Taking Financial Literacy to the roots by cdf12215


									                                                                                                     A Monthly Newsletter by

                           I NTELLECT
                             For internal circulation only                                           VOLUME 2: April, 2007

                         Thank you for the warm response to the first edition of "INTELLECT". This edition brings to
                         focus the importance of financial literacy and the need to make it a part of the primary
                         education. Credit Card fraud can catch us unaware in the hustle and bustle of everyday life.
                         Some standard precautions while using credit cards can prevent frauds and potential hazards.
                         Read on for details.
                         Theory of compounding which forms the basis of financial investing has been clarified.
                         Mistakes that people make while investing has been addressed along with recommendations.
                         In the health section we have uncovered the virtues of turmeric and brown rice.

                             Taking Financial Literacy
                                   to the roots
One of the basic drivers of human endeavour is the need for     society evolved into the industrial age, people who worked
security. In the post-modern world, since physical security     in factories needed to leave their villages and homes in
under normal conditions in urban centres is more or less        search of work to where the production units were located.
taken for granted, the craving for financial security drives
many individual endeavours. The need for Financial              This migration started eating into the joint family support
Planning by the individual citizen has roots in this need for   system as nuclear families mushroomed. Increasingly,
financial security especially in the latter half of one's       'financial security' became the responsibility of the self
working / retirement life. To understand how this has           sustaining nuclear family unit. In the meanwhile our
evolved over the past few decades in India, we will need to     economy has been rapidly evolving into a services economy
have a quick overview of how the thinking on what makes         with further fragmentation of families. While the needs and
for 'financial security' itself has evolved.                    complexities of financial planning have evolved over the
                                                                past few decades, corresponding individual learning in this
The Indian society has metamorphosed over the past 50           area has been found lacking. If you take a straw poll of your
years from primarily an agrarian base to an industrial          acquaintances and friends and ask them about their
economy and society and now finally to a services driven        knowledge and learning in the area of financial instruments
economy. As happens in most agrarian economies, lifecycle       and financial planning, I am sure you would be quite
financial planning and support post a person's working life     disappointed with the findings. Even highly educated
was basically a social contract with future generations. It     professionals and accomplished corporate Executives have
was expected that after a person's productive life span came    had very little exposure to the need for and the tools
to an end, the children who would inherit his property etc.     available for life cycle planning of financial needs.
would also have the primary responsibility of taking care
and looking after the financial and other needs. Agrarian       While the Indian education system has done a marvelous
societies have less mobile families and as a corollary such     job in creating a highly skilled workforce which is
families typically are large joint families. However, as the    providing quality services to the world, it has been
significantly lacking in equipping the individual with basic        If the individual is motivated to put savings in these asset
understanding and learning of what makes for financial              classes through appropriate careful channelisation, the
literacy. Typically, the subjects taught in today's classes         economic appetite for capital can be satisfied through
upto the XII Std. have virtually been the same over the past        domestic means. Enhanced financial literary will also mean
few decades with no macro level changes. The major                  that individuals will have the wherewithall to sift the grain
function of education is to equip a child and enable him or         from the chaff in terms of financial opportunities. This will
her to meet the challenges that life is going to pose in the        in turn lead to a healthier financial market and an healthier
future. One of the important challenges in the complex              economy.
world that we live in is related to planning finances. It is
                                                                    There has been a view recently that our capital markets are
amazing however, that while we learn lessons in history and
                                                                    getting increasingly owned by FIIs. It is felt that these FIIs
geography which are no doubt important while ignoring
                                                                    are benefiting from the growth of India's economy and
other relevant areas of learnings in financial planning have
                                                                    India's capital markets while our individual domestic
been completely ignored and excluded from any known
                                                                    investor is being kept out. The genesis of this problem lies in
curriculum in India. Time has now come to look at whether
                                                                    the lack of understanding and hence an aversion towards
we need to introduce specific curriculum to enable early
                                                                    participating in capital markets. This can only be overcome
learnings in this area which is going to play a very important
                                                                    through a sustained programme of education and what
role in a person's life. While we are all aware of our
                                                                    better than catching them young.
country's literacy index we should also pay some attention
to the 'financial literacy' index.                                  In the initial stages financial literacy courses can be made
                                                                    optional for students after the X Std. and in colleges. In
Learnings from certain other countries show that an
                                                                    course of time as benefits of these courses become evident,
approach to education which enables early learning in this
                                                                    they will find their way into the permanent curriculum as
area of financial literacy has rich benefits for the person
                                                                    well. For starters, a programme like this can be
concerned, for the economy as well as for the society at
                                                                    implemented in the Central Government sponsored
large. One of the countries which has tried to implement
                                                                    educational institutes. There is almost no doubt that long
financial planning in the curriculum of young citizens is
                                                                    term impact of such a course will be beneficial to the society
South Africa. Learnings from this particular endeavour
                                                                    at large.
have been very positive.
                                                                    What are the benefits for the society at large? Our
We are a country of a very high savings rate. The savings
                                                                    population which is growing at a rapid pace will also grey in
habit is typically inculcated in an individual's mind from an
                                                                    the future. If individuals have used their productive life
early age. However, it is a pity that still bulk of these savings
                                                                    span for proper financial planning and have invested in
get deployed in assets which have low productivity. In fact,
                                                                    assets yielding good long term returns, the expectation is
data shows that even from an early life cycle stage, bulk of
                                                                    that the burden of social security on the society at large will
an individual's financial assets keep lying in bank's fixed
                                                                    come down. Thus, there are several benefits of enabling an
deposits etc. which have a poor track record of long term
                                                                    early introduction of young citizens to financial planning at
                        returns vis-à-vis alternative asset
                                                                    the individual level, at the economy level as well as for the
                          classes. Thus, an early introduction
                                                                    society at large. In many ways it is inevitable that at some
                           to the potential of various
                                                                    point in time education of this nature will have to be
                            financial asset classes and a need
                                                                    introduced in our schools and colleges. It is up to us to
                             for appropriate focus on
                                                                    expedite this and hence enable the future generations to
                                  financial planning can have
                                                                    participate in creating the wealth of the nation and their
                                        rich rewards for the
                                                                    financial security at the same time.
                                          individual. Similarly,
                                          for the economy there
                                          is a need for
                                          significant capital
                                         investment in assets                                          Ved Prakash Chaturvedi
                                        which can also give                                                 Managing Director
                                       long term good returns.                                    Tata Asset Management Ltd.
                                     Using Credit Cards Safely
                                                                                Remember these points while using credit cards

The highway murder of Infosys executive on Pune-Mumbai               the customer having no idea that this is happening. While most
highway last year and subsequent misuse of his credit cards by       e-commerce sites claim to be encryption enabled, it is
the culprits brings to focus security issues related to using and    worthwhile to check the security level before a transaction is
carrying credit/ATM cards. Carrying cash is normally                 made. This is done by clicking on the lock which appears at the
considered risky but carrying a card with huge cash limits is        bottom of the browser.
never considered a threat. In fact, the reality, as is evident       Phishing is another way to get a person's credit card info online.
through this incident, is quite different.                           This is done by sending an official looking email telling the
Credit card fraud has accounted for about $40 million in             customer that they have to update their credit card information.
just one year alone. That translates to about 900,000 victims in     They are directed to a site where information is collected and
22 countries. This was the case of JK Publications                   used for whatever purpose the scammer wants. It is best to ring
(this and other details of fraud are available at                    up the card service provider before replying to such unsolicited
http://www.faughnan.com/ccfraud.html.) There are many                mails.
ways in which card fraud happens. One of the common types is         An easier way to get the card information is from the computer
skimming. Skimming happens when an employee or merchant              used by the customer. Most computers have 'Auto Complete'
makes a second copy of the person's credit card details before       option checked. This helps the computer remember the
processing the payment. This copy is then sold on the black          passwords and various entries made on forms. In case you are
market to professionals who clone illegal copies of these cards.     using an internet café to make these transactions, the best way is
Fortunately, skimming has become less of a problem since the         to make sure that the computer you are using has the Auto
introduction of CVV and CVS codes. These are not encoded on          complete setting off. This can be done easily by checking on
the card strip but are physically written on the back of the card.   Internet Options on the browser (in case it is Internet Explorer)
This is a required three digit code to finalize all transactions.    and clicking the content tab. In the content frame click the auto
Without this code even a cloned credit card would not work.          complete button and turn off any active buttons.

Other types of fraud happen on the internet. When a customer         A bit of extra caution helps in case of using cards. Following are
uses credit cards online, hackers monitor his entry into the         some of the easy steps one can follow while carrying or using
merchant's system and steal the credit card information with         credit cards:
• Take care of your cards as you would take care of your cash         have to use then make sure you did erase all personal
• Do not get flattered by having huge limits on your card. It         content.
   amounts to carrying that much cash in your pocket as credit     Credit card and cash are
   card                                                            synonymous.         Scammers
• Never let the card get out of your sight while making a          understand this more than us.
   transaction                                                     While police will investigate the
                                                                   crime, some amount of fraud and
• Avoid merchants who take an imprint of your card
                                                                   misuse can surely be avoided.
• Send your credit card details only after confirming the origin
   of requestAvoid using your cards at internet cafes. If you

4 Common Mistakes
Before you go through the rest of this section, consider           Short Term Focus. The breathless and breezy newspaper
these common mistakes many people make when deciding               headlines and TV commentary grab us. Brokers call each
on investing.                                                      day with what to buy and sell. Avoid them. They are
Doing Nothing. Millions of Indians have large amounts              probably meant for professionals or those with substantial
stashed away in savings bank accounts. This amounts to             time each day to trade in stocks. If you are not one of them,
doing nothing and will lead to slow decay of                                     put money in the market that you won't need
purchasing power thanks to inflation. Putting                                    for at least 3-5 years or even longer and avoid
at least some money in higher-interest bearing                                   getting carried away by the useless everyday
post office accounts makes sense. What if you                                    noise. By trading in and out of the market, you
invest in stocks? There is no guarantee that the
                                                                                 will be saddled with costs and uncontrollable
stock market will go up immediately after you
                                                                                 losses that will leave you depressed. Plus you
pull out money from your savings account and
                                                                            will miss out on gains that long-term investors
buy stocks. But if you remain invested at least some
                                                                            enjoy with much less effort.
amount in funds and for the long term, it will leave you
with more money than doing nothing.                                Playing It SafelRisky. If you are in 30s or below, most of
                                                                   your money should be in the stock market. You have
Starting Late. The earlier you start the process of scientific
investing, the better off you are. Postponing the start of         enough time to weather panics and crashes and to gain from

your investing journey gets you substantially lower returns        the long-term upward drift in stocks. However, do play safe

in the end. Frantic large amounts of investing later when          when you are in your 40s and cannot afford to lose your nest
you realise that you have not saved up enough for                  egg by falling to the temptation of an irrational market
retirement usually cannot match the small and steady               mania.
investment started fairly early in your career.
The Miracle of Compounding
Outstanding winners of the investment game often have                     begins to grow in the later years. By the time you are 58,
something ip common: their ability to keep their gains and                your money would have grown to Rs 15.01Iakh! And that is
make further gains on those initial gains and so on - over a              only at a compounding of 8%. If your returns are 15% a
long period of time. As they do this, they have a simple math             year, the amount would be Rs 70.10 lakh only by saving Rs
on their side called the Power of Compounding. It simply                  1000 a month.
says that if you put your money in an investment with a
                                                                          Clearly, the longer you leave your money invested, and the
certain return - and then reinvest the income from that for
                                                                          higher the rate of return, the faster your wealth will grow.
further gains, the returns keep accumulating at an
                                                                           This is something that the most successful investors and
accelerating rate leading to unimaginable
                                                                                   entrepreneurs understand instinctively many of
wealth over the long term. Compounding is
                                                                                       whom had to start from scratch to build wealth.
a miracle that allows you to turn a measly
                                                                                         Either directly or indirectly they follow the
rupee into thousands of rupees if you leave it
                                                                                          power of compounding, an automatic method
invested long enough.
                                                                                          of building wealth. You too can make the
Suppose you are 28 and you decide to put Rs                                               power of compounding work for you by
1000 every month into an investment with                                                 automatically setting aside a specific amount
an 8% annual return. After Year I, you will                                                each month for a good mutual fund or a
have Rs 13,533. If you leave your wealth to                                                 basket of blue-chip stocks of your choice.
earn another 8% next year, rather than                                                      Your wealth grows very fast for three
take out the Rs 800, on Year 2 your wealth would rise to Rs               reasons: one, you are adding to your account every month;
27106. This does not look all that great - until after a few              two, the growth assets increase your growth and three,
years. The longer you leave your money in, the faster it                  dividends and distributions are automatically reinvested.

Understanding Uncertainty
What's Volatility                                                         are unexpected political events or just a statement by a global
                                                                          leader that could set off a market frenzy overnight.
Volatility is a measure of fluctuation in the price of a stock, market
index or value of any asset. If the price of a share rises to a high of   Checking Volatility : Volatility can't be prevented but it can be
Rs 27, falls to a low of Rs 17 within a day and finally closes at Rs      moderated to some extent. Stock exchanges have circuit breakers
20, its volatility for the day is 50%. Generally it is taken to be
                                                                          for certain types of shares which means that trading is suspended
proxy for risk: the higher the volatility. the riskier the investment
                                                                          in the stock for a specified period if it falls by a pre-defined
in that asset. But higher. risk. caused by high volatility, does not
                                                                          percentage. The percentage varies across different categories of
always mean lower return. On the contrary high volatility can co-
                                                                          stocks and is also extended to the market indices.
exist with high returns. and the reverse can also be true.
                                                                          Fall : No copy book definition, but a drop in the indices (Sensex
What causes Volatility                                                    and Nifty) over the previous day's closing value can be termed a
                                                                          fall especially if it recovers lost ground the next day.
Globalisation : On 28 February stock prices went into a freefall
following the fall in the Chinese stock markets. A few days later a       Crash : Again no fixed definition, but a crash is a huge and
rise in the yen's value created panic in the market. Effects of           sustained fall. The 565 point (11%) fall in the Sensex two days
globalisation-Iargely good but not always hunky dory.                     after the UPA government took over in Delhi in May 2004 was a
                                                                          crash that suspended trading. It's better to look at percentage-
Interest rate : A fall or rise in interest rates affects returns form     rather than absolute fall-to distinguish a fall from a crash
debt investments, which become more or less attractive. This can
have a domino effect on stock investments too. If debt is less            Correction : A short, measured fall in prices, especially one that
attractive, more money will go into equity or vice versa.                 shaves off some gains from a continued rally is a correction. It is
                                                                          considered good I because during a correction, the ownership of
Events : There are predictable events like the Union budget or a          shares from weak hands (short-term investors) to strong hands
company AGM that could trigger" market volatility. Then there             (long-term investors).

Turmeric's New Uses
As you know, turmeric or haldi is a spice made from grinding           of existing cancerous tumours. Also, because populations that
the roots of the Curcuma longa plant. It is a prime ingredient in      consume turmeric in large quantities have traditionally had a
curry powder and figures heavily in Asian cuisines. Because it         lower incidence of Alzheimer's, turmeric was also being
imparts a vivid yellow colour to the food, it is often used to         investigated as an anti-Alzheimer's medicine. Early animal
colour as well as flavour condiments, rice dishes and sauces.          studies were very encouraging. Scientists at the US National
Milk with a liberal dose of haldi is also one of our age-hold          Institute on Ageing found for instance, that in mice injected
home remedies. Generations of grandmothers in India have               with a chemical that mimics Alzheimer's, curcumin reduced by
also been using the vibrantly coloured spice as the first aid of       half the buildup of knots in the brain called amyloid plaques,
choice to staunch cuts, burns and other injuries with                  which have been linked to
spectacular effect. If you thought all that was just sentimental       Alzheimer's. At least a dozen
nostalgia, you couldn't be more wrong. Western scientists have         clinical trials on humans are
at last begun to make sense of grandma's wisdom. The initial           underway in the US, Israel
spark came when researchers noticed that traditionally people          and England to test the
on the Indian sub-continent had remarkably low levels of               safety and dosages of
several kinds of cancers such as that of the prostrate gland. This     turmeric's main
was later co-related to high levels of curcumin consumption.           ingredient. While the
Turmeric's active ingredient is a compound called curcumin.            results of the ongoing studies
It's thought to be an anti-inflammatory, as well as an                 aren't conclusive, it certainly
antioxidant. Antioxidants are substances that help prevent             couldn't hurt to incorporate
aging by inhibiting the breakdown of cells by oxidation. And           more turmeric into your
studies did indicate that turmeric slowed the growth and spread        diet. - V.N.

Brown Rice Rediscovered
On the shelves of many of your local grocers languishes a health food that could revitalise your life. No, we aren't talking about
things like broccoli or avocado. It's far more basic - brown rice. Our grocer calls it Patni rice. But it has different names depending on
the region. In the Philippines, for example, brown rice is called pinawa.
Brown rice is the form of partially polished rice produced by hand pounding. With the introduction of milling machines that produce
the white polished rice, consumer tastes and preferences have shifted in favour of snow-white rice. It becomes milled or white rice
when the bran layer is stripped of in the milling or 'whitening' process. Brown rice became associated with rice harvested from a
poorly managed paddy because of its 'dirty' or off-colour look. It was regarded as suited only for animal feed. But only the well-
informed health-conscious knew better.
 Brown rice is loaded with vitamins and minerals not available in white rice. The bran layer contains very important nutrients such
        as thiamine, an important component in mother's milk. Brown rice is also rich in fibre and essential oils. Fibre has been
             involved in the prevention of major diseases. The essential oils in the bran have also been shown to prevent heart
                diseases because these decrease serum cholesterol, which is a major risk factor in heart disease.
                           This lost health food is now being revived and taken back into the regular diet of consumers, but this time
                               without reintroducing the back breaking hand pounding and stone grinding method. The brown rice
                                  you get today is unpolished whole grain rice that is produced by removing only the hull or husk
                                   using a mortar and pestle or rubber rolls. It may be distinctly brown, reddish or purplish or even
                                      black. Thus, the distinguishing factor should be its unpolished feature and not the colour.
                                         Finally, some cooking tips: you need to soak the brown rice in water for at least half an hour
                                              before cooking. Soaking reduces cooking time, thereby saving energy. -V.N.
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