The New Problem- Problem of Plenty

 

The New Problem- Problem of Plenty

Before I start this article I must clarify at the outset that though all people have started seeking me for assistance in planning their finances, my specialisation or rather focus remains for Mariners .

It is not because there is any difference in the numbers or the kind of money being handled but because I understand (or at least SELF-claim to understand) the psychology of my junior colleagues, their life and challenges.

It is without unfailing regularity that at least one or two senior officers are reporting achieving their retirement corpus every month. This is become certainly faster than what was happening earlier and the credit that I give to is the aspect of time or duration of the investment . They have been investing for and have remained invested.

Most of these people are young Masters and Chief Engineers who have just got their promotion and in many cases they have not even reached that top rank.

The reason why they phone and I come to know that they have reached their corpus is because after having reached their milestone their next step is automatically in the form of the question,  "can I take up the shore job in the office of my company".

Last week itself there were three people within a span of 24 hours who phoned for this reason but I would consider that a coincidence or a one off thing.

This is certainly a very beautiful problem where the person has achieved to accumulate what is required to spend a comfortable life and from this stage onwards if he does not touch this amount and let it grow it is going to reach some dizzying heights.

Now to deal with the question of plenty...

Whether the person should take up a shore job or not?

I have already made a video on this for Merchant Navy Decoded (you tube channel) But let me deal with this in readable words.

Mostly my advice to them s to evaluate for themselves that do they need that job for a reason or are they considering it the next step in their professional career.

Is it because they feel that they will get more time with their family or is it because they have seen their contemporaries doing so. The sailing life has certainly become a lot more challenging (read as TOUGH) than before and almost certainly risky too with the fast changing Geo-political conditions.

But leaving a career or changing stream only for this cannot be a smart move. By moving to the shore management you will not be able to escape the ship visits even though the duration on ship may reduce but number of visits maybe more than before- taking the travelling time to be higher than before.

Another important aspect that one must consider ( and this is based on the first hand experience of my other contemporaries) that the nature of job ashore will not change with the new designations in form of promotions that you will get.

In line with the above statement my advice to those trying to change their career graph are two:

1. If you stay in shipping career (even though ashore)- Keep your licenses and documents valid and not let them expire.
2. Use your time ashore by gaining extra qualification - preferably in non shipping stream. You may gain the qualification within the shipping stream but try to get the best higher education.

Now suppose after reading above you decide that you do not wish to leave shipping to settle for a shore based career for whatever reason it may be. Then please do not suddenly go off track and lose control on yourself and start splurging your resources, and by this I don't only mean spending on expensive things but also by starting a business in unrelated areas simply on the behest of your good friends or gooder relatives.

The risk that I have pointed out in " The Seafarer's Story " in the begining of my book - still lurks stronger now because you have the resources now which act like honey for the bees.

You maybe inclined to try your hand at business- but it maybe a good idea to do it without your own money or learning about it by working for someone in that field. Entrepreneurship certainly does not mean burning your on money. In fact as I understand- it is all about finding ​***atic who can lend it to you for burning.

These are things that I have warned you against not doing but it will be unfair if I quit without pointing out where you should or could find your bearings.

You can certainly start by doing the things which you could not because you did not have sufficient time or maybe not resources to buy the necessary equipment. You could start by writing that book or making that long travelogue.

Discovering yourself by looking inwards Through various meditation techniques could certainly help you in focusing or other than spreading yourself very thin.

You could certainly start studying for a different courier all together as a lot of people have done earlier. Engineers have become lawyers and navigators have become company owners and educationists. There is certainly no limit today and the limit can only be because of your imagination.

So please solve your problem of plenty in a holistic way which can benefit you , your family and certainly the society which has helped you become what you are.

 

Debt and its relation to economy and the bank rates

  Debt and its relation to economy and the bank rates

Even though the entire focus of the public is always on equity, it is the debt market, which actually keeps the economy moving.

In simple terms, Debt is the money that is given by individual or an organization to another organization or the government.

This is termed in different ways, depending who the debt is been given to.

A private organization may take it form of commercial paper, debentures, or fix deposits, the government on the other hand may take it form of tax-free bonds, bank deposits, post office, schemes, PPF and it’s debt papers.

For the government, the papers, and the market is also referred to as GILT( at least in Indian context).

Needless to say, government or sovereign papers, have the highest safety, and while investing in the debt, it is the safety of capital that should be given the highest priority, instead of simply the returns.

We have seen with the case of Franklin india liquid fund and ultra short term fund. What happens in case of a default when we chase returns and ignore the quality of the debt papers.

Another very,Important aspect of debt, and its relation to the bank rates is, it’s inversely proportionality. Which means when the bank rates go up the return on the debt papers or the debt mutual funds falls.

As a corollary when bank rates fall down, the return on debt papers goes up.

THE IDEA OF WRITING THIS ARTICLE IS TO ELUCIDATE THIS IMPORTANT FUNCTIONALITY FOR NEAR FUTURE.

Even though the RBI has said that there is no indication of reducing the rates, but if the industry has to prosper, the bank rates and other connected rates like repo and reverse repo, will definitely come down, but when we cannot say.

Should this happen the returns from all the debt funds, including the GILT funds, will go up.

So what should be our strategy keeping this in view?

I have always maintained a ratio of 25% of the corpus in debt funds at all times. WheneverMy exposure to equity used to go above 75% are used to invest my salary in the debt funds.

Since it was very difficult for me to predict, what kind of debt funds will benefit, I used to spread my debt investments across ultra short term funds, credit risk funds, GILT funds and dynamic bond funds.

Invariably always I benefited immensely from the interest rate cycle.

Therefore, for those who have sufficient equity exposure, and are still earning, this could be a good time to start investing in the debt funds of the above categories or different categories as they feel comfortable.

Once again, I will request you to kindly do not fall for the highest return funds, but instead check the quality of the fund by checking the holding of the securities that they have. The papers or securities being held by the fund must be AAA RATING OR SOVEREIGN RATING (MEANS BE GOVERNMENT BACKED).

There is no need to shift your NRE fixed deposits to debt funds, and you should only invest the fresh earnings or proceeds from the sale of other assets. 

THE TAXATION ON DEBT FUNDS HAS CHANGED FROM FIRST APRIL 2023, AND AS SUCH DOES NOT COMPETE WITH THE RETURNS FROM RRE FIXED DEPOSITS, DUE TO THE TAX NATURE OF THE LATTER.

As I suggested in the opening lines, the industry depends upon debt, and therefore lower the rate of interest more profitable. It is for the industry and government to borrow money from the public.

So certainly when the interest rates will go down the stock market will also get a boost because of projected company profitability, and they will be in the equity returns also.

Therefore, it makes sense that you do not sell any equity to switch into the debt funds.

From the author : this article may be forwarded to your other colleagues on board  on leave or other friends and relatives, working assureso that everyone may benefit.

Horses and Investing - Lessons from history

In the olden times when it was required to move with speed and strength, a single horse would not do, and in order to harness the power off multiple horses chariot was designed.

In the chariot, the slowest of the horses were kept in the middle, and the fastest at the back . so that the slowest of the horses were edged to move faster, but overall power delivered to the chariot was enormous. It is possible that the fastest of the horses would not have had the stamina which the slower horses did.

Modern mutual funds are almost like that horses .

Six to eight horses are sufficient to give you that chariot for financial journey .

These horses should not be the same type in stamina or speed. They have to be different.

So, just having small cap horse will not be enough,They may be having a good speed, but the stamina is very less.Similarly all the horses cannot be large cap as they would have the stamina, but much less speed to cover the distance in less time. Apart from the desi horses, you may also need some Overseas horses from foreign world etc

But when they would start running, and if the fastest of the horses got tired, the slower ones would still be able to pull them along.

It is possible along the way one of the horses become sick, so you can always remove it and run with less horses, or include another horse who can be young and experienced, and also have the stamina.

In the initial times, you will need to move up the hill for accumulation of assets, and would need the horses which have stamina and speed, but but towards the later part of the journey when you will reach the top of the hill, and the road would become with less gradient, and you would have already covered a lot of mileage….  your Horses, even if they were moving slow would be able to cover your distance and take you to your destination. 

At that stage, if you feel necessary, you may change your horses to more sturdy ones or continue with your existing ones. It all depends upon you because by then you would be an experienced charioteer …

Admission of Omission

@240124 

 A lot of you have pointed out that makes me think that I did everything right with my financial management.

Nothing can be far from truth, because what I pass on to you, are the lessons, more from my mistakes rather than my minuscule achievements.

I may be from the generation when equity investment was synonymous with gambling and speculation and information for investing was non-existent.

Therefore, we made our share of mistakes and getting up and starting to walk again.

But what we want to pass on to all of you is the essence of all those mistakes so that you don’t have to make any of your own.

You will never find any database, stronger and more objective than the collective feedback of my generation, which is represented on this group also.

Balancing out with the mistakes that we made in our attempt to become matured investors is a challenge that the present generation of seafarers is facing .

That is the elevated age of juniors entering shipping as officers.

The loss of 5 to 6 years to join as junior officer from our time to today is indeed a great loss from the point of journey of financial freedom.

Therefore, I implore you again, and again that if you are on this group, then please start your investment immediately, if you have already started investment, make sure the amount you invest per month is at least 35% of your annual income.

If you are already doing it, then ensure that you stay on the path and guide others on board who may not be on this group.

The concept of emergency fund for Seafarers

 

The life and life routine of a seafarer has very curious intricacies which sometimes or rather most of the times are beyond the comprehension of the people who live and work ashore as also the financial planners who are necessarily shore based.

Where will you find a profession in which people get only paid for 6 to 8 months a year for their work?

 Even more, for a work which has no fixed date of starting and ending neither for the short term of each assignment basis or the overall career. Not to talk about the uncertainties and vagaries which make the profession of a mariner not only risky but highly Untenable for most of the people.

Right from the time that a person enters his primary training as a cadet and going up to the level of a senior and top most rank on board ,he finds that he has to continuously and consistently upgrade and reskill himself in form of courses for which he hs to pay from hs own resources.

No other engineer, doctor or other professional is subjected to such rigorous demands from his career.

Under such circumstances one of the major fears that a person has ( most of the time) is - when would he go back on board and start re-earning his salary( which unfortunately is called wages for us). This is a big question which everyone has at the back of his mind because those who become confident or overconfident of having the attention of their employees suffer an ordeal sooner or later because of various misunderstandings between the ship shore interaction. 

Not going into the intricacies of interpersonal relationships between Ship-shore... The question that our mariner faces is about his finances during the interim of his being on leave and obviously without any salary.

So today I would take up this question of the on-leave finances!

This is very important because during leave one needs to spend on acquisition of various goods and assets and also for fulfilling the aspirations of the family and parents which was one enjoys doing in his own presence. While dealing with all these expenses there is a big element of uncertainty of how much to spend where And at the same time also have sufficient assets in liquidity to last for the family till the remittance from on board starts coming through.
To approach this question you must first give up your habit of mental accounting (regarding this term you can read my blog or in the trailing messages on the Telegram Group FinWorld@sea With the title of mental accounting and also two articles on Colour of Money).

What I mean by mental accounting here is to stop spreading your money by keeping it under specific heads like for buying the fridge, saving for going to Vaishno Devi or a foreign trip or any such smaller expenditure. Keep it in one single account.

 We have already discussed that 35% of your annual earnings must be divided into 12 parts and should be invested all along the month and the year. This should preferably be kept in a dedicated investment account which should be a NRE account if you are a non resident.

This still leaves you with 65% of your Earnings to be taken care of.

Out of this you have three things to take care of: 

1. Monthly household expenses including premium of various insurances and Home Loan EMIs.
2. Discretionary expenses like holidays buying  Or changing the vehicle
3. Save in fixed income schemes like NREFD, PPF, Sukanya SC , buying gold etc.

So your and your spouse's art of balancing will come into picture in doing all the above within the 65% of the remaining income.

What will need to be done here is what I have mentioned before also:

1. Transfer To your wife's account roughly Twice the amount of your monthly household expenses every month. After taking into account all the expenses whatever is remaining continue to either invest it in equity and debt mutual funds in her name.
   

OR

  b) In case you are not married then most of the issues are obviously not there and you can continue to contribute to the monthly expenses to whichever family you are staying with e.g. brother , parents etc.

Whichever account you use for the household expenses you need not keep more than three months expenses otherwise.

Anything which remains after paying the premium or contributing to the PPF or Sukanya Samridhi, You may add to the existing NREFD Corpus but do not take the total deposit beyond Rs75,00,000 otherwise this will take away the opportunity cost of investing in equity MFs and also Debt categories where you can get better and tax efficient returns.

Beyond this it is better to build up a corpus in a variety of debt funds starting from liquid funds, short term funds, dynamic bond funds and long term debt funds.

How does this take care of the uncertainty during leave or other periods when there is no income:

This has more to do with the mental satisfaction and makeup. You must realize that whenever it will be required you will be able to liquidate your FD or take a loan against it at justice one percent more than what you are getting as interest, You can take loan against gold at a very reasonable ROI .

What I am implying is that by not spreading your money too thin in too many accounts or schemes from where you may or may not be able to withdraw in case of need you will be feeling lot more confident as you will be seeing a larger amount in your redeemable fixed income schemes.

You have to be very careful in not signing up for long term liabilities like ulips and endowment or money back policies of various insurance companies. The premiums for these companies or any other scheme that you might encounter upon the pressure from your colleagues or peers can actually causeway a big dent in your fragile financial position in the beginning of your career.

 

EMERGENCY CORPUS:

We have already taken into consideration various contingencies like that of loss of life or accident or a medical emergency by taking various insurance policies with due declaration of the factual position. So beyond this there are very few emergencies which can occur or causeway a massive outflow from your finances.

The only foreseeable stress on your finances that might seem could be because of loss of employment or change of employer or an inordinate delay in getting the next assignment ship easily and in time. This can easily be countered by withdrawing money from your fixed income schemes or taking a loan against them wherever applicable.

If you will notice that any of these supposed emergencies have no effect upon your equity investment which is taking place however should you feel uncomfortable in continuing with those investments you may easily temporarily halt those sips or stps till your income stream is restored.

P.S. The above situation is only during the transition period of One's life till one moves to the rank of second engineer chief officer or that of Captain and chief engineer. But since the question came from a person of a rank which does not have much of promotion prospects unless one reskills himself for a higher level we need to address that as well.

I have also experienced that after a certain stage one may not have any requirement of keeping too much money in liquidity as the emergency situation can easily be met by one or more than one credit card also which obviously must be directly linked with your bank account for the cyclical debits.

One must remember however that most of the loans and credit cards must be used by people who are in more than comfortable position to pay them off timely .

Investing Large Sums in Mutual Funds

Investing Large Sums in Mutual Funds

Quite a few times I am asked by our Mariners about investing money in lump sum.

Sometime this arises from the desperation of FOMO or fear of missing out in the markets, and sometimes simply because a person has not been investing in the past, and has reached an age when he realized that he should have started earlier.

In both cases, I try my best to wean this person away and to satisfy his desperation.

I tried to tell them that at Best if they want they can increase the amount of their SIP or Stp (systematics as I call them ).

Only once in a while, I come across people who have come into large sums of money by selling real estate or by virtue of inheritance after the parents have passed away .

what our Mariner does not really understand is that the sums that they contribute as systematics is more than what other people would be investing as bulk . e.g. your single SIP of 25,000-50K May actually be the bulk investment of a person earning ashore

So it is the definition which changes in the context.

Still, to answer the question whether one should invest in bulk if one has the money or should one follow the SIP I will suggest following hybrid route:

1. When will you come into large sum of money which is more than your 1-2 month’s salary please treat it as a modest sum, and continue with your SIP. At best you can make 3 to 6 bulk purchases of not more than 5% of your amount at hand..
2. If you have acquired an amount which is more than your above salary and you wish to make some bulk purchases, then do so in their existing funds only, if they are doing well and do not try to increase the number of funds.
3. For the purpose of bulk purchases, try to not make a single investment of more than 10% of the available funds with you. Try to continue with your existing Systematic or increase them if you like.
4. If You are fortunate and you find that while continuing with the above ,the market has taken a correction downwards, then invest up to 10% of your total corpus for first 5% fall in the market. if you still have appetite for risk, then invest 15% for the next 5% and 20% for the next 5% fall.
5. The above is a formula which I adopted in 2020 when the market melted ,as most of you know. this allowed me to make my investments in a hybrid mix of Stp, SIP and bulk from the month of February to September 2020. However, I did not stop the systematics before this amount actually depleted and my fixed income portion came down to my pre-reset 25%.
6. There are a lot of calculations by financial advisors, floating in the market about investing more in bulk when the market goes up and Vice versa. But I am not tempted to follow any of them. Our investing journey should be long and our test is in retaining that investment for as long as possible while maintaining our asset allocation..

I hope this will satisfy you and your future queries, and you will be not tempted to time the market and continue with systematics.