Hang Seng BeES ETF

Benchmark Funds is launching the first international ETF in India: the Hang Seng BeES ETF. This is an ETF that will track the Hang Seng Index of Hong Kong by investing in stocks in the same proportion as the Hang Seng Index. The Hang Seng Index has 42 constituents, and a few are well known in India like HSBC Holdings, Hutchison Whampoa and Cathay Pacific. The ETF may also invest in mutual funds or ETFs that track the Hang Seng themselves.

This is a passive fund, which means that it will try and replicate the returns of the Hang Seng index rather than actively manage and beat them. However, due to fees and other factors, it will not be able to track the index returns exactly.

The expense ratio of the Hang Seng BeES ETF is expected to be 1.50% of weekly net average assets which is a tad high for a passive fund by international standards, but in India the expense ratios tend to be higher.

Keep in mind that this fund might invest in other ETFs and mutual funds, so in a way you might have to pay the expenses of this fund, and then indirectly the expenses charged by the ETFs and mutual funds owned by this fund.

The other thing to keep in mind is that since this ETF invests in foreign securities, – you are subject to foreign exchange fluctuation risk in addition to the usual risks you face while investing in equities.

It is interesting to note that ETFs are entering the International space too; in the past I have written about the MIRAE Asset Korea Discovery Fund and there have been other mutual funds that offered international exposure, but this is probably the beginning of a new trend of International ETFs in India.

Disclosure: This is just a summary of the Hang Seng BeES ETF, and is not a buy or sell recommendation.

5 factors to think about before you start investing

I got a few interesting questions in comments and emails while I was away, and now that I am back, I will try and address at least some of them.

One of the more interesting emails I got was to do a write-up about investments for beginners. As I thought about this question — my mind kept wandering to a situation where someone had just started earning, and although I realize a write-up about investment for beginners doesn’t necessarily imply that the person just started to earn, — in this post — I am penning down some thoughts on how people who just got a job and started earning should approach investments.

Before I begin, I should warn you that post this is solely based on my personal experience, and the lessons I learned from my mistakes and is not expert advice.

1. Pay down your education loan: Before you think about investments or building assets, – you need to think about your liabilities and how you will deal with them. I had a student loan when I graduated, and I paid as much as I could every month to get rid of the loan as quickly as possible. I think this worked out really well for me; not only financially but in terms of discipline as well. I got into the habit of putting aside some money every month, and when the loan eventually got over, – I found that it was easy enough to put aside the same money as savings. The discipline helped me build savings once I got out of the debt.

2. Don’t get into credit card debt: The only thing greater than paying down existing debt is to not get into a new one, and especially credit card debt. That to me, is the worst kind of debt. It is almost always spent on stuff you could live without, and the high interest rate means it adds up pretty quickly. I actually got into quite a bit of credit card debt early on. I got lulled into thinking that I can manage a certain number on my credit card bill, and that number just kept increasing every month. Finally the outstanding balance became quite big, and I realized my folly. I paid off the debt in a few months, and have learned my lesson since then.

If you are paying an insane amount of interest for the new jeans you just bought, – there won’t be much left for you to invest. Stay away from it.

3. Risk: One of my finance professors used to say that she had students come to her all the time and talk about returns, but no one spoke about risk. I think this is very important. Thinking about risk, when you first start out to invest is very important. Different people have different tolerance for risk, and different products offer different risk levels. A fixed deposit is usually much safer than an investment in an equity fund. How much money can you lose without losing your sleep? This is an important question, and you should keep asking this to yourself.

4. Invest in tax saving instruments: I bought my first stock in my first year of college, and it was only natural that I continued investing in stocks when I started earning. I think that was a mistake. Early on, I should have invested in mutual funds that are eligible for tax savings instead of buying stocks. After some point in time, – you will reach the upper limit and not be able to save any more tax, but until then invest in stuff that reduces your taxable income and tax liability.

5. Stay away from short term trading: If you are not a professional trader, – stay away from short term trading in the stock market. You will only lose money. If you must trade, then do so with small sums of money that you are comfortable losing.

As you can see only one out of these 5 factors really talk about investing your money. To me, when you start thinking about investing, that’s how it should be, investing is just not buying a certain stock or making a fixed deposit, – a lot of factors influence how you invest and it’s important to think about the big picture and take a holistic view of things before you start thinking about specific investment options.

These are my top picks for factors that will influence investing early on, do you have any to add?

Photo credit: Wonder Webby

Book Review: The Difficulty of Being Good by Gurcharan Das

I went to the book fair when I was in Delhi, and picked up “The Difficulty of being Good: On the Subtle Art of Dharma” By Gurcharan Das.

Gurcharan Das is also the writer of India Unbound, which I read a few years ago, and liked a lot. I used to be a regular reader of his column in the Times of India as well. I loved India Unbound, and although I don’t read a lot pertaining to Dharma or things of that nature, I thought I should give this book a try.

I really liked the book, and read the whole thing in just three or four sittings.

It is about characters from Mahabharata, their stories, actions and moral implications of those. Each chapter focuses on a different character, and examines an episode from the Mahabharata about the character and looks at the morality of the situation. To give you an idea of what I am talking about, here are the names of some chapters:

  • Duryodhana’s envy
  • Draupadi’s courage
  • Yudhistara’s duty
  • Arjuna’s despair
  • Bhishma’s selflessness

I really love the stories from Mahabharata, and found several ones in the book, which I didn’t know of before. For example, I didn’t know that Krishna dies an ordinary death when a hunter shoots him, or that Arjuna lost his powers sometime after the great battle.

The book looks at the moral dilemmas that various characters faced throughout Mahabharata, and analyzes them from different perspectives.

For example: When Draupadi is first told that Yudhishthira has lost her in the game of dice, she asks:

Whom did you lose first, yourself or me?

The book takes you to the answer of Bhishma who tells Draupadi that it is true that Yudhisthira lost himself first, and so he is not competent to wager Draupadi. A person who has lost himself is no longer free to wager that which doesn’t belong to him.  On the other hand, a wife does belong to her husband, and even if he is not free, she is legally his, and he is allowed to stake her. Bhishma concludes that this is a complex matter and he cannot solve Draupadi’s dilemma.

He states:

As dharma is subtle, my dear, I fail

To resolve your question in the proper way

The book is filled with such questions, and their probable moral implications, and to me, that’s what makes it great.

After going through this book, I realize how much I want to read the Mahabharata. Most of my knowledge of it comes from the TV serial, and an abridged version that I borrowed from a friend many years ago. But there is certainly a lot more to Mahabharata than what I have gathered so far. The book quotes extensively from the Mahabharata, and although the subject itself is not light, the writing makes it clear and easy to read.

I loved The Difficulty of being Good, but I will not recommend it to everyone. You should only buy this book, if you like the Mahabharata, and are also interested in questions of morality, and sometimes ponder about the questions of right and wrong. Without such interest, I think you will find the book difficult to read and not interesting at all.

Disclaimer: The links to Amazon in this post are affiliate links, which means that if you click them, and buy something from Amazon, I will net a commission.

Factors influencing your emergency fund decision

Last week I read an interesting post about emergency funds over at Dough Roller, in which DR states that he has never kept cash stashed away for emergencies and doesn’t plan to do it either.

Here is what he had to say:

Confession time. I’ve never kept 3 to 6 months worth of cash sitting in a bank account and don’t plan to. In an emergency, I can tap investment accounts, a home equity line of credit, or yes, even the dreaded credit card. The question for today is whether it’s a smart money move to rely on credit cards as your financial backstop.

An emergency fund is a sum of money that’s easily accessible, covers 3 – 6 months of your expenses, and is only used in emergencies. Money in your savings account qualifies, but money tied up in stock doesn’t.

Some people don’t like keeping cash in savings accounts for emergencies because of the pathetic returns. Their argument is that the same money will earn higher returns elsewhere, and if there is an emergency, — you can always tap into your stocks, home equity line of credit, credit cards etc.

I used to be part of this camp, but my perspective has changed over the years. Primarily because, when things start to go wrong, everything goes wrong at the same time, and all hell breaks loose.

During the recession — people lost their jobs, the stock market crashed, home prices went down, and quite a few saw their credit card limits slashed too. Even if the limit wasn’t slashed, it must really hurt to pay interest in an emergency. This, in a nutshell is my reason for having a cash emergency fund. To protect yourself from times when all hell breaks loose.

Now let’s take a look at the factors that determine how likely a person is to have an emergency fund.

1. Total savings: This is an important factor when it comes to an emergency fund. If your total savings cover just 12 months of expenses, then it is highly unlikely that you will be comfortable with keeping half of that in a savings account that doesn’t pay much. On the other hand, if your savings are somewhere to the tune of 3o or 40 months expenses, then you won’t mind keeping some cash idle.

2. Job security: If you have a reasonably secure job, like someone in the government sector, then your propensity to think about emergencies will be slightly lower than someone who is used to seeing layoffs around him. As a result, your inclination to keep money idle will be lesser.

3. Fixed expenses: If you have to make a number of fixed payments every month like car loan payment, home loan payment, credit card bills, school fee etc. — then getting into financial trouble is a lot easier than if you didn’t have so many liabilities. Higher liabilities should generally mean that a person protects themselves from emergencies by having some liquid assets.

4. Dual income: A family where both the husband and wife work would feel a lot more financially secure than a family where there is only one earner. I think single income families should be keener on an emergency fund as compared to a dual income family.

5. Personal experience: I see families where someone or the other is always sick, and such families are more likely to appreciate the need for having some cash at hand. Then there are people who lost a job, have their car damaged every month, or have some sort of financial demand on them every other month. Such people are more likely to appreciate an emergency fund, than someone who hasn’t been through many financial hardships in the past.

Personally, number 1 influenced my emergency fund decision the most. As soon as I built size-able savings, I stashed away a certain sum and forgot about it. I have a bright sunny outlook on life, but I have seen several stock market crashes, and layoffs to not worry about a rainy day.

I would hate to make distress sales in the stock market, and a credit card is a tool of convenience for me, and I’d hate for it to become my lifeline.

Think about these factors and how they apply to you, maybe you need to build an emergency fund, but haven’t thought about it.

It is a question of sound finances, but also of mental peace.

Photo Credit: Gilbert R

Got married

Most of you know that I was on vacation almost whole of last month, but what I didn’t disclose was that I was getting married in that time.

I just kept putting it off, until it got too close to the wedding and I got no time to write about it. Now, I am finally back and thought I’d write a quick announcement type post.

I got married on the 23rd of last month; the wedding was in Goa, where my wife is from, and then there was a reception on the 30th in Delhi, where I am originally from.

Both ceremonies went really well, and it felt great to be surrounded by so many loved ones for such a long period of time. I realized how lucky both of us were for having so many people who blessed us and shared our happiness.

As I left Delhi, I thought about how lucky we humans are because we can bring smiles and happiness to others by letting them share our happiness, and that is primarily why I wrote this post today.

I am looking forward to married life, and life itself feels a lot better now that I have a companion to share this journey with.

401(k) and your retirement

The 401(k) is a retirement savings plan that happens through the employer.  Here are some major points about the 401(k) plan:

  • Contributions made to the account are pre-tax.  Depending on a person’s tax bracket, this can mean substantial savings when investing money for retirement.
  • The employer automatically takes out the money from the employee’s paycheck.  An employee can typically start and stop investing into a 401(k) on a monthly basis.
  • The employer picks a financial investment company to manage the 401(k) for them.  Money is invested in mutual funds of stocks and bonds.  Investment choices may be limited but are self directed.
  • 401(k)s are not guaranteed savings plans.
  • Earnings grow tax-free.
  • Withdrawals are subject to taxation.  Early withdrawal is subject to an additional fee.

Company matching is an employee benefit where the company agrees to match a percentage of the employee’s contributions.  Here are some points about company matching:

  • Company matching is usually limited to a set percentage.  Typically, it is worded like “the company will match 50% up to the first six percent” of what you contribute.  Employers cannot contribute more than six percent of your salary to a 401(k).
  • You can only keep company matched savings if you are properly vested with the company.  This means you have to stay with the company for a set number of years.  If you leave before that time is up, the amount of company matching you get to keep in your 401(k) may be limited by your vesting.
  • Vesting normally takes three to five years.  Graded vesting means your vesting is increased each year.  You are vested 20% after one year, 40% after two years, etc.  Cliff vesting means you are not vested at all until after the vesting schedule.  For example, with a three-year vestment period, you are 0% vested after one year and two years.  After three years, you are 100% vested.

Maximum amounts limit how much a person can contribute to a 401(k) account.  Here are details regarding contribution limits:

  • Starting in 2009, the maximum annual contribution made to a 401(k) account is $16,500.
  • This amount increases after age 50 ½ to $22,000.
  • The contribution limit includes the total contribution between employee and company.
  • Highly compensated employees face further restrictions over what they or their employer can contribute to his or her 401(k) account.

Variations of 401ks include:

  • 403(b) is for the non-profit sector.  Hospitals, churches, charities, and college employees use a 403(b) instead of the 401(k) savings plan
  • Starting in 2006, employees can opt for the Roth 401(k) if the employer avails this option.  In this case, money is contributed after being taxed but it is distributed tax-free.
  • The Solo 401 (k) plan is just like the 401(k) plan but for self-employed people who do not have employees except for spouses.

The following points specify 401(k) withdrawal:

  • If you take your money out before you turn 59 ½, you must pay the IRS a tax penalty of 10% of the total money withdrawn.
  • You can roll over the money from a 401(k) into an IRA without tax penalty.
  • You can take money out if you show justifiable hardships.  Reasons the IRS will accept for a hardship withdrawal include:
  1. funeral expenses
  2. medical expenses
  3. college tuition
  4. mortgage or rental payments
  5. to purchase or repair your main home
  • Tax law under 72(t)(2)(A)(iv) is a little known rule that lets you start your withdrawals earlier than when you turn 59 ½ without suffering an early withdrawal tax penalty.

How to retire early when you didn’t plan ahead

You’ve always wanted to retire early but you just don’t see how you can do it.  Somehow, the years have slipped by and now you are looking at your golden years coming around the corner.  But what if you wanted to retire now?  Could you do it without having planned for it all those years ago?

Work out how much you need to retire now.  Use “Planning Now to Retire Early” to work out how much you need to retire right now.  The next step we need to do is figure out what the difference is between where you want to be and where you are right now.  What does your current savings look like?  If it doesn’t reach the mark, consider the following ideas to try to breach the difference:

  • Use your current equity to retire early.  Downsize your home, sell a vacation home, or get a reverse equity on your house mortgage.  Instead of selling your vacation home, you could rent it out year round for extra income.
  • Move in with your grown children.  Many more retirees are moving in with their families anyways; now they finally have the time to spend time with their families.  Your children might let you live rent free because you raised them like that or maybe you can stay in exchange for watching the kids after they get home from school.  Consider becoming a boomerang senior so you can use your property as a rental for an income stream.
  • Sell whatever you have in your house that you don’t need, want, or care about.  Nothing is too insignificant.  One man’s trash is another man’s treasure.  Those collections, jewelry, anything that you have at home that you care less about than an early retirement.  Have yard sales, sell them at consignment stores, or auction them on eBay.  If you would rather retire than be surrounded by stuff, then take that cue to start selling all your stuff.
  • Think about moving if the cost of living is too much where you live.  Every year magazines come out with the best places to retire.  While medical and community services as well as the crime rate all factor into these lists, one of the biggest contributing factors is the cost of living.  AACRA publishes cost of living indexes for major cities in the US.  Leaving crazy places like New York City and San Francisco out of the equation, you could still easily cut your costs down 20% by moving.  For example, using 2005 statistics, living in Charlotte, NC is 10% cheaper than living in Albuquerque, NM and 25% cheaper than living in Philadelphia, PA.  Think outside the box.  What about becoming an expatriate?
  • Consider Semi-Retirement.  Work PT.  Still consider yourself retired but working enough hours might help you with health insurance coverage.
  • Slash your annual budget requirements.  If the gym membership and a new car is all that stands between yourself and an early retirement, consider what really matters to you.  Do you want that country club membership or the chance to play more golf at a public golf course?
  • Take money out of retirement accounts earlier.  Look into Substantially Equal Periodic Payments as a way to do this without penalty.

Planning now to retire early

Sure you want to retire.  In fact, you would like to retire early.  Who wouldn’t want to have time to enjoy all those things in life you never had time to enjoy when working.  But the reality is that many people are not adequately preparing for a comfortable retirement, much less an early one.

Reaching an early retirement successfully can be done but it takes planning and working.  You need to first come up with a viable plan and then second, use discipline to work that plan, every day, until you reach your retirement.

According to a retirement survey published by the EBRI (the Employee Benefit Research Institute™) in 2007, only 43% of the people surveyed have ever tried to work out how much money they would need to retire.  Why such a small percentage?  How can anybody guarantee success if he or she isn’t even working off a game plan?  Planning is confusing when you don’t know what to do and scary because you’re not sure you’ll like the results.

But here’s the cold fact: You definitely won’t be able to retire like you want to if you don’t do something about it now.  An early retirement will definitely not happen on its own.  Follow these steps to figure out how much you need to start saving now in order to retire when you want.

  • First, determine how much money you need a year to retire.  To figure this out, you can use a percentage of your current income.
    • How much is your annual income now?
    • Take your annual income and multiply it by 70%.  Retirement planning experts recommend using 70% of current income.  They reason your mortgage should be paid off and you won’t be worried about paying tuition in your retirement.
    • While using your annual income to determine your retirement needs, check that you are not currently building up debt.  That would suggest that you are not living within your current income.
  • Multiply your annual retirement income requirements by how long you plan to be retired. You can determine this by deciding how soon you want to retire and statistics on average life expectancies.
    • Write down how old you will be when you plan to retire.
    • Research life expectancies for where you live.
    • Subtract how old you will be when you retire from how long on average you can hope to live to.  The US Social Security Administration reported that for people reaching 65 in 1990, they could expect to live 15.3 (men) and 19.6 (women) years longer.
    • Multiply the number of years you will be in retirement by what your annual spending requirements will be in your retirement.
  • We’re almost done.  You’ve got a good idea of how much you would need to save in order to retire but that number is in today’s money.  We need to take inflation into effect.
    • Pick an inflation rate you are comfortable with.  You could use the current inflation rate or take an average over a period of years.  If you are pessimistic or wish to be more conservative with your planning, use a higher rate.
    • We’ll need to work in the impact that inflation will have each year that you will be retired.  Use a hand or online calculator to make calculating the accrual of inflation over your retirement period.
  • Now you have a number to work with.  Working backwards, figure out how much you need to save each year.
    • How far away is early retirement for you?  This will tell you how many years do you have to save.
    • Determine how much money you can make each year with your savings by investing it.
    • Remember to offset the amount you make in interest by the amount you will lose through inflation.  You could go with 5% for example (8% interest in savings minus 3% inflation).  Use a calculator to make calculating the accrual easier.
    • Now you know how much you need to set aside each month in order to retire like you want to, when you want to.
  • Is this number seems impossible, consider if any of the following initiatives could help:
    • Reduce your annual cash requirements for when you retire by working out a careful budget.
    • Investigate a better return on your savings.
    • Cut your current spending so you can save more.
    • Earn more now.
    • Determine if you are taking advantage of company matching for retirement plans.

Analyzing GameStop, A Leading Video Game Retailer

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With all the snow this winter, we can be sure of one thing – people who live where it is cold will be getting cabin fever. Traditionally, people go outside to go sledding or participate in various snow sports. More so these days, the video game industry is taking hold of our idle hours and keeping us indoors while still providing for our need to let our hair down and relax –- thus there is no need to go outside and be cold. Video games have come a long way since their humble beginnings to the point of virtual reality in our family living rooms.

An industry leader in video game retailing is called GameStop. This Texas based company went through several transformations from its beginnings in the 1980’s. Today, the company is a $4 billion dollar company with 6,400 stores. That is pretty impressive for a specialty retailer. Sure it has some hefty competition… well known retailers with big names, none of which specialize in video games, but happen to sell games as a smaller part of their overall business. Which begs the question of any investor: which type of company would you rather add to your online stock brokerage account — a large sprawling retailer which sells many things including video games, or a focused video game retailer with small stores full of all types of video games? Interesting question, right?

GameStop, ticker symbol GME, is nearly the only company of its kind and scale which sells video games exclusively. I was in one of these stores over the holidays and I have to say, it was packed to the gills. The service was a bit slow, but that may be due to their policy of keeping the actual game discs behind the counter. Sounds like a recipe for not much shoplifting if you ask me — all the better to send the profits back to investors instead of thieves. This is a bricks and mortar retailer which also has a phenomenal website store.

GameStop is the only player in an industry which is in its relative infancy because video games only came on the market about a quarter of a century ago. Here the potential for growth lies in ever expanding technology, not in taking market share away from its competitors. Although with so many stores, and a strong grip on the video game market, GameStop has the potential for a near monopoly. In 2005, the company merged with a competitor –- EB Games. Two additional smaller competitors are Game Crazy and Play and Trade, a franchised store network. What makes video games a growth industry is the unrealized future potential of video games development. Plus virtual reality has applications outside of video gaming, creating other possibilities for technologies developed in the first industry to cross over into other industries.

As someone who comes from a family of video gamers, I’m intrigued by GameStop and will be keeping an eye on it. It may very well become part of my stock portfolio one day, after I assess its potential even further.

Similarities and differences in marketing of mutual funds and credit cards

Today, Mr Credit Card will be exploring the similarities and differences in the marketing of financial products like mutual funds and etfs versus credit cards.

Since it is my business to read everything about credit cards, I am pretty familiar with how credit cards market their cards. But because I also read a lot about mutual funds and ETFs, I find it fascinating how marketing strategies in the mutual fund industry differs from the credit card industry. Today, I would just like to highlight some of their similarities and differences.

Mutual Funds Market Their Performance – Credit Cards do not! – One of the unique features of the mutual fund industry is that funds are marketed solely based on performance and long term track record. Due to investor behavior, mutual funds tend to seek gather lots of fund inflows from retail investors after a year or years of outperformance. Track records are also used frequently by mutual fund companies. The better the long term average, the better obviously.

Unlike mutual fund companies, credit card companies do not even engage in such practices. One example where this might actually work is the the subprime or “new to credit” categories. I’m sure marketers of secured credit cards could make a statement to the effect that “x percent of our applicants managed to improve their credit scores by xyz and managed to get an unsecured credit card within x number of months? But I do not see that. Or how about cash back credit cards? Surely, credit card companies could say something like ” on average, our cardholders managed to earn x % cash back every year from using our credit card”? Wonder why they do not do that at all? Perhaps it’s regulations, but surely this would be a great selling point.

Credit Card Issuers give teaser deals, Mutual Funds do not – Have you noticed that credit card issuers give teaser deals all the time? It could be in the form of a 0% balance transfer offer, bonus miles or annual fee being waived for a year. But you never see such things in mutual funds. You never see a mutual fund offering to reduce your front end load when you invest. Neither do they waive fund expenses for one year. They are probably not allowed to due to SEC regulations. But maybe there isn’t any marketing restrictions. They just do not do it that way.

Credit Cards make claims that mutual funds cannot – Lots of credit card issuers, especially those marketing credit cards for people with bad credit, make promises like “instant approval”, “no credit checks”, “no employment checks” and in certain cases, “guaranteed approval”. Mutual funds by law, cannot make any performance guarantees. Hence, you do not see any guarantee like marketing language from mutual fund companies.

Both mutual funds and credit card issuers do not highlight their fees – If there is one thing both mutual funds and credit cards have in common, that is they do not advertise their fees. For mutual funds, you need to look through their prospectus or their marketing sheets to find their fees. For credit cards, you have to look through their terms and conditions. The fee “lingo” isn’t exactly intuitive either. Most folks do not understand exactly what an APR is. How many folks know what is a 12-b1 fee? Know the difference between an A share, B share or C shares? What is daily percentage rate?

Unfortunately, for most products, fees are one of the murkiest areas. It pays to be educated in what you are buying and make sure you choose a product that does not hit you with hidden fees. Many credit cards for bad credit folks like First Premier Bank have lots of hidden fees like one-time application fee, monthly maintenance fees on top of annual fees. Most consumers are never aware of these fees, just like they are never aware of 12-b1 fees.

Final Observations – It is interesting to note that both mutual funds and credit cards are financial products. But they are marketing differently. But one thing they have in common is that it is tough to look through their terms and conditions. And most people don’t really know what fees they are paying!