Will we learn from MLM Scams. The history of ponzi schemes. Source:quezi.com

                                                         Charles Ponzi


In the  recent times all news channels, news paper in Kerala is filled with news about the investors who lost money by investing in so called "RICH QUICK" investment options. Tycoon international, Bizzare, RMP....... the list goes on. Few years before, there was a magic product which will double your money in one year. The company is LIS. I know many highly qualified people, people working in banks, teachers invested in this product.Now no one knows what has happened to the promoters and investors. Most of the malayalam channels were showing the ads and these ads been done by smart creative people. If you use your common sense no creative ad can take your money away. Just do a simple calculation on how much you earn if your money doubles in a year.


100000 invested will become 102 crore in 11 years does that make sense. But then how new schemes able to collect money. No need to blame the promoters

All Ponzi schemes are based on maintaining the illusion that profits are being generated, when the “profits” are really new money being invested into the scheme. Therefore, the Ponzi scheme depends on a constant influx of new members, or of new money from existing members. When the flow of new money dries up, the scam collapses.

Some Ponzi schemes start out honest. The organizer is under pressure to keep the profits coming, and if profits drop can be tempted to start paying out “profits” from incoming capital. After this has been done for a while, collapse becomes inevitable. Even if profitability returns, there are no longer enough funds under investment to generate the necessary payouts.

Sometimes the scam continues unabated for years or decades. The perpetrator keeps going, often under the delusion that things will somehow “come right” and enable the scam to be unwound. The scheme may only collapse when the funds run out completely, by which time there will be nothing of value left that can be recovered by the investors.

Ponzi scams are named after Charles Ponzi. His was not the first such scheme; no doubt these schemes have been played out many times over thousands of years. Indeed Ponzi had worked for Banco Zarossi, a failing Montreal bank that was funding its interest payments using the capital deposited by new investors.

In early 1920 Ponzi noticed that International Reply Coupons (which can be exchanged for a postage stamp anywhere in the world) were being sold so cheaply in Italy that he could theoretically make a profit by buying them there in bulk, sending them to the US, exchanging them for US postage stamps, and selling the US stamps.

Ponzi sought backers to exploit this, and raised funds from his subscribers. But the overheads of trading in the IRCs were high, and Ponzi instead paid his subscribers from the capital of new investors. Because this seemed to be working, the number of new investors continued to grow and, despite a few setbacks and suspicions, Ponzi kept the scheme growing, “making” millions for himself.

The US Post Office announced that the IRCs were not being bought in quantity, so any rational investor could have seen that it was a scam. But people are not always rational, and the scheme ran for almost a year before it collapsed suddenly when Ponzi’s publicity agent, James McMasters, sold the inside story to a newspaper. Ponzi was arrested and it was all over.

, investors greed will never end.

Regret Aversion.

Who do you think feels worse, Ramu or Shamu


Scenario 1
Ramu owns 100000 INR worth of stock in Reliance. A trusted friend suggests that Ramu sell it and buy 100000 of TCS stock. Ramu does not sell, and over the next year Reliance share price drops 30%, turning his 100000 INR holding into a 70000 INR investment

Scenario 2
Shamu owns, 100000 INR worth of TCS stock. During the same period, a trusted friend suggests that he sell his shares and buy 100000 INR worth of Reliance. he does this,and over the next year Reliance share price drops 30%, turning Shamus 100000 INR investment into a 70000 INR investment stake in Reliance.

Who do you think feels worse, Ramu or Shamu

Planning for your children education and marriage.. Facts you must know about children plans in the market.

The market is flooded with children plans. The goal of every parent is to give their kid the best education no one is ready to compromise when it comes to their children. Whatever we didn't get when we were child we need to give that to our kids that is the top priority.Education is getting costlier day by day. If we do a bit of number crunching the picture looks bit scary!

Here the companies selling the children plan has got a huge potential to do "emotional blackmailing"   they  use all marketing gimmicks to sell the product." If god forbid you die what will happen to your child future, how your dreams will come true" any parent hearing this will get scared. On the other side the agent is curiously waiting to close the sale and complete his target which will make him qualify for a fully paid trip to Thailand :) Then the conversation goes like this normally.

Agent  : Sir, i hope you  now understood how good is our product. Can you pay by cheque or cash (A          typical sales closing question)

Parent  : How much i need to pay? what is the minimum in your scheme??

Agent  : Sir, i recommend you pay 50000 Rs p.a. so that you get a good life coverage and other benefits.

Parent  : No no.. i already have many policies i can pay only 25000 p.a.

Agent    : Ok sir lets do one thing, we will invest 25000 half yearly, you can give standing instruction to the bank so that you don't have to worry about paying premiums. Is that ok.

Parent    : Ok, agreed, He signs the cheque and hand it over to the agent. Back of the mind he feels proud, investing a hefty amount for the kids future. Same time also bit concerned about the huge commitment he has made. Decided to put in extra effort in work and bring in more incentives and overtime pay so that all commitments can be met on time.

So far the story looks good. Have you experienced the same, i am sure few of you would have undergone the same experience. The agent might be your friend, a relative who is highly concerned about your well being. Now my request to all is if you have bought a policy just go and check out what is the current status of your investment. What all benefits is been disclosed in the policy document. If still you are happy kudos to the person who have sold the plan. Or else....

Important things you need to know   

• The life assured is the parent . If something happens to the parent sum assured will be paid. Because the parent is the earning member, and insurance can compensate financial loss alone.  
• If you don't have a sum assured (Death benefit) of at least 20 times of  your annual income you are not safe.
• If you are not going to continue the plan for the entire term,You will loose most of the benefits.( unfortunately these plans are miss sold as 3 year plan).
• Most of the plans ( except single premium) if you have not paid premium for the first 3 years, the whole amount paid till date will be forfeited. No money will be paid back.
•  Don't fall prey for fancy names. Children plans are normal endowment plans or ULIP with few ad on benefits.

Do post your valuable comments. The next article is about the viable investment options for children education planning.

Life before marriage and after marriage:) in terms of personal finance....

This article is dedicated to all my readers who is going to get married soon and got married recently like me :). based on survey on spending patterns and saving patterns.( This is a general perception. There are exceptions, if you belong to the exception you might be lucky or unlucky depends on how you look at life)

Life before marriage 

• Commitments are limited. 
• Salary or income that we earn will be spend for things what we like more than what we need.
• Friends and fun will be the top priority.
• We love plastic money.
• We take credit  as far as our salary slip or form 16 supports.
• We are not interested much in saving. Will be very bad in maintaining financial discipline.
• Will be willing to stretch EMI for the dream car.
• If i am a successful in my career the flat that i own will prove that, because thats how society look at things, result more EMI.. Because now a days for getting married you need to submit your resume, more assets you own more chances for you to get a partner.( When you get more assets unfortunately your EMI becomes fatter and at times will exceed what you can afford)

Life after marriage

I am looking forward for comments from readers on how life after marriage will look like in this kind of scenario.Do give your view points so that we will reach a conclusion. 

Facts about Gold. ( source: world gold council 2009-2010 numbers)

India is the largest market for gold jewellery in the world, representing a staggering 440 tonnes of gold in 2009. All evidence suggests that 2010 will exceed that figure.

Indian consumers are actively engaged in considering their next piece; 75% of women say they are constantly searching for new designs. Whilst over 50% of gold jewellery is bought for weddings, the wedding anniversary has now become the most aspirational occasion for receiving gold today, extending a couple’s relationship with gold beyond the marriage ceremony.

The festival of Dhanteras, the most auspicious day in the calendar just before Diwali, has traditionally created a strong seasonal surge in sales. However, the strategic development of the Akshaya Tritiya festival in May, together with leading trade partners, has seen phenomenal recent success; sales during that period grew over 28% in the last year.

India’s culture and mythology embrace gold. And India’s traditions of unparalleled craftsmanship and skill are exemplified by the country’s gold jewellery manufacturing, with the majority of pieces still made meticulously by hand. Each region’s symbols and designs are reinterpreted in gold which is overwhelmingly high in caratage.

I Earn, I Spend, I cant Save...

I earn I spend I can’t save. It’s true for most of us. India as a country is in its best growth phase, the country having the demographic advantage. More youngsters making big money that their parents couldn’t dream off, buying cars in their late twenties, buying home in their 30’s, exotic foreign trips. But the sad part is most of us (not all) are not happy. Even when driving the new car, sitting in the balcony of apartment there is something haunting our mind. The biggest “Satan” is the EMI commitment for next month. Then comes the credit card bill, have been paying minimum due for last few months credit card company is happy so are we. We use top notch brand products, let it be perfumes, there are many like Hugo boss or Davidoff with a price tag of 3k plus. Even underwear people has become brand conscious. Nothing less than a jockey is considered cheap.

Is this for good? The answer is everything is good as far as it doesn’t put you in a debt trap.  Irrespective of the income let it be 5000INR or 500000 INR a month it’s not difficult to spend.  The urge for spending more than your income is due to the phenomenon called “instant gratification”.

Gratification can be explained as “the pleasurable emotional reaction of happiness in response to a fulfilment of a desire or goal”. And instant gratification is what we want; we want right now not ready to wait. It is human tendency and it is very difficult to control instant gratification. When we go to shopping mall or any big retail outlet we tend to buy more than what is required, with lot of discount sale. For buying 1 shirt we end up buying 3 by paying for 2. Good deal. Was there a need for the 2^nd shirt?? We ourselves don’t know why we bought it. Another good example, once we get a job with few payslips in hand we are ready to buy our first car, why? because everyone  around us are doing the same. Get some money borrowed from parents or if the pay cheque is fat enough use that to fund 10% of on road price of car.. rest is simple, sign few documents within hours the loan will be disbursed by your banker.

Now let us look into a different scenario, what if you could delay your gratification. Preparing a proper plan and budget before shopping. Instead of buying the car immediately make investments for 3 years or so to build a corpus to fund the first car. Even 10% of income channelized to the right investment avenues like mutual fund in a systematic way can make wonders. The power of compounding can do wonders. Few things that you need to keep in mind to ensure u not making a hole in your wallet.

• ·         Just because credit is easily assessable don’t leverage too much

"Start Writing your family budget" A Good article by STEVEN FERNANDES in fpgindia.org

Start Writing your Family Budget

by STEVEN FERNANDES on APRIL 5, 2011

Shreekant & Geeta had been married for 5 years now and from the constant franctic calls that I had started getting recently from Shreekant, I figured out that something was amiss on the personal financial front. Both had decent salaried jobs and nearly a year back they purchased a home in the distant suburb of Mira road, near Mumbai, by availing a home loan of around 20 lakhs. They had a kid who was just 3 years old and was being looked after by a full time maid.

I felt that it would be better to meet this couple at the earliest and conveyed the same to them. Both Shreekant and Geeta met me on a Saturday evening at my office with all their personal financial papers.

After the initial discussion and on further probing, I realized that this couple did not have any form of budget in place. They could tell me how much net income they earned but could not figure out how the entire income got exhausted month after month, sometimes forcing them to use their credit cards excessively to meet  the shortfall.

I suggested them to prepare a simple cash flow statement which contained Income on the left hand column and expenses on the right hand column. Expenses were further broken into Fixed and variable. I explained them that expenses such as Home loan EMI, Car loan Emi, rent, school fees, maid salary, etc are fixed expenses where the amounts did not change month on month, while groceries, utility bills, petrol/ travel, medical, etc would form the variable expenses since these amounts would change every month.

I could see the couple sweating it out to figure out the various expenses since they had never taken the trouble to make a note of it on a day to day basis. After nearly half an hour they were able to fill the monthly expenses details.  I further suggested them to break up all the one time annual or half yearly expenses such as Insurance payments, vacation etc into monthly so we could get an idea of the exact monthly outgo.

After some debating and arguing between the couple they were able to write down the complete monthly expense breakup.  Now things were clearer and we were able to figure out the exact monthly expenses.  It was now time to do a simple subtraction of expenses from income and surprisingly we discovered that there seemed to be some surplus too. But we figured out that due to non budgeting of expenses and frequent use of credit card, most of the time the minimum balance on credit card was being paid which resulted in the card issuing bank charging them high interest and thereby leaving them with no surplus at all. A few months of monitoring of the expenses would help them to arrive at the exact figures and enable them to plan better.

Shreekant shared with me that when he was a kid; he remembered his father would hand over a sum of money from his monthly salary to his mother who being a housewife would manage the entire household expenses within the money provided and in spite of the fact that there was only one earning member in the house, still all the basic requirements of the family were met comfortable. Today things which were luxuries earlier have become necessities and there are so many expense heads which if not tracked and monitored, would land a majority of the couples in a similar situation as of Shreekant and Geeta.

Geeta realized the importance of the above simple exercise and promised me that both of them will commit themselves to writing their monthly budget from here on.  They also understood that it was more prudent to withdraw the required budgeted cash from the savings account in the beginning of the month, thereby avoiding frequent and unmanaged withdrawals during the entire month.

Though Budgeting is a not a very exciting activity but it is the most basic step of financial planning. It is also advisable to review your budget on a regular basis to make sure you are on the right track. So like Shreekant and Geeta, let the budgeting begin!

Budget sample

Items	Per Month	Per Annum
	Rs.	Rs.
Salary {Net)
Mr	40000	480000
Mrs.	20000	240000
Total Income	60000	720000
Fixed Expenses
Home loan EMI	20000	240000
Any other EMI	0	0
Kids School fees and school bus	1500	18000
Life Insurance Premium	6667	80000
Health Insurance {Cancer Policy}	833	10000
Scooter insurance	100	1200
Total Fixed Expenses	29100	349200
Variable Expenses
Food & Groceries	7000	84000
Clothing / Personal Care	833	10000
Electricity Bill	1200	14400
Cell & Telephone Expenses	1500	18000
House Maid/ServantsExpenses	2000	24000
Cookiing Gas Charges	400	4800
Cable Charges	475	5700
Dependent parents	0	0
Medical Expenses	1000	12000
Basic Traveling Expenses	2000	24000
House(Society) Maintenance Expenses	1500	18000
Vehicle/ White goods repairs	500	6000
Vacation	2500	30000
Entertainment	1500	18000
Miscellaneous	2000	24000
Total Variable Expenses	24408	292900
Total Expenses	53508	642100
Surplus	6492	77900