Leveraging Lives for fulfillment- Role of debt in a common man’s life

Its aptly said that the role of financial institutions is re-distribution of wealth from surplus sectors of economy to deficit sectors. Over the last decade or so the ease of getting a loan whether for a vehicle, a house or a personal loan (proceeds being invested on higher volatile assets in expectation of future returns) have transformed the life of a common man in India.

I define Common Man as an individual possessing any of the 2 attributes:
Attribute 1- Is ignorant or superficially educated on financial planning or aspects of a rational financial decision-making;
Attribute 2- Employed with income not exceeding Rs 2 lakh per month

Any individual possessing both the above attributes is an ICU patient as per me.

I have experienced several instances where greed has won over rationality, even for the well-educated. One such instance is taking a long-term debt to acquire a fixed asset like a flat or a plot of land, in expectation of exponential increase in value of the property in a short span of time (within 5 years). Plan is to make enough capital gain to repay the loan pre-maturely and still have enough profit to invest somewhere again.

While credit department of bank may rate as eligible for disbursement of loan, the common man not have the repaying capacity considering lavish lifestyle where most of his monthly expenses may be taken care by credit card companies.

In this gamble common man fails to realize the critical trade-off between risk and return. He has borrowed a long-term loan, repaying capacity of which is contingent on:
a) his job,
b) enough salary growth that takes care of his increased living expenses over the next 20 years, and
c) saves enough if he hopes to live beyond his working life.

Job assumed to be secure is the underlying asset and loan is the derivative. During a downturn there is always a possibility of losing the job or no increase in salary. Further, the upside expected in the investment either turns to be a flop or extended by few years (for the optimistic).

God save him!

This situation is similar to what major financial institutions have fallen prey to……LEVERAGING OF LIVES FOR FULFILLMENT….

What may have gone wrong with auto-component industry of India?

I recall writing company analysis on several auto-component companies of India that had opted for making acquisitions abroad especially in European markets. While I was apprehensive of the high leveraged deals, I was confident that this signaled the strength of Indian auto-component industry that was getting efficient over years.

One such company that I closely tracked few years back was Amtek Auto. It had completed 8 acquisitions within a span of 4 years. Such aggressive acquisition it seemed was in line with increased interest of global automobile manufacturer who were turning to Indian auto-component companies for better and low cost supplies. ANG Auto was other such company that undertook significant consolidation of its operations and was bagging contracts from large automobile manufacturers both from domestic as well as from international markets.

Acquiring companies in European markets was coming at much lower valuations since most of them were turning red with automobile manufacturers shifting their sourcing base to Asian countries. While it seemed ideally right the current financial crisis followed by economic recession may have just hit such companies hard.

Was the onset of financial crisis made such acquisitions cheaper in the first place? I leave this for researchers to study empirically.

The upturn especially for the export led companies may not be in site for next 4 quarters. This is when the leverage has its negative effect, impacting cash flows and net worth of companies simultaneously.

BUY Insurance for risk coverage and not for investment

Thanks to limited formal personal finance knowledge, most of us look at insurance as a tax saving avenue rather than for risk coverage.

As of date there are more than 15 private insurance companies selling their products in India unlike the days when LIC dominated the insurance market. The private players I feel have achieved a significant milestone in educating masses about the need for risk coverage though most of them had to resort to ULIP plans to achieve faster break-even….most are yet to achieve that anyways

Lot to read on web on why of insurance….please use your google skills

SENSEX……….goes crazy

The 3 main components to a price of an asset are its intrinsic value, inflation and expected growth potential. Majority of empirical search in finance has focused on measuring and predicting the expected growth potential…..

Post Congress coming back to power without the constraints of Left, Indian stock exchanges seems to have gone crazy. Price fluctuations in asset seems to be dominated more by the emotional and perceptual components in the ‘expected growth potential’ part of the pricing function…atleast in context of WE INDIANS

I am surprised at the role of Indian media in twisting the fundamentals of India economy superficially. Even the leading national dailies’ editorial teams and analysts fail to look deeper into the variables and their inter-linkages….

Fundamentals of an economy do not CHANGE overnight…expectations DO and thats what I feel makes SENSEX…. go crazy

Charity – the common way

HT City New Delhi edition of June 4, 2009 carries an article on Sherlyn Chopra’s auctioning endeavors to raise money for charity. I wish her success under the presumption that this definitely goes towards charity.

While such initiatives help celebrities enhance their fame and repute, there are many ways by which common people can also do charity…

On introspection I realized that idea of charity should be the so called ‘feel good factor’ rather than letting others know about it….
I have seen people feeding birds, cows, monkeys, approaching old age homes, orphanages etc. for providing help in kind or by service.
I feel the most appropriate way to look at charity in our lives is like a HOBBY, a SACRIFICE, a SELFLESS SERVICE, a PURE GESTURE etc….