Credit Series- Introduction

Spending 13 years in similar domain can be boring or can be interesting. So here I will be sharing some interesting observations I came across in this period.

To start with these are the points I came across while doing credit/ risk assessment over this period. For those not part of BFSI, these are the do’s and don’ts I followed when I was evaluating the financials and business sustainability in order to decide whether to lend or wait.

  1. Bank statements and business model are the best match makers.
  2. End use of funds is as important today as it was 20 years back.
  3. Numbers are numbers. It’s as objective as thing can get.
  4. Statutory dues and salary payments cannot be ignored.
  5. Related party and arm’s length.
  6. Risk and reward go hand in hand.
  7. See the numbers, meet the people but also give some weightage to your gut feel.
  8. Everything looking bad is not always bad and everything looking good is not always good.
  9. Numbers if don’t match there is a story to be uncovered.
  10. Don’t underestimate the potential of secondary research.
  11. If market intelligence points to something, explore that further.
  12. Do the basic stuff first, complex models can be built by many.
  13. If something is too complex, then it’s not normal. It may or may not be good

I will be covering each of these in a separate write up for each may or may not in this order.

I will be sharing my experience and approach in each of these. Feel free to share yours on these.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.


Money Talks- Part 7- Mutual Funds

In this post I will cover the Mutual funds (MF) :

–          What they are?

–          Broad Types.

–          How we can do it ?

Mutual Fund combines the features of shares ( stock/ equity instruments) and debt instruments (debentures/Bonds/Any other fixed income investments).  So it gives the option to us to invest in a combination of equity and debt instruments with proportion of each varying under different funds.

You would come across multiple funds. Below would help understand broad differences-

–          Equity Funds where majority of funds say more than 60% would be invested in shares and balance in debt instruments. Equity fund can further be divided into Large Cap, Mid Cap, Small Cap and Multi cap funds. Market capitalization (Cap) is value of shares of the company listed on stock exchange.

–          Debt Funds where almost entire funds would be invested in debt instruments & balance in cash/ liquid instruments.

–          Balanced Funds which invest in almost equal proportion in debt and equity.

–          Liquid Funds which invest in short term instruments like commercial paper etc.

You further get the below options while choosing the first three categories:

–          Dividend Option

–          Growth Option

The first one pays dividend when declared , while the second one reinvests that. Considering there is no payout of dividend in second one, the overall returns would be higher than the fund with dividend option.

The other common term you come across is SIP ( Systematic Investment Plan). So you can either make a lumpsum payment to invest in a MF or save yourself of the hassle of investing every month and register SIP which will help you put the amount every month on specified date and fund. Minimum period is 6 months for which you need to continue  SIP.

Now how to do it?

You can go directly to any mutual fund website and register there where you will need provide your basic KYC details.

Your KYC should have been verified which you can do directly from either MF website or from one of the CRA agencies – NSDL/CDSL. CAMs also provide CRA services.

Once your KYC details are verified, some MF’s ask to upload a scanned copy of cheque. After having registered you are ready to invest in the funds offered by that fund house.

Some banks also provide the facility to invest in MF account from your net banking portal itself like HDFC bank. It enables ease to invest in any MF of any MF house from a single place. There is however a variation in the returns ( which may or may not be significant of around 0.5%) when you invest directly or through an intermediary like a bank.

So get started with your SIP in case you haven’t.


Money Talks- Part 6- EPF and PPF

Provident Fund is another common investment option but used interchangeably for EPF and PPF.  Both are similar in few aspects but not same.

  • EPF stands for employee provident fund and is applicable for salaried individuals.
  • PPF stand for Public Provident fund which anyone can put investment into.

Both are long term investment options and offer less liquidity.

  • Returns on both of them are announced yearly/ quarterly by Government bodies.
  • Return you will receive in investment is not known in advance as it keeps on changing Quarterly/ yearly and the maturity of this instrument extends for longer period. However in the past 5-6 years the returns have ranged around 8% plus/minus 1%.
  • Both give you the benefit of Sec-80 C deduction on the amount invested and the return is also exempt provided you are holding it for min 5 years in case of EPF. PPF partial withdrawals are permitted post 7th year .

Snapshot of both these instruments is as  below:

Who Salaried Anyone
Frequency Monthly deduction from salary Min once in a year.
Tenor Retirement. It can be withdrawn in case of unemployed. 15 years.
Withdrawal Permitted for specified usage Permitted from 7th financial year.
Max withdrawal Upto 90% Upto 50%
Taxation of returns If withdrawn before 5 years taxable If withdrawn before 15 years taxable.


Government is considering increasing giving the option of increasing equity contribution for EPF on which more clarity should come post March-19.


Money Talks- Part 5

So after having understood the need of investment, post tax return and risk return taking ability during different life stages, lets now understand different investment options.

Let’s start with fixed return investments ie Fixed Deposit (FDR) and Recurring deposit (RD).

  • Both offer fixed Rate of interest (ROI). So one knows well in advance what is the amount which would be realized at the end of tenor/ maturity.
  • Both are taxable. So take into consideration the post tax returns. Banks deduct TDS amount post a threshold amount in case of FDR’s.
  • Both can be done for short as well as long duration and withdrawal can be made before expiry also subject to lower ROI/Penal and excluding tax saving FDR’s. Tax saving FDR are for 5 year period and amount invested for the same is eligible for Sec 80 C deduction. Interest received on same is taxable.
  • If certainty of amount is of essence these are the best options.

For those who are new to RD, FDR is one time deposit and RD is regular which generally ranges from 6 months onwards.

FDR can be done for a few days also. However if you are breaking the FDR there is penalty and / or lower ROI payable.  ROI of the applicable tenor when you are withdrawing the amount prematurely is paid and/or penalty generally is 0.5% to 1% of applicable ROI.

So if the surplus is for very short duration say upto 30 days then you need to look at saving interest which currently is around 3.5% (4% for if amount maintained is > Rs. 50 lacs) for most banks and interest on FDR for that period.  Note that Saving account interest upto Rs. 10000 is tax exempt.



The other two points on risk taking and investing horizon are closely linked to each other and to what life stage you are in.

In general the ability to take risk and invest more as a proportion of income is higher in early years. It reaches its peak and goes down over the period with increasing liabilities and lower recurring income as one starts reaching retirement.

Let’s see some scenarios-

Age Career Income Saving Spending Loan
21-30 Beginning Increasing Can be increased Can be curtailed Mostly Taken
31-40 Middle Increasing Can be increased Increases with Child expenses / Education Mostly Taken
41-50 Peak Increasing Can be increased Increases with Child education/ Marriage/ Medical conditions Mostly Taken
51-60 Plateau Constant Goes down Increases with ageing/ Medical conditions Mostly Closed
60+ Retirement Becomes Zero Becomes NIL Minimum basic maintenance and healthcare needs to be met Not Taken/ Given


So depending on the life stage you are in, you need decide on the risk you are comfortable with. This in turn will help you decide which financial instrument to invest in.



Let’s understand the key considerations while investing and we will then take each of them one by one:

  • What amount of risk you can take?
  • What is your investment horizon?
  • What is post tax return?

We will start from the third one. What is the impact of tax on different instruments we can invest money.

  • So say hypothetically one instrument offers return of 10% annually which is taxable and another offers 8% which is tax free.
  • If your effective tax rate is 25%, then the post tax return in first is 7.5% which is lower as compared to 8% in second option. But if your effective tax rate is 15%; then first option offers returns higher.

Below table depicts the four scenarios-

  Instrument 1 Instrument 2
Return 10% p.a. 8% p.a.
Tax Treatment of returns Taxable Tax free
Tax applicable    
Scenario-1- 25% Tax 7.5% p.a. 8% p.a.
Scenario-2-15% Tax 8.5% p.a. 8% p.a.


The key point is while looking at the return of any instrument you must look into post tax return of the instrument in terms of instrument and your tax bracket.


Money Talks – Part 2

So next comes how much to invest & where which will depend on risk appetite of each individual.


Before that let’s cover some risks by “insurance”. Buy your term insurance & buy it online , some companies offer premium differential on that . Most of the employers cover your medical insurance, but in case it is not or the coverage amount is small, take medical insurance.


Once the protection is in place, then understand different instruments where we can invest :

  • Fixed deposit
  • Recurring Deposit
  • Mutual fund
  • Stocks
  • Gold
  • Provident Fund
  • Real estate
  • Nps


The differentiating  factor is return vis a vis the risk . And when you are calculating return you need to look at it as return post tax.


  • Fixed deposit, Recurring deposit will give you fixed returns ie the rate of interest. But as interest is taxable you have to keep the after tax return into consideration depending on your tax bracket .
  • Provident funds returns are tax free and amount you invest also gives you benefit under sec-80 C. But this amount would be available to you post 15 years ( partial after 6 years).
  • You can either invest directly in stock or indirectly through a mutual fund. Here returns are not guaranteed and you can’t rule out negative return or risk of loosing the principal. A stock you have chosen may give you excellent returns as well.
  • Since we have just begun on this journey on investing so we can use the diversification benefit given by mutual funds instead of investing in a single stock.
  • If you do little homework and keep it for a long term horizon (say 5 years plus), then the returns on mutual funds are relatively much higher.
  • Real estate will take up later along with REITS.
  • NPS combines the feature of mutual fund and fixed return instrument along with tax benefit on amount invested; but again amount would be available post you complete 60 years.

Money Talks – Part 1

Starting a new category from today which will be focussing on small steps in how you manage your money which brings long term benefits.

Today there is a lot of information on anything and everything you want.  The problem now is of information overload. And MONEY is a widely covered subject.

The journey of money in our lives start with the first paycheck which is your own money earned by you, belonging to you. This is quite a beginning in everyone’s life and is generally followed with the gifts and celebration with the ones who helped you in starting this journey.

What about the subsequent paychecks? If you are an investment or stock market savvy person or know & believe someone who is into it; that’s mostly sorted. But if you are not, what do you do with it ? If you are the one who lets it remain in your bank saving account after the expenses have been met; then I have a small advice for you.

Invest the surplus. If you are risk averse and not sure which mutual fund to invest; at least start a FD or RD with that till you decide on that.

If for some reason there is no surplus, from next month start setting aside a small amount for investment and manage other expenses from the residual.


The bottomline is for the long term you need to start investing as early as your second paycheck. Instrument you invest will decide your risk as well as return. Getting into the discipline of investing is the first step which one needs to inculcate if it is not there.