Early Investment Options

So you’ve landed your first job. Congratulations! After treating your friends and family to the best eatery your startup salary can afford, it is time to consider putting aside others cash. After all, you are never too young to start investing for the future. But while your trusty piggy bank and savings account can aid you in saving for the rainy days, it will take decades before you can put aside adequate to purchase your dream home. So maybe you need to learn how to invest as early as now so you can secure a comfortable life for yourself in the future.

Approaches to investment

I notice this guy in my office who disposed of a significant fixed asset and holds a GIANT sum of money right now! He's got that money saved up in a bank somewhere; and sleeps sound every night with a big grin on his face - the 'rich man' grin! And then there is this other guy; same office, same team! But he's got small sums collected here and there, and he keeps on fiddling among various investment opportunities. Some he floats up in share market while some he's sunk down on medium term-deposits on some 'trusted' finance companies and cooperatives that have blossomed in recent years; and soon, as the amounts size up, he plans to plough on the real estate and stock markets and stock some bullions for safekeeping. Immediate liquid safety is not the first priority, growing is.

I don’t think he sleeps with the ‘grin’ on his face and keeps battering his mind among alternate investment opportunities and the risks involved. But he is farming money, is proud of himself, and life is moving in a direction.

Successful Investors of the past

One cannot talk of early investments without having a mention of how Warren Buffet accumulated wealth of over 75 Lakhs (USD 90 thousand) by the time he was only a student in his high school. He sold newspapers, worked as a door-to-door salesman, worked in a grocery store. Early in his high-school, Mr. Buffet purchased a pinball game in partnership with a friend at $25 and put it in a barber shop. Within months, they were already owning several pinball games across many barber shops. The key point is, he SAVED what he earned, and ploughed back most of it, to keep his money growing.

Take Carlos Slim Helu for example. He is currently the richest man in the world! At the age of 71, he owns over 74 Billion Dollars. And he too started early. At the age of 12, when Mr. Helu had just migrated from Lebanon, he made his first lot of stock market investment in a Mexican Bank, from the money his father had given him to migrate to Mexico to avoid being recruited in the OTTOMAN Army. By the age of 26, Mr. Helu had already accumulated forty million dollars and focused most of his investments in the construction, real estate and mining business within Mexico.

Inflation

Let me redefine inflation for you. Inflation is time’s way of taxing you on your money. The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. (Warren Buffet, 1977, Fortune Magazine).

The bottom line is, keeping your cash idle erodes it away at the rate of the economy’s inflation rates. This means, at the inflation rate of 9.6% for the year 2010, if you put your money in a fixed deposit at 12% in a bank and earn 11.4% (pay 0.6% in income taxes), your actual earnings is 11.4 minus 9.6 only. That is, by the end of the year, you have actually earned only 1.8% on your money. If inflation was higher than 11.4%, your money would actually erode away!

The fundamental learning for any investor is to ensure that the friction applied out of inflation does not exceed the returns you expect out of your investments. Inflation in Nepal was as high as 21% during 1992. Without anything else happening, people lost 21% of their wealth that year.

Risk and return

High returns usually come along with high risks. If such high return options had low risk associated with it, everybody would invest in them. When everybody invests in them, the returns would then be diluted and bring the returns down.

Early investors start with small sums. Initial savings are very precious, and one always looks to minimize the risks first, and focuses on the returns later. While it could be counterproductive to be greedy about big returns to begin with, but letting your money erode away with inflation should be equally troubling. It is a personal judgment for every single investor to make the right balance between the risk appetite and the return requirement at any point in time.

Price Fluctuations

Sometimes ‘active trading’ and investing become inter-changeable terms. For example, as you see the share price for a bank soar up, you buy them. But when they have already soared up, be clever enough to know this and sell it right off to buy another share that’s started to soar up. But this isnt’ that easy, and if it were, everybody would jump into it and make sure it became difficult!

But there are times when the whole share market is bearish and there aren’t any shares soaring up. This is the time to start investing somewhere else. Real estate for example, or gold and silver. While investments in local stock market and real estate has mostly got to do with the local economy, dealing and gold & silver mostly concerns the international market movements. This means, gold and silver trading and investments are independent of the national economic status and trends. In an economy like ours, such bullions become a safe bet.

Investment Options

There aren’t much investment opportunities floated in the Nepalese market as you would find in the International market. So the tips you may find online or the instruments you have studied in your business schools will sadly not come in handy when you consider investing here. And investment here does not mean starting up a business. It’s about using your small regular savings that you slowly accumulate to start growing based on where you put them. Here are a few examples to guide you through the options:

Bullions

The charm in gold and silver never fade away. Their values remain untarnished by the effects of inflation. Their values remain stable when the economy collapses or even when the national sovereignty is at stake. They sell across the international market and will continue to be valued for as long as mankind shall prevail.

Gold prices are seeing new heights and some say they’ve reached their peaks. But they said the same thing a decade ago. And they will continue to say the same thing in the coming decade as well. So don’t fret over the soaring prices, but keenly stand on the tip of your toes and watch out for price fluctuations. If you play right, your returns per annum could be as high as a 1000% (ten folds). But be careful, your losses too could accumulate to the same levels if you do not play right.

Stock market

Nepalese stock market is too small with too small a population controlling its major stakes. This is more troubling because all the theories you studied in your B-Schools do not work in such a scenario. Share prices here do not go down based on change of CEOs here. Neither do they change with bonus declaration trends or balance sheet figures. Such makes the stock market extremely difficult to predict and manage for the early investors. And with a limited number of stock brokers around, and you standing at the back of a line requesting a low value ticket sale/purchase, you fall far behind in the priority line.

The trick here is to buy and sell shares from your friends, families and work peers, instead of being dependant on the broker.

Insurance

Insurance is a safe call, not an investment plan. Even when an insurance company offers you a pension plan that requires over 25 years of disciplined commitment from you, the returns are much lower than what a savings account would provide you in that long a period. Besides, Insurance companies here earn out of their deposits in the banks and pass on a portion of that income back to you. If you simply see it from an investment perspective, it is always better to get rid of the mediating channel and deposit the sum sincerely and regularly – directly to your bank account.

But insurance keeps you disciplined. Keeps you assured of your family’s well being as well, should something happen to you. And if it’s a pension plan, it ensures you keep on receiving your cash flow even during the last days of your life. Afterall, you start thinking about investments at an early age because you want to improve your financial stability and sustain that financial strength to the last days of your lives. Of course the rate of returns is relatively lower here, but you run no risk here. Instead, it takes a lot of risk burdens off your shoulders.

Fixed Deposits

Fixed deposits are your savings, not investments. Just that these savings have a ‘lock’ feature for a certain period and thus provide you higher returns than on your savings account, but that don’t change the nature of this instrument. Here again, the rate of return is directly proportional to the amount of risk involved.

You may take up a local cooperative in your neighborhood, or a newly opened bank that offers a handsome return. But banks with high rates can only sell high-priced loans. Buyers of high priced loans are the risky businesses who wouldn’t be honored by cheaper banks because these banks have safer clients they can invest on. So your high-interest deposits are actually invested in high-risk businesses, and should these businesses fail, the institution you bank upon fails alongwith.

Commodity Exchange

There are quite a few commodity exchange houses that have come up in recent days. And just like you trade in shares and bullions, they allow you to trade in commodities. You would be dealing in certificates and not real rice grains and sugarcanes and whiskey and so forth. The theory here is simple: buy when it is cheap, sell when it is expensive, enjoy the difference. But knowing the right times to buy and sell is a riddle you can only gamble upon. This means, commodity exchange is an option for those of you who are looking for high returns and are willing to bet high risk on your hard earned savings.

But it is also for those who go the extra mile to study the commodity trends, do sincere exercises to examine the past trends, influencing variables and stay on top of current affairs to affect the commodity prices. If you have what it takes to predict the price trends, this is a place for you. Gambling houses shut you off if you keep winning the house all the time. But Exchange houses will find you investors, supporters and followers when that happens here!

Make more out of your salary!

Make more out of your salary!

Did you know that there is a big gap between what you earn and what your company spends upon you. The difference is usually accounted for by TAX EXPENSE. However, there are a lot of benefits to work around for better returns out of your salary. While most are focused on minimizing your tax obligation, you will discover down the lines that you can actually make MORE out of your salary than what your company has to offer:

1. Invest in retirement funds. The government does not tax you on your retirement funds. In addition to the provident fund that goes into your retirement account, you can contribute up to 33% of your salary without exceeding a total of three lakhs per year, in contribution to your retirement fund. This option is of better value to you if you fall within the 25% tax bracket or above. This effectively increases the amount of money in your account by 24% (1% deducted as tax when you encash your retirement funds) and also allows you handsome interest on the funds. Though you may only withdraw the funds when you retire out of the job, you still can take loans against this fund to cover for some rainy day.

2. Invest in Life Insurance. The government also provides tax rebate on life insurance policies you take. However, tax is waived off on insurance premium of Rs. 20,000 per year. So if you are on a 25% tax bracket here, you end up saving Rs. 5,000 in your tax expense every year. So try contacting your insurance agent and asking for a policy that charges Rs. 20 thousand as premium per year. Different policies from different life insurance companies have varying returns at varying time frames. Do your homework to choose the policy that best meets your needs.

3. Take Loans. Sounds funny, but taking loans effectively increases your income! Of course, it’s a waste if you do not put your loan money to better use. Annual price inflations are at 18% per annum and growing. Just look back a few years and you will realize that a house or a gold/silver ornament or even the latest in electronic gadgets cost much more now than they used to cost a few years ago. Meaning, if you took a loan to buy a piece of land or a gram of gold three years ago, your total loan and the interest amount combined will not be able to buy that one gram of gold today. So, having taken the loan to capitalize on your ‘future income’ today itself, you have effectively accumulated more wealth.

While this is true in present context where expensive loan interest rates are still lower than inflation growth rates, it might not always be the same. However, for as long as inflation rate is higher than the difference between what rates you earn on your savings and what you pay on your loans, and you can afford to timely pay for the loan installments, taking loans for investments always makes you a richer person than one who waited to accumulate his/her savings for it.

4. Take loans to invest in retirement funds. Again a difficult idea to digest, but think about it – especially if you fall within the 25% tax bracket. If you take a loan of Rs. 100,000 and place it into your retirement funds during the fiscal year ends, you receive tax rebates of Rs. 25,000 on it. So your loan of Rs. 100,000 effectively becomes a loan of Rs. 75,000 only on the same day itself. You could further invest that Rs. 25,000 in your retirement funds or use it to settle that loan by Rs. 25,000. Either way, you would have earned yourself a 25% return on the loan right away. However, your benefit here is bound by a maximum of Rs. 300,000 you can put aside for your retirement fund every year. For amounts above that, government does not give you any tax returns and thus does not add to your savings or earnings.

Not only do these instruments add up to your earnings, they also add up to your safety and financial security for the long run. The government has allowed for tax returns on Provident Funds and Life Insurance Policies as a means to encourage public savings and risk hedging through insurance. Good luck with making more money out of the money that your employer spends on you.

Insurance – letting others take your burden and setting yourself free!

Insurance is all maths!

There are many individuals that insure their risks with an insurance company. Very few actually face that risk. Insurance companies calculate the probability of an individual facing that risk, based on years of past data to set a trend projection for themselves; and then set a premium value for individuals to buy that insurance. You may never face that risk, but somebody who does, will receive major cuts from your insurance premium to pay up for the big loss he or she faced.

If you look at it from the service perspective, you can compare the service with what a coolie does with your luggage. He takes the burden which otherwise you would have to carry yourself, and then charges you for it. An insurance takes the burden of having lost an asset, a revenue source or even having lost your life, and provides you financial strength when you have lost it. For taking this ‘risk’ burden off your shoulder, they charge you a certain premium.

Insurance is also trust!

Most important term that insurance companies abide by is ‘Utmost Good Faith!’. Anytime you go to buy a policy, they just ask you to fill up a form. Based on various variables you fill up on the form, the guy behind the table calculates your risk factor and comes up with a premium amount. He won’t go check if your facts are straight, he won’t try and cross-verify if you were honest with them. If he did, your insurance policy premium would include that cost of verification, and probably you wouldn’t be able to afford it. So they will only cross verify the facts of the applicant when there is a claim on it. This way, insurance companies save a lot of costs.

Insurance is also investment at times, in case of Life Insurance!

A customer pays a premium top-up to cover more than the risk involved. Customer keeps paying for a long period of time, which, in an accumulated form, is invested by insurance companies in big projects, lease and other kinds of investments. This too is returned back to the customers in addition to the premium paid every year by the customer. This way, the customer receives the insurance benefits, along with good returns on the money invested in such insurance policies.

Insurance in Nepal

Insurance and Banking industry are the backbone for any economy. They provide accumulation of funds to support infrastructural investments, big projects, long term financial requirements, etc. Both banks and insurance deals in public money. That is, the general public’s hard earned money is deposited and entrusted with these institutions. So the promoters’ capital funds act as the security cushion to reflect the strength of the institution. Regulatory body (Beema Samiti, in cae of Nepal) provides necessary rules and regulations to ensure these institutions make healthy practices and also take care to foster the insurance industry to grow and prosper. However, Nepalese Insurance industry is far behind the banking industry in terms of maturity, market penetration and contribution to the national economy.

Capital Adequacy

Nepalese insurance industry is fairly undercapitalized. If you go through balance sheets of some of these insurance companies, you will see that total insurance fund collected is almost twenty times of the total capital and reserves of the company. Also, you will notice that majority funds have been placed with Banks rather than being placed in long term investments. It is a clear indication that the insurance industry cannot foster in absence of large scale and long term projects. It is also an indication that the insurance industry is simply playing safe through lump sum placements that fetch a decent return and pose marginal risks only. Projects, on the other hand, are considered risky– given the socioeconomic and political scenario of the country.

Popularity. Advocacy towards the benefits of Insurance.

It is difficult to find individuals who would ensure their vehicle or house out of sheer desire to have their assets insured. It is either because there is a regulation that demands insurance or because Financial Institutions that finance their assets require them to be insured. It is also difficult to find an individual who actually took some time to enter into an insurance company to inquire about a life insurance policy and actually buy it in the process. It is mostly the insurance agent that explores out for the customer and provides door to door service.

There have been feeble efforts from the private sector to bring about awareness towards the need and value of insurance. While each insurance company does it in its own meager ways, there is no consolidated efforts from all of them together towards educating the mass and in turn increasing the overall market size for their combined benefits. One also cannot feel any such effort from the government side to bring about such awareness.

The government has made some effort at its end to promote insurance. For example, there is a significant tax benefit a salaried individual will be awarded for having taken an insurance policy for a certain amount. That is, not only will you reap the benefits of having purchased the policy, but you will also save your tax liabilities on your insurance amount. For example, if you fall under 25% tax liability bracket as per your income, and insure yourself for Rs. 100,000, then the government will free you of Rs. 25,000 worth of tax obligations. Along with rewarding schemes such as this, the government has also imposed that your four-wheel vehicle tax will not be accepted until you show that the vehicle is insured for third-party risks on it.

While such efforts prevail, the mass still is at lack of knowledge, confidence and understanding as to why insurance is important. And for this, advocacy in part of the government and concerted effort from the private sector seems seriously lacking.

Life vs. Non-Life insurance

Life insurance also provides you returns on your money. Non-Life simply protects you against the financial risk.

This is the basic fundamental difference between the two, and this is where Life Insurance picked up a stronger appeal to the Nepalese mass, as they get their money back, along with ‘bonus’ added up to their money. So agents marketing Life Insurance policies can reach out to individuals and explain the details to curious hearing ears. But non-life agents simply pitch across business houses that need to insure their assets, or banks that have clients insuring their financed assets. While non-life insurance is mostly institution driven, life insurance has a strong retail client base.

The future

History has it around the world. Insurance is the second biggest industry after banking and forms the backbone of entrepreneurial success – both in terms of risk coverage and provision of long term investments. Nepal can be no exception. However, there is a tangible need to voice strong advocacy in favor of Insurance where both the private and the public sector have critical roles to play. The future cannot be bright for the insurance industry, without the general public’s faith and value put upon insurance and its benefits.