Difference between Growth option and Dividend Reinvestment option in MF

So what is the difference between Growth (G) option and Dividend Reinvestment (DR) option of a Mutual Fund. At present, there is no difference.

There is no entry load when the dividend is reinvested in DR scheme. The dividend is simply used to buy back shares at the new NAV. As a result, the net effect of DR is same as it would have been in a Growth scheme.
If the tax policy changes in the future to either introduce dividend distribution tax, or long term capital gains tax, it would adversely affect DR and G options, respectively.

Smorty - blog for money service

As part of my posts about blogging for money services, I will discuss about another such website today. Smorty is one of the get paid to blog services that connects advertisers and bloggers. Advertisers pay bloggers to put links on blogs and write about their service to get traffic and create buzz. A regularly updated blog has good chance of getting accepted. They, however, reject blogs if the content is not updated frequently, is not indexed by Google and Yahoo, or is not at least 3 months old. This service is only available for blogs in English.

Smorty's interface is easy and any publisher can easily set up an account. The offers for review are priced based on the Page Rank of a blog. More Page Rank sites gets higher paying campaign offers. They also have a combined score called smarty score based on Google Page Rank, Alexa ranking, return rate of given tasks, approval rate of completed tasks and the number of completed tasks. Blogs scoring higher get higher paid offers.

One advantage of Smorty is that one can submit as many blogs as he/she wants unlike some other blog for money services. This is greatly beneficial for small time bloggers. Another advantage is the payment which is a weekly system. So bloggers get paid every week for the previews done last week through PayPal. One can apply from any country for Smorty's service.

One of the limitations of Smorty at present is that one can't submit more than one blog from the same account. One has to create as many accounts if he/she wants to submit many blogs as a publisher. They say they are working on fixing this issue. Also, it seems there are limited number advertisers for blog advertising at Smorty. This puts it at a disadvantage as compared to other more established names in the blog for money services. Hopefully, as the service gets older, more advertisers will register for Smorty.

Mortgage loan guide

I was reading a blog post by Deepak Shenoy the other day in which he mentioned some terms in the US that are unique and not used elsewhere. One of the terms mentioned was Mortgage. It's used when a person applies for a loan to buy a house in the US. It is pretty expensive to buy a house and so most people would find it impossible to pay the price in cash. Not to mention, the tax man would come calling if someone did pay cash.

Mortgage is a common term used in the US for house loans. There's a useful website with links to many useful articles to learn more about mortgage. Mortgage Loan Place has articles ranging from FHA loans to Reverse mortgage to Mortgage insurance and Refinancing. Some of these are complicated terms (e.g. Reverse mortgage) and there are many articles in the guide to make you understand them better. I found the articles interesting to read even though I went to the page to do this review.

The guide gives information on any policy changes and housing market. Buying a house is a dream for most people and one of the most important decisions in their life. Being well aware of the current situation in the market is a must for anyone. The articles in Mortgage Loan Place are one of the easiest way to learn more about loans. The articles are free to read and updated regularly. Anyone interested in knowing more about the housing loans can go read them.

Life Insurance for Key Man

Among different types of insurance that companies buy, key man life insurance is usually neglected. Businesses that protect their assets like buildings and other properties forget to protect their key men. The key man of a business is an important person who is essential to run the business. An obvious key man is the CEO. There can be other important employees like General Managers who can be insured using the Key Man Life Insurance.

Most insurance companies provide this type of insurance for businesses. Among the various ways to get quotes from these insurance companies, getting it online is the easiest one. One can get quote online for key man life insurance.

In case of the death of the key man, the face value of the money he is insured against can be used to hire new key man or other employee. It can be very useful for a business in such scenarios.

Financial goal - calculate the rate required

The author of the book described in my previous post gave a very simple method to calculate the interest rate required to achieve a financial goal in the long term. As an investor knows very well, one should always have a financial goal in mind when he starts investing. Otherwise, his approach won't be a systematic one and the returns not as good. Most investors have a retirement goal.

To start, you must compute a variable called Investment Capital. This is an estimate of the amount of money you have invested and will contribute in the future. The equation to compute this Investment Capital is:

Investment Capital = Value of Current Investments + (1/2 * Annual Contributions*Years to Retirement)

From this equation, compute the Capital Fraction as:

Capital Fraction = Investment Capital ÷ Financial Goal

For example, if I have a goal of 20,000,000 that I want my investments to grow to in 25 years. If my current investments are of worth 400,000 and I contribute 100,000 every year to my investment.
Then,

Investment Captial = 400,000 + (1/2 * 100,000 *25 ) = 1,650,000

The Capital Fraction variable would then be computed as 1650000/20000000 = 0.0825

Now, there is a chart with years and Fraction variable matching the compound interest rate required. It is given in the chart below.


From the above chart it is clear that if I want my investment to be worth 20000000 in 25 years, I have to match 0.0825 in the column '25' i.e. my investments have to grow at about 11.0 to 11.5% every year to achieve that. I find this calculation to be very useful. Just create a long term financial goal, calculate the rate your investment has to grow every year and work towards achieving it.

Investment blunders of the rich and famous

I've just finished reading a book on Investments, named "Investment Blunders of the Rich and Famous...and What You Can Learn From Them".

Some of the important advice the author of the book gives to investors, and some of his comments in the book are:

- Beware of cheerleader advisors.

- If you have a clear picture of your preferences for the future and what you need to accomplish them, you simply pick the investment alternative that best meets your needs. However, the person with unclear preferences doesn't pick the alternative that fits the goals; he or she picks the option that looks best compared to the alternatives.

- The willy-nilly approach of most investors gives them a lack of solid foundation from which to make decisions. As a result, investor allocations and stock picks are frequently not aligned with their goals. One consequence is that the typical investor spends time moving money from one investment to another, trying to meet an obscure goal. Investing without a plan, or road map, leads to a lack of discipline. The lack of discipline allows your psychological biases and emotions to invade the process

- The more active the investor, the worse the net return. Cost of trading eats away a big part of the investment. Active trading magnifies your emotions and psychological biases that cause these bad choices.

- Investors don't like to sell losers, only winners. They sell when the stock is going higher and hold on to the stock when it is going low. This is not a good strategy.

- Investors have fixed their sights on the purchase price. This is called anchoring. Investors frequently anchor their hopes to fixed prices. The purchase price is one anchor. The highest stock price the investor has seen also becomes an anchor. Investors typically wait for the stock's price to reach these anchors before making a trade.

- Gamblers tend to treat winnings as if the money is not quite theirs yet. Their behavior seems to suggest that the profits are still the casino's money. Specifically, the feeling of betting with someone else's money causes you to accept too much risk. Similar behavior could be seen in the stock market, too.

- Many investors have realized the alluring trap of frequent trading and using debt to buy stocks. People have gone bankrupt when they borrow to trade.

- In order to earn a high return, you must take market risk. We want to take market risk while avoiding firm-specific risk. This is because we are compensated for market risk, but not for firm-specific risk. If you own just one stock, you are taking both types of risk. In fact, most of the risk you are taking is firm-specific risk. However, if you add one randomly selected firm to the firm you hold, you reduce the total risk in your portfolio by 24%. This risk reduction is completely due to the reduction in firm-specific risk. Add two more randomly selected stocks and the total risk in your portfolio is only 60% of the risk of holding just one stock.

- It now makes sense to reduce the firm-specific risk in your portfolio further by holding over 20 randomly selected stocks. In fact, a 30-stock portfolio is optimum.

I found the book title a misnomer since the book was about general Investment theories and not about investment blunders of the rich and famous, but it was an interesting read.

Cashunclaimed

I'm reviewing of a very interesting website today. It's called Cashunclaimed. For the US people, it seems like there's some kind of central database of all the money that is lying without being claimed by anyone. This website offers a service to find if you have money lying somewhere without your knowledge. It offers money-back guarantee that the legitimate owner will get their money.

One can search the website for free by First name and Last name if they have such money. It could be some inheritance, some savings account, or some other source. The search is free, but if you get some unclaimed money on your name and want to search the records to find where the money lies, you have to pay a fee of $11 per month to Cashunclaimed. You can do anything you want for this one month.

Being sceptic, I entered my first name and last name, and there was no money unclaimed for me. I entered Bill Gates, and his namesakes have some money. Note that there is a big chance that the unclaimed money doesn't belong to you but to some other person with same name as yours - or a person with some variation of your name. There would be only one person or a group of such persons with legit claim on the money, but hundreds others with similar names. So, one has to be careful before registering in such sites. Try to make sure you are likely to have been left with unclaimed money from somewhere. Otherwise, the website will make money.

Review - Compare credit cards

These days credit cards have become a sort of necessity for consumers. Be it shopping, eating out, or simply booking flight tickets online, many times there is no other option but to use a credit card. With the abundance of credit cards, it would be good to have a website that compares the different types of credit cards available in the market. Today I will review one such website .

There is a website aptly named creditcard.org.uk for credit cards available in the UK. It compares credit cards based on different categories. There are different categories of cards like Gold cards, Cashback cards, Platinum cards, 0% purchase cards, etc.

There are so many options to chose from the available credit cards that such a site for comparing credit cards is useful for anyone planning to get a new credit card. The home page of the site has 'Compare credit cards' menu from which one can select any category to compare. The user can compare these cards based on offers such as rate, duration, cashback, rewards and choose the best one.

Even though there are different categories of credit cards to choose from the drop down menu, I had a feeling that it doesn't have information on all credit cards. For example, I chose cashback cards but the result showed only one card. Similar was the case with Gold cards. That is very unlikey, even impossible, that there's only one bank offering such cards in the UK. Similar was the case for some other categories as well. To be truly useful to a user, all available cards should be available in the result so that he can select the best.

Gambler's Fallacy

There are people who see patterns in random data and try to predict the future based on such patterns. Probability theory states that for an unlimited set of trials, the numbers in a game should come up equally or the same number of times.

For example, a coin when flipped a given number of times, should have equal number of heads and tails. So, if the coin has been flipped 5 times and the outcome have been head, head, tail, head, head, the outcome has not been what was perceived. A person might assume the chance of the next outcome being tail is more as it has only occurred once in the last five tosses. The reality is that the next toss has equal chance for tail and head, both have 50% chance. The past events don't mean anything for the future outcome. But, the person thinks there'll be an unknown self-correction that will skew the results in favour of tail to make it more balanced as per probability theory. This belief is known as the gambler's fallacy.

There are similarities in such beliefs with trading. Predicting the price change at any time is like flipping a coin. Most of the patterns that are found are a result of the random data searched. These patterns are not likely to repeat in the future. They can't be used to make predictions. But people often make such predictions and others fall for them.

Rule of 72

Here's a simple rule of thumb to quickly calculate compounding interest in your mind. It is called the rule of 72.

To calculate the annual compounding interest required to double your money in a fixed number of years, or conversely, given an annual interest rate, to calculate the number of years it would take to double your money, divide it my 72.

For example, if the rate of interest is, say 9%, it would take 72/9 = 8 years approx. to double your money. Similarly, if you want to double your money in, say 6 years, you'd need an annual
compounding interest rate of 72/6 = 12%.

This rule gives good results for upto 20 years or 20% rate, and very good results at typical compounding rate between 6% to 10%.

The same rule can also be applied to find out the number of years for the value of money to get halved at a certain inflation rate. For example, for an inflation rate 6% it would take 72/6 = 12 years for the value of your money to get halved. This means the money which gets you a certain commodity now would only buy half of that after 12 yrs. In other words, you'd need double of this money to buy the same thing after 12 yrs.

UK finance forum - a review

Finance Markets recently changed the look of their website and UK finance forum. They wanted to get a review of the new look forum of their website. So I registered on the forum to experience how it is like before reviewing.

A forum dedicated to discussions on finance anywhere would, expectedly, have similar kind of discussions. The forum is no exception and has all kind of threads of discussions. The discussions are divided into three main categories - Finance, Investing, and General. Each category is then further subdivided into different groups e.g. in Finance they have Banking, Loans, Mortgage, etc. I feel while it is nice to divide them into so many different groups, it somehow fragments the category too much and browsing the forums becomes more cumbersome. Instead, if they had just the main categories, it could be better. Since it is not a heavy traffic forum yet, this could give users a better experience.

The topics of discussion in the forum vary from "how do I save money to invest" to "where should I invest", to any other topic one could come up with related to finance and investments. In addition, the "General" category has threads on other non-finance topics as well.

The look and layout of the forum is not intuitive. In fact, one would immediately feel he has seen such layout many times in other forums. It looks like this is the most common format for online forums.

There are a few hundred registered users in the forum. The traffic is not high; there are entire stretches of weeks with not a single posting in some groups. That is one of the reasons they are pushing on getting the word out about the forum. People interested in Finance and Investment, specially in the UK, could register and might find their answers in this forum.

Super affiliate Zac Johnson

Today I am reviewing the blog of super affiliate Zac Johnson. The term super affiliate means they run their own affiliate networks and obviously earn quite $ome money online. Well, quite a lot, actually. Zac's network of affiliates is called Moneyreign network.

First thing I did, which I hope every reviewer does, was to go spend some time on his blog. The blog is lively with daily updates on interesting ways to make money online through affiliate marketing. Zac has a lot of experience in online money-making (10+ yrs experience in online affiliate marketing is like doing business on earth since prehistoric time. Afterall, the real thing started with companies like Google, Amazon, and Ebay that weren't around 10 years ago).

One of the things I like most in a blog, apart from the quality of posts, and which keeps me subscribed is the frequency of posts. It should be frequent and Zac does it almost daily which is a big plus. His postings are mainly about money making schemes but there are some personal posts as well, along with pics. Such postings makes the blog more attractive to readers and breaks the monotone. Afterall, there's more to write than just money even if the site is named 'Make money with Super Affiliate Zac Johnson'.

The blog posts are nicely aggregated into categories which a new reader to the blog should find useful depending on his/her topics of interest. Archives of his blog shows that he started the blog in March 2007 which means it is only a few months old. Still, it is generating a lot of traffic and comments. I guess it should have a loyal feed readers, though the number isn't yet shown on the site(maybe Zac want the number to go up to few thousands before putting up that chicklet showing xxxx readers).

There are few ads on the site. In fact, I observed only some affiliate links in the blog, some of which are very wisely converted into tinyurls. The lack of ads on the site indicates he is focussed on increasing the readership of his blog.

Overall, the blog is interesting for those wanting to learn how to make money online. Since I am one of them, I have subscribed to his blog and intend to read it with interest.

Merchant account processing website

I have decided to review some websites as a filler to this blog i.e. When I don't write about investment, I will try to keep this blog updated frequently with such reviews. These reviews may be of interest to some of you.

Today I am reviewing a website that deals with merchant accounts It provides merchant account processing services to small and big merchants. If you don't know what a merchant account is used for, read it here.

The website accepts Visa/Mastercard processing and also accepts Credit Card Payments processing. Retailers who accept such cards from their customers are expected to have a merchant account. Without a merchant account, a retailer has to wait for weeks for invoice to come and more for the payment to clear. With such accounts it is a matter of days when payments get cleared. Merchant account are provided by banks as well as third party like the website being reviewed. Banks are very selective in opening such accounts, so third party solutions are the best option in that case.

As far as the website is considered, it is decent with every page having at least three links at various places to "Apply now" link. The navigation could be improved though. For example, there is a FAQs section, but it would take some serious effort to locate it. Similary, the help/tutorial/information section is difficult to reach from the main page. These two sections should be on the homepage. Sitemap is not the most obvious place to place those links, and many readers don't even click it.

Overall, it is a good website to go look out for more info on merchant accounts and to get in touch with a processor of such accounts.

How double indexation works for FMPs

My last post discussed FMPs and why they are better than FDs because of Double indexation benefits. I'll discuss how double indexation works for FMPs against FDs, for the same amount of investment:

Let's say you invest Rs 1000 in FDs and Rs 1000 in an FMP in March this year.
The maturity value in May next year for both FD and FMP = Rs 1100 approx.
Assuming inflation of 6%, the cost price of your investment after March this year = 1000 + 1000*6/100 = Rs 1060
Cost price of Rs 1060 after March next year = 1060+ 1060*6/100 = Rs 1123.6
For FMPs the maturity value of Rs 1100 is less than the cost price of Rs 1123.6, that is you are at a loss in paper. This happen because the effect of inflation in case of FMPs is calculated twice, at the end of March this year (that is the financial year end) and also at the end of March next year. This results in capital gains tax = 0. This is double indexation benefit.

For FDs, the cost price = Rs 1060 ( it is calculated only once ).
Maturity value of Rs 1100 is more than cost price, so you have to pay capital gains tax on the interest earned.

This results in FMPs giving a post tax return of about 8.5%, where as FDs give about 5.5%. This is for a period of about 13 months of investment that started in March and ended in May.
FMPs don't work for you in case you want to withdraw the money invested before the maturity period. Then FDs might be a better choice.
If one is sure they can remain invested for the period, then FMPs are a good choice over FDs.

Fixed Maturity Plans ( FMPs )

Recently, I read about Fixed Maturity Plans or FMPs as they are commonly known. These plans are of about 13 months duration and give better returns than Fixed deposits (FDs), normally. FMPs manage to do that because of Double Indexation benefits. Double indexation basically is - showing the effect of inflation on your investment for two years even if the investment is for only slightly more than a year. Since the financial year ends in March, FMPs show the period of investment from March of the year of investment to May of next year. This results in showing on paper the final value of investment as being much less than what it is in real. This results in less tax to be paid and more net return to the investor. FDs in banks, even if they give the same % return like FMPs don't have such double indexation benefits and so the investor ends up paying more in taxes and gets less net return.

In effect, while FDs manage to just beat the inflation, FMPs manage to grow the investment. FMPs, thus, are a better choice if one has money they are sure they can invest for at least 13 months.
One thing I haven't found yet is if FMPs are available all year around, or just around March. Would they be available in May? According to a relationship manager, they should be.