A word of Caution: Beware of mushrooming financial planners

Nowadays a lot of agents, blogger, financial distributors and banks try and call themselves financial planners. They generously also use the term financial planning/wealth management as and when it pleases them. Consumers are confused about the various terminologies used and hence do not actually question what a particular designation means. A person will always go for a Certified Financial Advisor or Certified Senior Financial & Investment Specialist, 95 % of the time, for advice. Incidentally, both these certifications are fake.

First of all, how detailed and comprehensive was the data gathering interview? Did the financial planner make notes of the information that you did not have and ask you to get back with this information. Did he take in information about you , your family, your aspirations, goals , income, expenses, cashflows, assets , liabilities, insurances, investments, powers of attorneys and information that might be relevant. Did he take information about your behavior towards risks and how you react in bullish & bearish situations? Did he understand the mistakes that you have committed in the past and how were they committed?

A good financial planner should take anywhere between 3-5 hours including social chat over 1 or 2 sessions to complete this data gathering process. Secondly, look closely at how the planner discusses risks and returns with you? Does he promise the moon and tells you how good he is and that he has provided the highest returns. No good financial planner in his right mind will ever do so and this is the kind of person you should look at working with. Does he take you through a proper risk profiling exercise, and tell you that the long-term return of the stock market is around 12% and therefore one should not count too heavily on 30% returns?

Thirdly, don’t opt blindly for the brand because it is the advisor and not the bank that matters. Most of the Relationship Managers in Banks are sales people always on the lookout for selling more and more products to clients.

Fourthly, does the financial planner take you through estate planning matters, retirement planning, different offerings as might be suitable to you and any other issues? He might not deal directly in any of those things but most good planners will at least give you an overview of what you need and refer you to someone competent. Finally, the composition and presentation of financial plans can vary immensely. The groups most notorious for doing rudimentary financial planning are banks and big distributors of financial products.

A nice ET Article!!!!

This is one of the articles published in Economic Times. The reason why I m putting it here is coz not only the article is interesting and relevant. In order to understand the views of Analyst and Advisors, one needs to understand the product. I can proudly say that my blog has explained majority of the financial products in laymen language.

Where to invest in times of inflation?

In a period of high inflation the big question is: Where could you park your funds, which are both safe and offer productive returns? With the two popular avenues of investment usually used to beat inflation - equity and realty - not doing well, it's no wonder then if the retail investor is at a loss as to where to park his/her funds.

While the Indian stock markets are plummeting, there is a lull in the real estate market too. Obviously, anyone with a little market sense would advice against real estate at the moment. Moreover, it also calls for huge sums. So, where should you invest?

Experts also aver that the stock markets also may not give positive returns in the next 12-15 months owing to two factors. One, the current political situation and two, the high oil prices.

"As long as the oil price does not stabilise, the markets cannot give much positive returns," points out Kancheti Surendra, director, SK Wealth Creators Pvt Ltd, a wealth management advisory.

"Don’t put all your assets in any one basket, as none is the best in these times. Spread your assets," is the advice most experts gave.

Investing in systematic investment plans (SIPs) of mutual funds, whereby you invest a certain quantum every month, is a good idea, according to many investment counsellors. "The SIP products help you average your investment against the vagaries of the market conditions and inflation," says C Parthasarathy, chairman of Karvy Stock broking Ltd.

If you have Rs 100 to invest, put in Rs 70 in balance fund schemes of mutual funds, which balance investments in equity and debt, through the SIP route. The rest, divide Rs 15 each in gold and realty, he advises. Concurs Surendra. "Actually, SIPs of mutual funds are diversified largecap funds and according to me this is the best instrument in an uncertain market," he adds.

"Buy Gold" or gold funds is the advice most investment counsellors are giving their clients, to protect the value of their hard-earned money, though one has been witnessing some dip in gold prices recently after an earlier rise.

According to Quantum Asset Management Company Private Limited, gold has historically been a good hedge against both falling stock markets and rising inflation and continues to give that “double hedge advantage” even today.

"Equity is still the best instrument to tackle inflation and saving the value of your money from depreciating," said a senior official of a leading private bank’s investment advisory division. However, you have to stay invested in stock markets or buy fresh equity with a longterm view, at least for two years, to get good returns, he said. According to him, your Rs 100 should be allocated 40 per cent to debt instruments with fixed maturity plans (FMPs), 30 per cent in equity, 20 per cent to real estate and 10 per cent to gold.

While it may be a good idea to increase allocation to real assets like gold and commodities, as against financial assets, it must be remembered that it is still a speculative activity and may fall with inflation, said Parthasarathy. Interestingly, this is also a good time to pick up stocks.

But the caveat according to Surendra is, "Only when one is well educated. That is, when they understand the underlying risk, this period of one year will give an opportunity to pick up quality stocks. So identify some quality stocks and buy them on panic days when the markets fall by 500-600 points."

According to Renu Challu, managing director of State Bank of Hyderabad (SBH), it still makes sense to spread part of the investment to fixed deposits, in the interest of easy liquidity and guaranteed returns. “We are also examining increasing our interest rates on fixed deposits by 25-50 basis points shortly,” she said.

While real estate market is not inching up, one may buy if the prices soften as it is likely to yield good returns in the future, said a personal finance expert.

Structured Products

In case you have surplus funds above Rs 25 lakh, structured products in equity-linked debentures make sense, as you get your capital back even when the markets go down and when they go up, you get multiplied returns, said a financial advisor.

How To Interpret Ratios?

Sharpe Ratio:
Sharpe ratio gives a single value to be used for the performance ranking of various funds or portfolios . It measurse the risk premium of the portfolio relative to the total amount of risk in the portfolio. This risk premium is the difference between the portfolio's average rate of return and the riskless rate of return.


Rp- Irf


where; Rp stands for return on portfolio;
Irf means Risk free rate of return which in India is considered either to be the bond rate or 181 days treasury bill.
SDp: Standard deviation of portfolio.Which is the total risk.

The advantage of sharpe ratio is that it assigns highest values to assets that have best risk adjusted average rate of return. It is also known as reward to volatility ratio.
Example: A company is considering the ranking of two industries based in India


Expected Return

Standard Deviation







Risk free rate of return is 7%. and return on market portfolio is 16%.
Rank both these industries.

Putting the above mentioned formula we get


Rp- Irf


we get (18-7)/2=5.5%
Similarly we get 3.33% for banking.
So FMCG industry is better because the return on risk taken is higher in comparison to Banking.

The greater the portfolio’s sharpe ratio, the better is the risk adjusted performance. In Simple terms, Sharpe Ratio indicates the clear difference between the portfolios created by two different funds. For eg. If XYZ Fund has given 50% returns in 1 year & has a Sharpe Ratio of 1 & there is another fund ABC which has given 35% return over the same period with a Sharpe ratio of 2, then on the basis of Sharpe ratio, ABC fund is a better choice as it comes with a lesser risk but higher risk adjusted performance.

Expense ratio:
It measures expenses incurred by the investment company to operate mutual funds. The costs of owning a fund are called the expense ratio. This is distinct from the costs of buying a fund, which are the sales loads. The expense ratio represents the percentage of funds assets that go purely towards the expense of running the fund. The expense ratio covers the fees paid to fund manger, costs incurred in record keeping, custodial services, taxes, legal expenses, audit fees, accounting fees.It is also known as management expense ratio.Operating expense includes the fees paid to fund manager, costs incurred in record keeping; custodial services , taxes, legal expenses, audit fees.accounting fees

Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to a benchmark index. The excess return of the fund relative to the returns of benchmark index is a fund’s ALPHA.
It is calculated as a return which is earned in excess of the return generated by CAPM.
Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the portfolio but the portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. This 5% is ALPHA.

Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock price will change by 1.5% for every 1% change in sensex.
It is also used to measure the systematic risk. Systematic risk means risks which are external to the organisation like competition, government policies. They are non-diversifiable risks. Beta of the market is always 1. The best index fund will have beta value equal to the market namely 1.

If beta>1 then aggressive stocks
If beta<1 then defensive stocks
If beta=1 then neutral

Price to Earnings ratio:

Popularly known as P\E Ratio.

It shows how much an investor is willing to pay for every Rupee earned by the company. A P\E ratio of a stock is 14, it means an investor is willing to pay Rs.14/- for every
Re 1/- earnings by the company. It also tells lot about the future growth/ earnings of the stock.


Market price per share =P\E ratio.

Earnings Per share

Eg: Consider the share price of reliance(RIL) to be Rs.500/-;Earnings of the company be RS.500000/- and number of outstanding shares be 5000

Where EPS=

Rs500000= Rs100/-


Then P\E=

500 = 5.


Conclusion: an investor is willing to pay Rs 5/- for every rupee company would be earning in future.

Important point: If the P\E of two stocks A & B is:
A 20
B 10

It does not mean that stock A is overvalued and stock B is undervalued. It just means that the investors have more confidence in the growth story of stock A rather than stock B.

However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company to a consumer goods company as each industry has much different growth prospects.

The biggest drawback in case of P\E valuation is that the Earnings in the denominator is an accounting concept which is prone to manipulation by the company.

Price-to-Book Ratio:
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
It measures how aggressively the market values the firm.
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company.

Price –To-Sales Ratio:
It is a ratio which is used to value start-up firms, since they do not have profit to show so sales is considered. Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months
A low P/S ratio is better since the investor would be paying less for each unit of sales

Price Earnings to Growth ratio:
Commonly known as PEG ratio.
It measures the value of the firm while taking into account the earnings growth.

PEG Ratio = Price earnings ratio
Annual EPS Growth

Investors prefer to use PEG ratio to value the firm instead of P/E ratio because PEG takes into consideration the factor called growth.

A lower PEG means that the stock is undervalued.

Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. one year vs five year). Be sure to know the exact method your source is using.

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Understanding Systematic Transfer Plan

While investing in a debt fund normally assures you of fairly consistent returns, equities have the potential to create wealth. But the unpredictability in equity funds can be quite a deterrent when you make a choice. To combine the best of both worlds, there is another plan in the market called Systematic Transfer plan.

Under this plan Investors invest a specific amount for a continuous period, at regular intervals. By doing this, the investor has the advantage of rupee cost averaging and also helps him save compulsorily save a fixed amount each month. When you opt for SIP, you automatically participate in the market swings. Yomaur amount of investment remaining the same, you buy more number of units in a declining market and less number of units in a rising market so that you do not panic in turbulent market conditions. As said earlier, SIP results in rupee cost averaging, which means that, when you invest consistently the same amount at regular intervals, your average cost per unit will always remain lower than the average market price, irrespective of how the market is - rising, falling or fluctuating. Where as this will not be true for a one-time investment. An SIP investor gets phenomenal rate of return compared to a one-time investor.

It is very easy to become a systematic investor. All you need to do is plan your savings effectively and set aside some amount of money every month for investing in a fund - ideally a diversified equity fund or balanced fund, since SIP is a long-term investment plan. The procedure involved is also very simple. All you need to do is, give post dated checks to the fund house. There is another advantage for the investor. He is at a liberty to enter or exit from the scheme whenever he wishes to, depending on the market conditions. So, if you want to stay calm and sail smoothly in turbulent times go for Systematic Investment Plans.

Understanding the basics of Mutual Fund?

A mutual fund is a professionally-managed investment that offers diversity, liquidity and convenience. Each mutual fund is made up of individual stocks, bonds, or money market securities. Because a mutual fund pools the money of many individuals, it has the buying power to invest in hundreds of different securities at once. In exchange for your money invested in a mutual fund, the fund gives you units in the fund that represent your participation in the fund.

Types of Funds

Funds can have different investment objectives such as long-term growth, high current income or stability of principal. Depending upon its objective, a fund might invest in cash investments, bonds or equities, or in some cases a combination of these.

Equity funds: Invest in common shares of companies.

Bond or Debt funds: Invest in the fixed income securities of companies or the Government of India.

Money market funds: Hold cash investments like short-term commercial paper issued by companies.

Other terms that describe types of funds are:

Ratio between Debt and Equity Securities

Balanced funds:
Typically, such funds invest in a combination of debt and equity securities, such that they can provide the stability of principal and income of debt investments, but also the growth and capital appreciation of equity securities. Usually, debt is 35% and equity is 65% of the portfolio, but that can change depending upon market conditions

Funds based on Size of the Companies Invested in

Large cap funds:Funds that invest in companies whose total market cap is above Rs40bn

Mid cap funds: Funds that invest in companies whose market cap is between Rs20-40bn

Small cap funds: Funds that invest in companies whose market cap is below Rs20bn

Duration and Liquidity of the Fund

Closed end fund: Usually for three or more years. You can buy this fund only during the NFO period and these cannot be freely bought or sold thereafter. Sometimes, close end fund can convert into open end funds after the initial period of three to five years.

Open end fund: Unlike closed end funds, these can be bought and sold freely and they do not have any limitation on the holding period.

Dividend or Growth Funds

Dividend funds: These funds provide dividends to unit holders that can serve as a source of regular income to investors. The companies they invest in are companies that pay dividends and these dividends are then passed on to the ultimate unit holders. Investors can choose a dividend reinvestment option where the dividends received are used to buy additional units in the investor's names

Growth funds: Do not have an income option, because often they are invested in companies that do not pay or pay less dividends because they are on a high growth path that need cash to be re-invested in the business itself

Mutual Funds and Taxes

Different types of Mutual Funds attract different types of taxes. Here is all you would want to know about taxes applicable on Mutual Funds in India.


Equity Funds

Liquid funds/Money Market Funds

Debt fund/liquid plus Funds

Short Term Capital Gain Tax


As per Income Tax Slab

As per Income Tax Slab

Long Term Capital Gain Tax


Less of 10% without indexation or 20% with indexation

Less of 10% without indexation or 20% with indexation

Dividend Distribution Tax




  • 80C benefits through ELSS: Under the current tax laws, you can get an annual income tax benefit of up to Rs. 1Lakh if you invest in Equity Linked Savings Schemes, ELSS. However, the minimum term for these schemes is 3 years and you cannot withdraw your money before that time

*There would be an additional surcharge of 10% of Short Term Capital Gain Tax if the individuals income is more than 10 lacs per annum. Further, the education cess of 3% shall be levied on all investors.

*Short Term Capital Gain Tax indicated above is inclusive of surcharge and education cess

**Dividend Distribution Taxes indicated above are inclusive of additional surcharge and cess.

Understanding SIPs!!!

Are the daily ups and downs in the market giving you sleepless nights…one moment you think you should jump in and start buying the next you have thoughts of selling. A volatile or consolidating market creates just these sentiments among investors.

Wouldn’t it be great if you can actually buy more into the market when the prices are low (market is down) and buy lesser when the prices rise (markets are up). The simple step to do this is get into an investing method called Systematic Investment Plans (SIPs) in Mutual Funds.

Systematic Investment Plan

A Systematic Investment Plan (SIP) is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme. It is similar to a regular saving schemes like a recurring deposit.

Buy low, sell high. Just four words sum up a winning strategy in the stock market. But timing the market is not easy, even for experts. Therefore, rather than timing the market, investing regularly month after month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance. Therefore, for a small investor, there is a huge risk in making large investments at one time. An SIP actually reduces this risk, by spreading the investments over a longer period of time, at various levels of the market.

Some points to consider before deciding on a SIP

  • Ascertain your investment horizon.
  • Decide on the periodicity of investment.
  • Determine the amount you can comfortably invest in a SIP periodically.
  • Pick a scheme according to your risk profile.
  • Invest for long term.

“Just Rs. 1500 per month invested for 17 years @10% would grow to Rs. 8 lacs.could be used for your daughter's marriage.”

Calculating Your Income Tax Liability 2008-09

The income tax which is charged to you is based on the tax slabs declared by the Government in its annual budget every year. The following table encapsulates the tax slabs applicable this year. (Financial Year 2008-2009 )

Taxable Income Slab

Tax Slab

Upto Rs. 1,50,000
Up to Rs. 1,80,000 (for women)
Up to Rs. 2,25,000 (for residents, 65 years or above)


Rs. 1,50,000 – Rs. 2,50,000


Rs. 2,50,001 – Rs. 5,00,000


Rs. 5,00,001 – Rs. 10,00,000


Above Rs. 10,00,001

30% + 10% surcharge on tax

Note: In addition, an education cess of 3% is charged on the entire tax amount including surcharge

Please note that the taxable income is arrived at after adding all your different sources of income and subtracting the deductions that you have taken advantage of under Section 80.

Lets take a few examples to illustrate how you can calculate taxes based on these slabs.

Example 1:
Sarla is a salaried employee, her annual income is Rs. 2,40,000. She has made no tax savings investments during the year.
Let us calculate her income tax liability.



Gross Total Income

Rs. 240,000



Taxable Income

Rs. 240,000

Income Tax Calculations


Tax on Income upto Rs 180,000



Tax on the remaining Rs 60,000



Total Income Tax Due

Rs. 6,000

Educational Cess @ 3%

Rs. 180

Total Tax Payable

Rs. 6,180

Example 2:
Vinod is a salaried employee. His annual income is Rs. 3,25,000.His home loan interest payment is Rs 1,20,000 and his home loan principal repayment is Rs. 80,000.He has made an investment of Rs. 50,000 in NSC.
Let us calculate Vinod's interest liability.



Income from Salary

Rs. 325,000

Income from House Property
(Section 24 Deduction for Home loan interest repayment)


Gross Total Income

Rs. 205,000

Section 80 C Deductions


NSC Investment

Rs. 50,000

Home Loan Principal Repayment



Rs. 130,000

Taxable Income


Total Tax Due

Rs. 0

Example 3:
Ram is a salaried employee who earned Rs.12,00,000. He has bought a health insurance policy for himself worth Rs 10,000. Ram has also bought ELSS funds for Rs. 80,000 and has also paid a LIC premium of Rs. 20,000.He has also donated Rs. 20,000 to the Prime Minister's Relief Fund.
Let us calculate Ram's tax liability.



Gross Total Income

Rs. 1,200,000

Section 80 C Deductions


LIC Premium

Rs. 20,000

Home Loan Principal Repayment

Rs. 80,000


Rs. 100,000

Other Donations

Rs. 30,000

Section 80D Health Insuance Premium

Rs. 10,000

Section 80G Donation To A Charity

Rs. 20,000

Total Taxable Income


Income Tax Calculations


Tax on Income upto Rs 150,000



Tax on the next Rs 100,000
(Slab 150,001 to 250,000)



Tax on the next Rs 250,000
(Slab Rs. 250,001 to Rs. 500,000)



Tax on the Tax on next Rs. 570,000
(above 500,001)


Rs. 171,000

Income Tax Due

Rs. 231,000

Surcharge on total tax
(Surcharge is applicable if the taxable income
is above Rs.1,000,000)


Rs. 23,100

Income Tax Due

Rs. 254,100

Educational Cess @ 3%


Total Tax Payable


A Dozen Tips on How to Save Money on Food Expenses

In many Indian homes, money spent on food stuff is the second biggest expense after housing costs. With prices of food grains skyrocketing, it becomes difficult to stick to one’s monthly budget for household and domestic expenses. With a little effort you can become a savvy and informed shopper, thereby reducing your food and grocery expenses without compromising too much on your lifestyle.
Here are some easy too implement solutions on how to save on your food expenses.

Do your homework before you go shopping: Before you go grocery shopping, take an inventory of your existing kitchen stocks. This will allow you to identify items that you already have or are short of. Draw up a list of items you need a couple of days before your visit to the shop. This will allow you to cut down on impulsive purchases.
Take into account all your needs for the month including festivals and entertaining guests so that you don’t have to make additional trips to the supermarkets.

Buy and stock in bulk where possible: Non-perishable items like pulses and rice can be bought in bulk at wholesale prices and stocked. Do some scouting around to identify which shop sells quality products for less.
Also keep in mind, that in an environment where petrol prices are rising, you want to minimize your trips for shopping, otherwise, every time you step out you are spending money on petrol that you could otherwise save if you buy your groceries in bulk.

Choose the right shop with the best bargains: New supermarkets and large format retailers are coming up across India. Today, almost every densely populated neighbourhood has a large local grocery store offering excellent bargains, perhaps even better than the local kirana stores. So check out your local Food Bazaar, Spencer’s, Subhiksha or Reliance Fresh and look for their regular weekly bargains on items that they mark down to promote sales.
Additionally, some stores have special days assigned for bargains on different products. Similarly, some stores like Reliance Fresh have a loyalty programme that gives members points for money spent, and these points can be redeemed for products or towards special offers. All the big shops are enticing customers with bargains – you just need to find the bargains that suit your needs.

Make the most of rebates and coupons: Scan your local newspaper for offers running in the local neighbourhood supermarkets. Save these coupons and redeem them at the time of your next purchase. You might also find that different fast food chains or local restaurants drop off discount coupons in your mailbox – use these the next time you are ordering food from outside and enjoy savings.
Take advantage of seasonal items: Always go in for seasonal fruits and vegetables. They are not only healthier because of their freshness, but will also be lighter on your wallet. Limit the number of out of season products you consume - ask yourself if its really important for to eat oranges in the summer, or watermelons in the winter. Usually, many neighbourhoods have a weekly bazaar where fresh fruits and vegetables are sold.

Cut out exotic fruits and vegetables: Consume fruits and vegetables that are grown locally or at least within the country.
New Zealand apples may look and taste good, but they also cost much more than locally grown apples. Remember that food or produce that has to travel a long distance has transportation costs associated with it, and you will have to pay for this in the final price you pay for the item.

Try in-house brands: Many big retailers have come out with their own store brands of groceries. These are far cheaper than the national brands. If you find the quality and taste suitable, switch over. You’ll be surprised at how much you can save this way. The same holds true for flours, grains and pulses too.

Comparison shopping: Take time to compare brands and prices. Always compare unit price where appropriate, instead of the entire packet price. Check expiry dates and don’t buy if the expiry date is within a month of the current date.

Minimize purchase of convenience foods: Maximise your grocery savings by minimizing convenience foods like cookies and chips.
These are not only high priced but also not very healthy. Often, you can make these yourself for a fraction of the cost. If you must buy these items, buy the in-house brands that many stores have started carrying rather than buying the branded products.

Cut down on your eating out sprees: If a family of three reduces their night outs by just one visit, that could mean substantial savings in the monthly budget of up to Rs. 500. Additionally, see if you can take food from home to your work place, rather than eating out for lunch everyday.

No impulsive shopping: Always do grocery shopping on a full stomach! It will prevent you from impulsive spending on exotic and tempting foods. If you cannot help it, then budget a small amount for such items on every trip and don’t exceed this allocation.

Leave the kids at home: You will be able to compare and shop better and will also not have to overshoot your budget to give in to the kids’ demands of the latest chocolate bar or ice cream.

Things to remember:
  • Keep a regular list of what you need – buy in bulk where possible
  • Minimize your visits to the grocery shop, cut down on your petrol bill
  • Compare unit prices to see if you are getting a good bargain or not
  • Take advantage of rebates and coupons
  • Buy at shops that sell food items at wholesale prices, and always consider in-house brands

Understanding How to Use Credit Cards the Smart Way

India has entered the era of plastic money. Credit is abundantly available just through the swipe of a card, with no questions being asked. Credit card marketers are enticing people into spending more than necessary. Being in debt, through use of credit cards, can results in a vicious cycle. Therefore, proper caution and restraint needs to be exercised when using credit cards. Here are a few basic things that you must know and do to get the best out of using your credit card.

What is a credit card?

A credit card is a facility by which the issuer of the card, the lending organization, agrees to provide credit to the user of the card, up to a certain period of time, at the end of which the outstanding amount is expected to be paid back to the lender. If the amount is not paid back in full, then the lender will levy a charge. Credit cards are the most expensive form of debt available, and should be used only if one has the discipline to pay back one’s dues in time.

The major benefit of a credit card is convenience. The issuer is willing to give you a loan. As a customer, you should use credit cards only for short-term gaps in your ability to purchase goods or services. Ultimately, you have to pay the loan amount back. And if you don’t have the money, then you will pay heavily for it in late fees and charges, which could often be more than you originally spent on the card.

Terms and conditions

Every card will come with terms and conditions. These will specify your rights and obligations towards the issuer of the card. Always read the fine print carefully. Once you start using your card it is assumed that you have read and accepted all the terms and conditions. So read and clarify what you must, before using your card.

Annual fees

Earlier it was common practice for banks to waive annual fees for the first and second year and not beyond this. However, as the market has become more competitive, a lot of credit card companies are doing away with the annual fees completely and are issuing life time free cards. So, shop around to see which is the best card that you can get at the cheapest fees.

Understand your billing cycle

A billing cycle is the period between two statement dates and is normally a period of 30 days. While using your card to buy big ticket items, time your purchase in such a way that you get a longer credit period. For instance, you could use your card to make a purchase at the beginning of your billing cycle. This way you get more time to pay back the issuer because you will not get a bill for at least a few weeks. In case you have more than one card ensure that the statement dates and payment due dates fall on different dates, so that your payments are not due on the same date.

Minimum payment due

The minimum payment due every month is generally 3% to 5 % of your total amount due, but that does not mean that you should pay only this small amount. It is strongly advisable to pay the entire outstanding amount due in one go in order to avoid carrying forward of your balance. The moment you start carrying forward your balance you will have to pay an interest on the unpaid amount. The interest charged could be as high as 40% which is almost double the rate any other lender will charge. This is where you have to be judicious and pay off as soon as possible to avoid credit card debt.

Late payment fees

Late payment fees are charged as penalty for not paying the minimum amount due, on time. The penalty levied is 30% to 35% of your minimum amount due. Default in paying your minimum balance can also lead to discontinuance of the card and will hurt your credit rating.

Service tax

Service tax is the tax levied by the card issuer for using their services which is 12.36%.

Cash advance limit

Credit card companies often allow cash withdrawals from an ATM up to a certain limit. The limit can vary from person to person depending upon their individual profile. Use this facility only in emergencies as interest is charged from the date of withdrawal itself. You might find it cheaper to take a personal loan, as these loans are cheaper than credit card debt.

Balance transfer charges

Today banks are wooing customers with the 0% interest balance transfer facility. Balance transfer is the transfer of outstanding debts on one card to another lesser used card or a new one for a nominal interest or 0 interest. What you must know is that this offer is valid only for the introductory period of 3 to 6 months. After this period, the interest will revert to the previous rate that you were paying. Free balance transfers is a trick that card issuers use to get you to switch your cards to them, by offering you a short-term benefit. In the long-term, you are still liable to paying off your outstanding amount, and no amount of balance transfer can save you from credit card debt.

Rewards schemes

All credit card issuers have numerous reward schemes to promote card usage among customers. Each time you spend a certain amount of money, you accumulate some points. These points can be redeemed in return for discounts, products etc. Be cautious and don’t spend on unnecessary products just to gain points. Similarly read the fine print before going in for any cash back offers during festival times. Please be aware that you will not be able to redeem your points as conveniently as you think. Often discounts are available over a limited period of time, or on a first come first service basis.

A word of caution

Be careful when using your card. If you notice anything suspicious, inform your card issuer so they can monitor activity on your card. Under no circumstances should you share your card with someone who you do not trust. Please do not share the security code on the back of your card with anyone. Above all, pay all your dues on time. This is the best way to use your credit cards.

By exercising caution you can make the most of your credit cards. Happy swiping!


For the first time in my life i am doing something that i am good at, in public. This blog is purely a cut-copy-paste work baring a few personal views. Their is a glut of sites, blogs, pages and views about investment & savings. Still understanding and finding the right instrument is difficult. This is an endeavor to simplify the complicated financial jargons and products to make it understood by laymen.

As the URL name suggests, it’s for laymen by a layman of finance. This blog is strictly meant for me, my family and my friends and their few friends. The blog is not meant for experts & gurus of finance.

The author of this page is not a registered financial advisor. One should not construe anything written here to be financial advice. All information is a point of view and is for educational and informational use only.