1. PPF gives me 8.5% guaranteed. So my returns from PPF match HDFC’s optimistic scenario.

2. If I die even 29 years 11 months and 29 days from the start of the policy, instead of getting 109 Lakhs return, I get only 55 Lakhs. So HDFC will ROB me of 50% of my savings.

3. PPF allows me to take loan/do a premature withdrawal (after 4 years) without any significant penalties. While in HDFC I do not only lose my interest but also the money I have invested.

4. PPF allows me to set the contribution level based on my financial situation. While HDFC will charge a huge penalty if try to delay/reduce my annual payment.

All these make me wonder WHY on EARTH will I invest in HDFC? But again there is no dearth of fools in the planet.

PS: Although PPF is a 15 year plan, you can extend it in 5 year blocks till your end of life.



Guest post by: T.R. Ramaswami

We have all heard of fertilizer subsidy, fuel subsidy, LPG subsidy and the PM even mentioned that the 2G scam was also a subsidy. But we now have a new subsidy that is self perpetuating – sex subsidy – also called BPL – which will ensure that generations of Indians will continue to be BPL and produce even more BPL candidates. If someone claims to be BPL and cannot even support himself and needs the government to provide handouts then why should such a person be allowed to marry or even have children? So that more people can be brought into this world who are BPL ab initio and will vote for his caste-wallah neta? So let BPL be given only to those who are single and the moment he gets married or has children, he loses his BPL status. And any children, legal or illegal, will not be entitled to BPL subsidies. This should apply with retrospective effect. Children of BPL will not be eligible for BPL. In one generation we will wipe out BPL. That is the only way to end this vote garnering gimmick at the cost of tax payers. Otherwise BPL will only be a government sponsored sex subsidy scheme.