Friday, July 31, 2015
Wednesday, July 8, 2015
Two recent news items, which make one sit up and take notice:
1) The Employee Provident Fund Organization is aiming to cap 'anytime' withdrawal from PF at 75% - the balance can only be withdrawn on attaining the age of 58
a. Currently, PF withdrawals are possible for a host of reasons, the chief among them for modern-day IT / BPO folks, is that you can withdraw it fully when you shift organizations – it is non-taxable provided you have five years or more of continuous service . In case you choose to keep it, you get it transferred to the PF account of your new employer. Apart from that, daughter's marriage, or purchase of residential house, are the favorite reasons which people cite for premature withdrawals.
b. Why is the government capping this? This is ostensibly to ensure 'social security' since the funds are meant for your 'old age'; and the government apparently is very concerned about your welfare, hence the move. Whenever someone tells you that it is for your own good that they are tying your own hands behind your back, is when you antennae need to go up.
2) The Insurance Regulatory and Development Authority of India (IRDA) is proposing that ULIP investment rules be modified such that at least a quarter of the assets under management needs to be investment in government securities (G-secs).
a. Now if I wanted 'traditional' options like G-secs, in preference to equity for my insurance linked savings, I have the option of opting for 'traditional' plans like endowment, whole life and money back. Ulip is supposed to be majorly an equity play.
Of course it is a different matter that the entire insurance industry in India has been a scam perpetrated on the general public by the government in collusion with the insurance companies. Lurching from traditional plans to equity linked plans, and then back again to traditional plans, is like lurching from Scylla to Charybdis and back again. Both of the monsters keep eating you alive, while you run from one to the other thinking you will be protected.
And no, don't ask your financial advisor whether what I just said is true. Just take my word for it - believe me, you will be better off sticking to only term plans when it comes to insurance.
b. I am sure the reasons trotted out will be similar: how the government is so concerned about our welfare and security in old age that it wants to do this for our protection. Reminds me of the corporate spins I used to hear whenever any organizational changes were announced, about how it would contribute to better synergy, alignment and closeness to the customers – you know what I mean.
3) What is the Government up to? A few reasons come to mind:
a. The government needs money for its infrastructure schemes. The best way to borrow is from the public, and the best sources to tap are the captive sources like PF and Insurance. The corpuses held by PF and the life insurance companies are huge, and no government sleeps easy when it knows there are some funds sloshing around which they have not yet appropriated.
b. The government has introduced NPS, which gives you a tax break on investment. Currently, you get 50,000 more on your NPS under section 80CCD, over and above your 1.5 lakh limit for 80C, for contributions 'either from employer or employee'; government employees are already compulsorily under NPS and are not eligible for defined benefit plans any more. NPS is labelled as a 'pension' scheme and not as a 'savings' scheme like PF and PPF; meaning the rules will always be such that you have to convert the major part of your corpus into an annuity, and that too on attaining the age of retirement and not before. The key thing about NPS is that it is taxable at the time of withdrawal.
It looks like the government will slowly make the PF less attractive in order to push people towards NPS. And both PF and NPS will assure you an annuity and will not allow withdrawal. What does this mean? The government is up to its usual tricks, which like all governments, would like to borrow in order to spend, and give promises about future inflows (for what are annuities but promises about the future?), which of course, will be funded by fresh contributions. If you think your money is kept separately, safe and secure for your annuity needs, you are mistaken – governments spend all the money they have, and more (called deficit financing), promise future benefits based on expected future inflows, cross their fingers, and hope that the shit doesn't hit the roof.
And the shit does hit the roof. Look at what is happening in Greece today. If you thought that happened only to countries like Greece, remember the city of Detroit which filed for bankruptcy? India is nowhere near that, and our money is safe for now, primarily because of the demographic dividend – we have a large pool of younger population who we can be sure will fund our retirement. What happens when our children reach retirement age though, is something I am thankful I will not live to see!
4) Anyway, what is the sum and gist, or in other words, what do we need to do? In this case, nothing. There is nothing much we can do except continue paying our PF contributions, and hope for the best. The interest rate on PF on a net-of-tax basis is not too bad, especially compared to the other debt options out there. If you are a risk taker who believes in equity and real estate more than in debt, then you can withdraw your PF balances at every opportunity to the extent possible, and take your chances in the real world. Leaving your money in PF is not a bad option for now as well.
However, what I would certainly do is not invest in NPS, at least not for now. I don't like the onerous conditions attached, nor the fact that it is taxable on withdrawal. And the other thing I would do is to be suspicious of any government and keep watching and tracking these regulations; for remember, no one is going to take care of us except ourselves. In our old age, it is not the government, nor our children who are going to take care of us – that onus lies unfortunately firmly on us.
Sunday, July 5, 2015
The whole country of Greece is a welfare state where everyone gets a pension. Pensions are of course contingent on there being a larger and larger number of young people joining the ranks of the workforce to help fund them. No government 'saves' money for the future – they spend everything and more; saving for the future is advice meant for muppets like us. They keep borrowing from the others, notably, from the Germans (who I really pity; they work, the others enjoy) – looks like everyone is still extracting revenge for the second world war.
And there of course comes the day when they can't pay their debts. In order for them to pay their debts, the lenders need to lend them money, which of course just maintains the illusion that they are paying their debts. At some point the lender feels that he is being taken for a jolly ride, and he says 'No more'. Which is when the people enjoying the free ride rise up in indignation. How dare they do this to us; they are humiliating us; this is inhuman; there are old people, children, and sundry other categories of people who will suffer due to this inhuman decision of our creditors to pull the plug! They need to keep funding us! The people with money are caught on a cleft stick – they are screwed if they lend more; they are screwed if they don't.
Moral of the story? If you have money, buy assets. Don't lend them to others. By the way, putting money in bank deposits or debt mutual funds is also lending to others. There is always the hazard of you not getting your money back. There is also the constant fact that the government keeps on eroding the value of money, by creating money (printing is not necessarily the right word – they don't create money just by printing – they do it nowadays by waving magic wands called quantitative easing) and distributing it like there is no tomorrow. In fact, they who do this are right – who has seen tomorrow – let's just live for today.
Look at Puerto Rico today. They are in similar shit because their politicians spent more than they could afford all these years; Iceland got out of a big piece of similar shit a few years back; Zimbabwe's case is too well known to bear repetition. A lot of countries cut a few zeroes off their currencies once in a few decades, once it is no longer possible to count the money without a calculator. In many countries people transact only in US dollars; which of course is another chimera. It is like the mad characters in Alice in Wonderland deciding to accept currency that is printed by the countries in the Game of Thrones, since they don't trust their own any more.
Money is an illusion. It is just a promissory note given to someone assuring him that he will get some things in return if he passes that note around. It is just the faith of all of us in a common illusion that sustains the illusion of currency; like any other illusion, it needs all the people participating in it, to believe in it, for it to succeed. Meanwhile, the magician who created the illusion is busy siphoning off some of it every time he waves the wand, and redistributing it among those who are participating in the illusion, so that everyone feels that he has a stake in the illusion. Those who have too much of it, are systematically eroded of their wealth – termites called inflation and quantitative easing are constantly nibbling at it. But then they are too much part of the system, too entrenched, too enmeshed, to realize; and even if they do, to protest.
When everyone is pointing to the stage and clapping, it is but politic for us, to also point to the stage and clap. We need to be enthusiastic in our participation in the illusion; and seem to be as mesmerized as the rest. Meanwhile, we need to keep converting parts of our money into real assets – the things of actual value, the things that people need, and the means of production to make these things; and some medium of exchange that cannot be manufactured by waving a wand, like gold and silver. Some land, to stay and to produce something. Some stake in ventures that produce things of value for people, like equity in solid companies run by people who are not illusionists themselves. And yes, it won't harm to borrow some of the illusionary pieces of paper called currency, to invest in some of these assets.
Net sum and gist: Not a lender, but a borrower be. And invest your money, at least most of it, in things of real value, things that people will want, irrespective of whether they pay for it with pieces of paper, or a bit of their own labor. Own the means of production, not pieces of paper that assure you that you own the means of production.
Too dire a prescription? Too pessimistic an outlook? Sure. Those who are dancing at the party, always look at those who are standing outside and pity them. The other way round is also true.
Posted By Dinesh Gopalan to Personal Finance, Investments, and other things at 7/05/2015 10:03:00 AM