Article: SIPs and rupee cost averaging

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Concepts

Rupee cost averaging

• Approach wherein you invest a fixed amount of money at regular intervals
• Ensures that you buy more shares of an investment when prices are low and less when they are high
• You avoid the manual, complex task of researching the best time to invest
• Averages out the costs of your units 
• Lessens the results of short-term market fluctuation on your investments

SIP

• Systematic Investment Plan
• Facility offered by mutual funds to investors
• Helps you invest in a disciplined manner
• You invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme
• Amount can be as low as Rs. 500
• Intervals can be weekly, monthly, quarterly, semi-annually, or annually 
• Investor need not worry about market dynamics or timing
• Stands to benefit in the long-term due to average costing and power of compounding

Gist

• SIPs help you lower your investment cost and hence maximize returns
• When you invest through SIPs, you automatically experience the benefit of rupee cost averaging
• When you invest, you accumulate units at various prices called net asset value aka NAV
• You get more units when the market is down and the fund's NAV is lower and vice-versa

Why it works

Markets are volatile, hence it makes sense to spread your investments over a period of time to benefit from the lows that frequently occur

How it works

• Say you invest Rs 10,000 in a fund at each of these NAVs: Rs 100, 150, 200, 250, and 300
• Number of units accumulated (amount/NAV): 100, 66.66, 50, 40, and 33.33
• Total amount invested = Rs 50,000
• Total units = 289.99
• Average NAV = Rs 172.41 (This amount is less than three of the five NAVs at which you bought the fund!)

Conclusion

• SIPs: psychological tool of discipline
• By nature, investors are tempted to invest more when the market is racing and stop investing altogether when it is falling, which hurts returns
• SIPs automate the entire investment process and delink sentiment from investing
• Via SIPs, you benefit from rupee cost averaging to get a good return

Article: How to buy the right health cover?

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Let's look at the types of plans commonly offered. What they do and don't cover should help you determine which one is suitable.

Individual Health Plans aka  'mediclaim' policies

Covers:

• Hospital treatment expenses provided the treatment is on an in-patient basis and lasts for at least 24 hour
• Expenses include hospital bed and room, nursing, surgeon's fees, consultant doctor's fees, blood transfusions, oxygen and operation theatre charges

Does not cover:

• Pre-existing diseases or complications arising from them for the first four years of the policy
• Specific conditions that may not be covered for a certain initial period

There is generally an enhancement for every year during which no claim is made.

Family Floating Policies

The sum insured can be used for the treatment of any or all members of the family and not a single person. Rather than buying an R2 lakh health cover for each member of the family of four by spending for a total cover of R8 lakh, if you buy a Family Policy for R8 lakh, each person covered under it can avail benefits up to R8 lakh as opposed to R2 lakh in the earlier instance.

• Comes at a lower premium than individual policies would have done
• Can be bought by an individual who becomes the proposer along with spouse, including dependent children up to 25 years or even unmarried, divorced, widowed daughter and dependent parent

Critical Illness Plan

• Not a substitute for the basic individual or family policy
• Designed to be added as an addition to the former (The fact that these have to be bought separately is a major flaw in the way health insurance is sold in India)
• Provides financial assistance if the insured develops a serious ailment, such as cancer, or has a stroke
• Each cover has a list of ailments, usually 9-12 of them
• Can get it in the form of a rider attached to a life insurance cover, or as a standalone policy from either a life insurer or a non-life insurer
• If critical illness occurs, it pays the entire sum insured and terminates and can happen only once for any particular illness
• To get the payout, the insured has to survive for 30 successive days after the diagnosis
• No claim can be made during the first 90 days of the inception of the policy

Medical Cover From Life Insurance Companies

Life insurance companies, too, have started offering health plans. Most of these are, however, defined benefit plans - the pre-specified amount which is the sum insured is paid as compensation, irrespective of the actual amount of expenses incurred. Also, these are long-term, having a fixed premium for, say, three, five, or even 10 years. 

If you opt for a good combination of basic mediclaim, family policy and a critical illness plan, then these are not needed.

Types of Accounting Statements

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Topic:

Financial statements - consolidated reports of thousands of individual transactions

Function:

They summarize a company's

• Operations
• Financial position
• Cash flows over a period

“Show me the money!”

Types:

Income statement

• Aka Profit and Loss (P&L) Statement
• Reveals the financial performance of an organization for the entire reporting period
• Income: what the business has earned over a period (e.g. sales revenue, dividend income)
• Expenses: cost incurred by the business over a period (e.g. salaries and wages, rental charges, depreciation)
• Net profit or loss = Expenses - Income
• Begins with sales, then subtracts out all expenses incurred during the period to arrive at a net profit or loss
• Earnings per share (EPS) may also be added if the financial statements are being issued by a publicly-held company
• Usually considered the most important financial statement, since it describes performance

Balance sheet

 

• Aka Statement of Financial Position
• Shows the financial position of a business as of the report date
• Covers a specific point in time
• Aggregated into assets, liabilities, and equity
• Assets: something a business owns (e.g. cash, inventory, plant and machinery)
• Liabilities: something a business owes (e.g. creditors, bank loans)
• Equity: what the business owes to its owners or stakeholders
• Balance sheet must balance: Assets - Liabilities = Shareholder's Equity
• Line items within the asset and liability classification are presented in their order of liquidity: most liquid items stated first

Cash flow statement

• Reveals cash inflows and outflows experienced by an organization during the reporting period
• Broken down into operating activities, investing activities, and financing activities
• Operating Activities: represents cash flow from primary activities of a business
• Investing Activities: represents cash flow from purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
• Financing Activities: represents cash flow generated or spent on raising and repaying share capital and debt along with the payments of interest and dividends
• Can be difficult to assemble
• Issued usually only to outside parties

Scandalous - Charles Ponzi

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What?

Origin of the Ponzi Scheme

Who?

Charles Ponzi (1882–1949) - an Italian immigrant living in Boston.

When?

It happened in 1919.

Crime in one line

Ponzi conned investors into giving him millions of dollars and paid them returns with other investors’ money.

What did he do?

He came up with a scheme to get rich by purchasing international reply coupons (IRC) for a low price abroad and then selling them for profit in the US.

What’s a reply coupon?

It’s a coupon that can be exchanged for several priority airmail postage stamps from another country.

What was the problem?

Though Ponzi was able to repay his investors their money, via subsequent investors, he had not yet figured out a way to actually convert the IRCs to cash. He then realized that changing the coupons to money was logistically impossible.

What this led to

The ‘Ponzi scheme’

In short:  “robbing Peter to pay Paul”

Damages and Impact

In order to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 were in circulation.

In August 1920, Ponzi was declared hopelessly insolvent, reporting at least $2 million in debt. It was later found that he was actually $7 million in debt.

Magnitude of losses

Ponzi’s investors were essentially wiped out, receiving less than 30 cents to the dollar. They lost about $20 million in 1920 dollars (approximately $196 million in 2019 dollars). By comparison, Bernard Madoff’s similar scheme that collapsed in 2008 cost his investors about $18 billion, 53 times the losses of Ponzi’s scheme.

Typical Characteristics of a Ponzi Scheme

Scheme:

• Guarantee of high returns with low risk
• Consistent flow of returns regardless of market conditions

Investment:

• Unregistered investments with the Securities and Exchange Commission (SEC)
• Investment strategies described as too complex to describe

Customers:

• Clients unallowed to view official paperwork for their investments
• Clients facing difficulties removing their money

Stay tuned

We’ll later look at some of the Ponzi scheme scandals that took place more recently, like Bernie Madoff, whose name this scheme is synonymous with, and also the Ponzi scheme employed by Sahara’s Subrata Roy to dupe thousands of poor investors.

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