Aug 312009

SR05 - Title-ZeroCpnRef: 0909-032A of 2009.09.01

Many centuries ago, Indians and Egyptians were regarded as great mathematicians. They invented the calendars of 360 days and measured the speed, rotation, angles of various planets around the earth. The Indians, known as Hindu, had invented one of the greatest theories of the mankind.

It was ZERO. Hindu believed that the entire universe was created out of Zero. In Hindu parlance, it was known in Hindi as “ Shunya me se Shrushthi” . Modern science created non verifiable dictum – Big Bang theory – for which there were neither understanding nor enough scientific evidence.

The whole world revolves around numbers 1 to 0 or 1 to 9 and then Zero. Another series begins after each “Zero”.  Everything around us moves in rhythmic motion in perfect unison. There are also 9 planets – 7 major and 2 minors – 7 days a week, 7 basic colors, 7 seas, 7 wonders, 7 musical nodes, 7 mountains etc. All numbers are in perfect harmony over years, centuries and ages. This is the perfect Arithmetic, the most powerful branch of mathematics.

In Investment world a similar principle was invented – known as Zero Coupon Bonds.  It was Zero that created enormous wealth for brilliant investors, and yet very few consciously knew about it.


Understand the word “Coupon” first, often abbreviated as CPN. The coupon is the rate of interest. When a bank says that it pays 2% for Savings, 3% for Short Deposits, 5% for medium term deposits and 8% for Long Term deposit, the % rate is known as Coupon. If there are no coupons, then it is known as Zero Coupon.

In normal bonds or deposits, the interest is paid regularly at monthly, quarterly, half yearly or annual interval. So, if you deposit 100 with 6% CPN at annual rest (that means, interest on interest is compounded at the end of  every year). At the end of one year, you get #100 as principal and #6 as interest, making a tally of #106.

In Zero Coupon, the yield is built in the principal itself, that is, the interest is not paid separately, but the principal value is discounted to the extent of interest rate built it. Thus, if 10% interest rate is built in, the #100 bond is discounted to say about #91, so that one gets #100 on maturity in return on investment of #91 in one year. Most of the treasury bonds of government are issued on this basis. They are treasury zeros. The higher or lower than #100 price determines the yield (interest rate per year)with reference to the period of issue.

If the bond period is 10 years carrying a built in coupon of 10% but paid only on maturity, the #100 bonds is issued at  about #38.55 as per the following table:

This is known as Zero Coupon bond for 10 years with Yield of 10% (Yield = built in interest rate). In this case, the maturity value is 100 but it is discounted to 38.55 at the time of issue. The issuer undertakes to make the payment of #100 on maturity at the end of 10 years for each lot of #38.55


In some Public Sector Unit  (PSU) banks in India, they issue deposit known as “Cash Certificates” where the deposit is issued for #100 face value @ #38.55. The difference between “Cash Certificate” and “Zero Coupon Bonds” is that former does not trade on the stock exchange. But the latter does trade on stock exchange.  If interest rates go lower, the value of bond goes higher, and vice versa. The bank deposits do not move with interest rates.  If the bond maturity period is longer, then the interest rate will have multiplier effect. In interest bearing bond, the rise could be just 5% to10% but in Zero coupon it will be 30% to 40%.  See the following table of 25 year bond Zero Coupon Bonds issued by IDBI in 1992 for 25 years with built in interest rates of 15.6% with initial value #2700 or multiple thereof.

I take #27,000 as initial value and #1 million of maturity value after 25 years. That is, your #27,000 becomes #1 Millions after 25 years, or 37 times nearly. In other words, you make 3600% return in 25 years or 140% every year on simple interest basis. See the following table:


Table for Discounted Value: #27,000; Maturity Value also known as Face Value = #1 Million; Investment period #25 years, Rate locked in 15.544% presumed to be Annual Rest (Interest compounded every year) and 365 days = 1 year.

Note the following:

  1. The Face Value of the Bond will be #10 Lakhs or 1 Million (also known as maturity value)
  2. Deep Discounted value (original investment value) = #27,000
  3. Interest locked in 15.544% for 25 years.
  4. At the end of 10 years, IDBI refunded #120,000 (Normal value was # 114,500 as per table above). That is they paid early redemption premium of 5,500 or about 5%
    1. That is, if the investor invested #27,000, he got back 120,000 after 10 years on first call date. Call Date is the option reserved by the issuer (IDBI in this case) under which it may redeem the bond (cancel the bond before maturity) at certain value + 5% redemption premium. (it is decided at the time of issue by the issuer)
    2. Although the bond was quoted for 25 years, the investor may sell it at any time in the market.
    3. When the bonds are sold, the interest rate is worked out until the date of settlement. For instance, if the bonds are sold after 5 ½ years, the market price will reflect the enhanced return, depending on the demand and supply situation.
  5. Presuming that the bonds were not recalled (say, it did not have recall clause) the holder may
    1. sell it unit by unit as under: after 15 years, sell one – realize 235,801 (or more if rates go down);
    2. sell second unit after say, 20 years (realize 484,593) and
    3. sell 3rd after 23 years (realize #749,049), presuming that he was holding 3 separate units of 27,000 each investment value having #10 Lakhs (1 million) face value.
    4. In other words, he will have increasing cash flow every 5 years, after initial 15 years.
  6. Above is hypothetical example with real numbers (as issued by IDBI – the numbers may not exactly match due to minor details)
  7. RECALL or EARLY REDEMPTION OPTION: Some issuer does write early redemption rights in case the rates turn in their favor later. If there were no recall clause, the issuer is obligated to pay full face value on maturity.
    1. it happened to Sardar Sarovar (Gujarat, India) Deep Discount Bonds issued in 1997 for 15 years where the company’s attempt to retire the bonds early by force were thrown out of window by Gujarat High Court). The bonds carried built in interest of 19% whereas market rates dropped to less than 6% at one time causing enormous loss to the issuer.


Bank deposits (except CD or Certificate of Deposits in USA) do not rise or fall in value with fall or rise in interest rates. The interest rate risk is assumed by the deposit issuing bank. In treasury or commercial bond, the interest rate risk is assumed by the investor (CPN interest rate is the contracted rate of the issuer)

For instance, a company issued bonds for 5 years with 8% CPN. That is, the company will pay interest rate @ 8% for a period of 5 years. Supposing, at the end of first year, the market interest rates for remaining 4 years dropped to 6%.  The prices of 8% CPN Bonds will rise in value to the extent of yield differential. For holder of 8% CPN Bonds, the yield is 8% .

However, market yield being 6%, the bond price will rise by 8/6×100 = 133.33, so that a person investing in that bond will get a yield of 6% (8/133%).

In other words, the bond prices will be so adjusted that its yield reflects closely the market yield.

The longer the period, higher the bond prices in early years in falling interest rate regime. Similarly, the lower bond prices in early years will reflect the higher interest rate regime. In other words, the bond prices have “inverse relationship” with the Market Interest Rates (MIR). If the  MIR goes higher Bond prices go lower; if MIR goes lower, the bond prices get higher.

This is where the ZERO CPN BONDS with longer maturity give the best return. In Zeros, the initial capital base being low, the % return becomes very high. Zeros lock in interest rate for long time at minimum value.

This is why Zeroes are best bought when the rates are near high and have tendency to go down later.  If one is a foreign investor, he also locks in currency at favorable rates when the rates are highest.  Contrary to popular belief that higher rates make a currency stronger, only the reverse is true. Interest rates are like a “support stick” for the currency. If the currency can not stand on its own, it needs higher interest rates to support its value. If the currency is strong, the rates move down.

For example,

  • When Indian currency became very weak due to FOREX crisis, the rates shot up to 15% to 19% on deposits.
    • This is when IDBI, ICICI, SIDBI and LT came out with Zero coupon bonds showing the people moon, hey give me #2,700, we give you back #1 Lakh (#100,000) after 25 years.
  • When the currency strengthened to 39/$ during BJP rule, the market interest rates (MIR) dropped to 3% to 6% on deposits and housing loans prospered creating biggest rally in real estate market.
  • When the RBI manipulated the exchange rates by constantly intervening in the market via Sterilization measures, the rates shot up with the result that Real Estate prices crashed.
  • This is why stronger local currency is in the best interest of the nation. This is the reason why United States always wanted strong US$ so that its interest rates could be kept low and import cost reduced. The people world over imitates US in every respect, but never follows its exchange rate policy.
  • Now, that US is running into severe economic problems, with UK and EU, a time is going to come when the people will start demanding higher interest rates to compensate them hold weaker currency.
    • When these governments are not able to raise money by normal interest bearing bonds, they will start issuing Zero CPN Bonds.
    • Wait until when that happens, when the rates get into high double digits similar to what India faced in 1992.
    • That will be the time to invest in USD/GBP/Euro when those currencies are weak and the interest rates are high.


I have already explained how I made most money in IDBI/SIDBI/Sardar Sarovar Deep Discount Bonds. I learnt Zeroes early state (first when my father taught me investment through NSC or National Savings Certificates issued by Government of India).

I made more money in Zeros when during my search on the net. I used Bloomberg dedicated terminal when I was the stockbroker. It was 100 times more powerful than what you see on internet.

I found the South African Rand Zero Coupon Bonds. I had set the following agenda (this applies to all overseas citizens outside their country of citizenship – such as NRI or Expatriate).

  1. Find the currency which is the weakest over the last 10 years
  2. Find the country where the interest rates are  also higher with weak currency
  3. Find the country whose strength of currency depends on its export products that are also at the weakest point.

This is when I found the South African Rand, Canadian dollar, Australian dollar, Russian Ruble, Brazil Real. I found the South African Rand the most attractive due to following reasons:

  1. United States and other Western countries were deliberately suppressing Rand to control the gold, silver, palladium, and other commodity prices. Some major banks started issuing Zero Coupon Bonds in SA RAND as hedging operation.
  2. SA RAND was depressed to 12.81 per $ versus 2 per $ during apartheid days.
  3. Interest rates were above 10%
  4. SA MAIN EXPORT products such as gold, silver, palladium, coal, iron ore etc were near 20 years low.
  5. I guessed that if the commodity prices go higher, the SA RAND (symbol ZAR) will go higher, rates will fall, so the Zeros will give me the best return. I had learnt this from IDBI DDB earlier.
  6. Most of the issuers were World Bank, Swedish export import bank, Deutsche bank, and some South African entities like DBSA (Development Bank of  South Africa) and ESKOM (largest electric utility
  7. I took the view that other international issuers were gamblers and issued ZAR Zeros to short the currency. Since only South African government could issue ZAR, I preferred issues of SA entities like DBSA and ESKOM, although they were rates A or A+ compared to AAA of other banks. It was my view that the only way for Aaa to go was only down, not up, whereas A or A+ could become AA or AAA, that is up (and down also)
  8. I bought DBSA at 2.79 to 6 level, and ESKOM from 1.90 to 5 level, paying for Rand from 11.30 to 12.31 per $.
    1. Today, after about 10 years, my bonds are at 17 and 12 level (they rose to 21 and 16 at one time) and currency improved to 7.8 today (it rose to 5.81 at one time).
    2. Thus, my return is almost 800% in my local currency in 10 years or 80% per year, fully guaranteed by Government of South Africa.
    3. SA is rated A+ whereas India’s rating is still BBB

For full details of SA RAND Bonds, please  click  SOUTH AFRICAN RAND ZERO CPN BONDS .  I used to buy these Zeros through RBC Dominion Securities (investment branch of Royal Bank of Canada), Morgan Stanley, HSBC, Rabo Bank, Deutsche Bank, Barclays and Merrill Lynch.  RBC was the best. If you have account with them, ask them to send you full list of zeros with bid/offer prices and full details/table.

Beware of banks like HSBC who give you the most inferior exchange rates. Once I lost about 8% in exchange rate alone. It is a lousy bank – it converts your USD into HKD and then converts HKD t o RAND, causing enormous loss to the customer or investor. 60% of HSBC profit comes from such cheating, because there are millions of TT and other exchange related transactions every day – just imagine, when they take the spread of 0.25% in both currencies, they make clean 0.5% per transaction when they do not pay even 1% interest per year. There is no one in Hong Kong to listen to such complaints.

Better it is one opens an account with SAXO BANK or still better INTERACTIVE BROKER (you see their Ad on Bloomberg channel always). IAB will let you buy anything anywhere in the world at minimum cost and giving you the best exchange rates, and lowest account maintenance charges.


This article is long. So it is written in two parts. You will find second part (part 6 of the New Series) under REJOINDER below within 3 days before I head off for India tour. This will be most useful part of Zero CPN bonds how it helps you most.

from 4/9 to 16/9 during which I will not be posting anything NOR will reply to any of reader’s queries (because of lack of internet access over there).

With Warm regards

Kalidas (Anil Selarka) – click for Scribd PDF Download
Hong Kong, 1st September, 2009

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Personal Blog :

Aug 212009

SR4- Bonds,CD etc

Ref: 0908-031A of 21-08-2009

In the days of Kings, Queens, Sultans, Moguls and Rajahs, there were only two currency denominator with reference to which a person’s wealth was measured. – Gold and Silver. Other units used were the number of sheep’s, goats, horses, cows and buffaloes.

Teacher_BlogHowever, these objects were relatively scarce, and hindrance to trade development. When paper was invented, especially Security paper, the concept of bank notes was introduced. It revolutionized the coming century. A time came when Alan Greenspan was spoken of more than the Jesus Christ.

Having seen the investment medium of Gold (Silver and Palladium will be discussed later), let us see how a person should build wealth that is liquid, earning and transferable. East and West followed different philosophy, thanks to many Nobel Laureate Economists who invented number of theories understood either by them only or some small fraction of so called professionals who brought the financial ruin as you witness today.

WEST followed the policy of “Spend first, Save later” and used plastic money (credit or debit cards) with gay abandon. Paper and Plastic were the two numerators of proof of wealth. When I went to USA a few years ago, I tried to pay them with greenback, that is, $ 100 green dollar bills so much loved by the Asians over here.  They love dollar more than their wives and children. The counter clerk asked me “Sir, don’t you have credit card?  We can not accept this note” I asked him for reasons to which he replied, we do not know whether it is genuine or fake. WOW, we Asians go mad after dollars, and these Americans do not trust their own currency!

EAST followed the policy of “Save first, Spend later”, diametrically opposite of western philosophy. This is why Asians prospered, and West was brought down to knees. After contracting debt via credit card, if the consumer can not pay, the remedy was easy – go bankrupt!

Look at the following table, how much consumers gain or lose in following West and East policy.

We compare two countries – USA and INDIA for simplicity.

Let us say, an American bought a few items for US$ 10,000 via Credit Card, paying interest @ 12% on average (it varies between 7% earlier to 16% to 24% now) for say, 3 years. An Indian saved the money for 3 years earning 9% interest and then decided to spend it. The cost of the items is worked out as under:

Description An American An Indian (not Red Indian)
Period of Comparison 36 months 36 mts
Item Cost 10,000.00 10,000.00
Immediate Spend 10,000.00 0.00
Paid by Credit card 10,000.00 0.00
Interest paid for Credit Card  or Received on savings (Debit/Credit) using reducing balance @12%

Paid for 3 years – EMI 332.14

1,957.04 @9% Received for 3 years saving 277.78/mth 1,517.14
Net Item Cost Cost + Int 11,957.04 Cost – Int 8,482.86
Relative Cost Difference LOSS 3,474.18 GAIN 3,474.18


  1. If Debt via credit card is used for consumer item, it is irrecoverable expense. The item also depreciates over 3 years, so that realizable value also diminishes.
  2. If no debt is used for consumer items, but savings resources were used instead, the cost of the item is reduced by interest income on savings.
  3. Debt is useful for a businessman because he employs the amount for earning. Though he pays interest, he also earns income or profits. His loss or gain is the difference between the two. It is“two way traffic” for him.
  4. For an employee, having no other income than salary, he loses on contracting debt, because no income is created out of debt. It is a “One way street” for him – loss only.

This is why the East is asserting on West now. America is technically bankrupt with years of consumer spending financed by Credit cards. Eastern countries like China, India and other Asian nations have acquired wealth due to their reliance on savings rather than debt.

Make your First Million by Savings (very difficult), Subsequent millions are easy.

Making first million in any currency anywhere in the world is extremely difficult. One makes or loses continuously, learning all the time. The balance so accumulates make the million after long time, may be 3 to 8 years.

Once one has made real one million in the currency of his country, he has sufficiently learnt the art of making a million. If he is able to hold on that million for at least 3 months, making of further millions become relatively easy process. There is a saying that “Money attracts More Money”. It works both ways – once one begins to lose, the lost money attracts more money from the holder, compounding the losses. Similarly, when one has made a million, the chances are the money that he holds will attract more money inward to make him rich.

So let us make our first million in the currency of your country. A million is a million, regardless of any currency. The PPP or Purchasing Power Parity operates silently in every currency to make the above idiom true.

Bank Deposits vs. Bonds;  Currency Risks, Capital Risk and Exchange Risk

Each country has its own products for savings. For instance, it is easy to buy Treasury bonds in USA, howsoever small amount may be. In a country like India or Hong Kong, the availability of Treasury bond is limited to large amount, often 250,000 minimum. An ordinary saver can not handle such amount. He is not millionaire yet. Now again, I remind you of the difference between “Savings” and “Investment”.

  • When one makes a deposit in the currency of his country with assurance to return the same currency in same principal amount (plus interest), it is called “Savings”. Example, one takes out bank deposits for say 100,000 in currency “X” with interest @ n%, with assurance to return the money on maturity in same currency with interest, it is Savings. (He gets X100,000 + n% interest)
  • Where one makes deposit in the currency of his or other country if his local currency is convertible), with no assurance that same amount will be returned to him later on maturity, it is called “pseudo Savings cum Investment”.
    • He is assured here the same amount of foreign currency on maturity + Interest, but he is not assured the same amount in his local currency. He takes exchange risk that may give him increased or reduced return. This is the first level of risk he undertakes.
  • If one buys the Treasury Bond, in his currency or foreign currency, he takes on one more risk – the interest rate risk. If the interest rates go higher/lower, the capital value of the bond reduces/increases during transit time (until it matures). On maturity, he gets the same capital value in respective currency.
  • If one buys corporate, municipal bond or state government bond, then he takes one more risk – the credit risk of respective corporation, municipality and state government.
    • For instance, in USA, many of the Municipalities or state governments face severe liquidity strains or nearly bankrupt.
      • The federal government in USA is not kind enough to guarantee the bonds of state government or municipalities (FED would stupidly guarantee $306 billions of Citibank bonds, but not even $ 25 billions of the State of California)
      • A country like India is more responsible. The Central government always comes to the rescue of the state governments or local semi government authorities

Having seen the difference between Savings and Investment, let us dwell on the specific products and their variations.

BEFORE that, please note that if you do not understand any investment products, simply say NO. In investment world, there are many conmen or crooks that are out to reach your pockets with innovating scheme or theme. They get paid liberal commission by the issuers. You must therefore be prepared to say firm NO. These two letters will save your life’s savings.

Also, when you are talking of the savings, do not include “investment” or “credit risk” profile. Savings must be Savings – totally risk free – returnable to you intact on maturity with interest on maturity. Here are some principles of how to save in bank deposits:

Fixed Deposits: (with Banks)

In centers like USA, Japan, Hong Kong and other dollar block countries, the interest rates are near zero. It would be stupid to invest in such deposits on long term basis. Use the following guide:

If interest rates are very low, follow the table as under:

If Interest rates/year are = <3% <6% <9% >10%
Retain your deposits for 1 month 6 months 12 months > 3 years
Cumulative Yes No No Yes

Remarks :

  • Do not lock up your money for long, if the rates are not so favorable
  • Until rates rich 9%, do not lock up for longer period. Eat interest every quarter.
  • By rule of thumb if the interest is over 10%, one may lock in yield for 12 months to 36 months. Make it cumulative, so that you earn interest on interest. That is, your effective interest rate is 11% (10% regular + 1% (10% of 10%) = 11%)
  • DO NOT make single large deposit. Make 3 to 5 units minimum. The reason is if  you need the money for any emergency, you can break the deposit (withdraw before maturity, paying some penalty).
  • If you are making deposits for 3 years or more, do as under to maintain continuous cash flow. Say you have X 500,000 to keep as bank deposits, keep 100,000 each maturing on expiry of 36 months, 38 months, 40 months, 42 months and 44 months.
    • This will ensure that after the expiry of 3 years, you have cash flow of 100,000 every two months.
    • Further, if you need some amount earlier, you need to break or withdraw premature only one unit without disturbing others.
  • CHECK the maturity value before leaving the counter. Most people presume that banks are always correct. It is not so. The clerk who is servicing you may make clerical error and write wrong amount.
  • USE the following Interest calculator – one of the best tools around. It is free software which works out interest and cumulative amount on loans, deposits, recurring deposits etc.
    • It has small limitation. It uses 360 days per year which is international standard for Bond market, not Fixed Income market like Deposits where they use 365 days per year as standard. (In India and Hong Kong, for instance)
    • This tool is very useful in planning your savings. Fixed, Savings, Recurring Deposit (very powerful concept discussed later)


While opening Fixed Deposit account, please ensure that –

  1. You are opening jointly with some member of your immediate family, say spouse, if your own age is 55 or more. Make it “Either or Survivor” (E or S) if you trust your named partner.
  2. In some countries like India, nomination facility is available where you can nominate non-depositor but your immediate family members like son or daughter, should anything happen to you or your spouse. This will avoid all legal formalities like will, probate, letter of administration etc.
  3. One may avoid nomination by including one more name after his name, say of Son or Daughter, but limiting operation in account as “Former or Survivor” which means that one will get the payment on maturity, not other beneficiaries. Former means you. If one makes a mistake in writing his Children’s name ahead of his own, then they will get the money on maturity, not he. Other beneficiaries will get if only original depositor dies.
  4. If you are 55 years or older, NEVER EVER give away your entire wealth to your children,. They will take care of you only when they know that money will be theirs when you are no longer around. Otherwise, you may have to wash dishes in their homes and reduce your status to that of a house servant or even worse. Money always talks, remember that always.
  5. In liberal countries like USA, where marriages often do not last long enough, it will be advisable to keep deposit in your own name without the knowledge of spouse. Such confidentiality will avoid substantial payment or alimony in divorce proceedings.
  1. Many frauds have been reported in India, when a Non Resident Indian (known as NRI) remits large amount without taking adequate precaution.  Note the following example (Illustrative)
    1. A NRI remitted US$ 100,000 by wire or TT to a small town branch of a nationalized bank with request to open the Cumulative Fixed Deposit (CFD) for 3 years in favor of the depositor and his wife. Since the online account opening facility was not available, he requested the Branch to send him the “Account opening form” for his signature and documentation. This was perfectly normal.
    2. The Branch Manager was not honest. He sent the FD Acct. form to the depositor with specimen signature card. At the same time, he issued the FD in the name of same depositors and attached the signature card with fictitious signature.
    3. On very next day, he created a loan in favor of third party and pledged the FD duly discharged by him and also signing necessary loan documentation forms.
    4. Meanwhile, the depositor sent him the Account form. The Branch Manager sent him another FD with similar particulars. Since the FD was for 3 years, and interest being cumulative, he did not know of this fraud for 3 years until his FD came for maturity and he wanted to cash it out.
    5. The Branch Manager was changed. He informed the depositor that third party had defaulted on loan, so the deposit was adjusted against the loan. No further amount was payable.
    6. The depositor then complained to his Regional Office, who instead of investigating rehearsed what the branch said. When he approached its HO, the Inspection department conducted the investigation and the entire fraud came to light. Meanwhile the original Branch Manager had taken voluntary retirement and absconded from town.
    7. It took for more than 6 months for the depositor to get his claim settled, and that too, without additional interest for extended period from maturity.
    8. If the FD was non cumulative, the depositor would have known non payment of quarterly interest into his Savings account, and the fraud detected early. Alternatively, the depositor may ask for “Certificate of Non Encumbrances” from the Regional Office sending them a copy of your FD received.
    9. The best course is to maintain account only with large branches or Main Branch where the chances of such irregularities are almost non existent.


Same as above.  However make sure that you know the bank’s Minimum Balance requirements, Otherwise they go on debiting your account every quarter with Rs 750/quarter. I have bad experience with Axis Bank in Mumbai, India. I opened NRI-PIS account with them with one ordinary NRE where I was maintaining decent 6 figure balance and another sub account for stock purchases. They disabled my Internet access on some fictitious ground. After a year and half, I realized that my account was debited 6 times with the bank charges of Rs 750/Qtr or Rs 4500 over 18 months. I tried to close my account, and lodged a strong complaint, that my relationship balance was 20 times their minimum balance required. But no one listens – you have to press 1, 2 4 5 6 and what not and finally told that it was a call center.

A new Manager assured me proper service again and refunded Rs 1500 only. Again, for last quarter, I was debited with Rs 750 again. I am going to close down my all accounts with such glossy electronic banks who do not know the basics of banking. (I was a banker for 19 years, so I know what is called Banking!)

The purpose of referring above episode is to help you understand that banking is not what it used to be 10 years ago. Modern day MBA bankers are too procedural to meet the requirement of ordinary depositor. Make it a habit to check your bank account regularly so that no charges are improperly levied.


Same as above.  This is non interest bearing account, so avoid keeping large balances. Instead, keep major portion of your balances in Savings account so that your deposit earns some interest.


Some banks, especially in India, have a facility of “Mandate Form” under which you may authorize signing powers to known third person (mostly in your family) without executing complicated Power of Attorney document.

As far as possible, try to avoid joint bank accounts with some third person with only intent to authorize him to operate your account for sundry purposes. Use Mandate form instead, which can be cancelled at any time, if you find inconvenient or your account is not properly administered.

There is a legal risk too in opening Joint account with third person for only operational purpose. By opening joint account, he earns the status of being joint owner or co owner of the funds. If he runs into financial problem, your account could be subject to court seizure or attachment. If he holds “mandate power” nothing happens or could happen to your account. He is merely authorized signatory, not co-owner of the account.

RECURRING DEPOSIT ACCOUNT – Sure way to build wealth:

This kind of facility is only available in India, not in advanced countries (they are not that advanced). This account is the most important savings instrument available to individual investors on long term basis. This is like an Imprest system under which you contribute some amount every month and receive lump sum at the end of contracted period.

This account helps you manage the following:

  1. One can lock in higher interest rate for 5 to 10 years with meager sum.
    1. Example: Supposing one is in era of high interest rates, say 15% on long term deposits. The rates have stopped rising and may fall.  One wants to lock in such rate with minimum cash outlay. He can open 5 different RD account with maturity of 5,6,7,8,9 or 10 years contributing say, 1000 per month. He has to pay just Rs 5000 every month for which he can give standing instructions to debit his Savings account monthly. Now look at the maturity scenario:
Installment Amt Period Interest % Maturity Amt Total Investment Simple Yield
1000 60M 10% 77,911 60,000 11.94%
1000 72M 10% 98,664 72,000 12.34%
1000 84M 10% 121,572 84,000 12.77%
1000 96M 10% 146,858 96,000 13.24%
1000 108M 10% 174,769 108,000 13.74%
1000 120M 10% 205,577 120,000 14.26%

Simple Yield = {Interest Gain / (Average Investment) %} divided by No. of years

(Average Investment = Initial Investment (=0) + Final Investment /2)

  1. It will be observed that current yield of 10% become compounded yield of  12% to 14%
  2. Above method ensures steady cash flow after 5 years in greater proportion every year
  3. If you plan from the age of 51, to retire after the age of 60, you will have steady cash flow every year from 77000 to 205000 per year, enough to pull on without much external support. This is your self made Provident Fund on which you have total control
  4. You can vary the amount in multiples of 5 or 10 to make larger sum available to you at later age.
  5. You can also open separate RD account for each activity, Children’s college education, wedding or purchase of property. Say in above case, you contributed Rs 10000 for 10 years for your children’s education, you will get Rs Rs 20 lakhs after 10 years, when they are about to get into higher education. No more educational loans at that time which will reduce your net worth. This will enhance your net worth…
  6. In 1992 to 1994 FOREX crises in India, one bank offered very long period RD (for 20 years). By depositing Rs 5000 per month for 20 years @ 13% interest rate, one would get   5,619,929 against total investment of 1,200,000 (240 x 5,000) netting simple yield of 36%.  Longer the period, higher the simple yield. The average investment is worked out on this basis: Initial Investment is ZERO, Final Investment = Installment x no. of Months in a period. Divide it by 2 to have average investment over the period.
  7. In short, if you plan your cash flow from early age, you will have worry less future, be it education for your children, their wedding, purchase of property or own retirement.

How to use Recurring Deposit (or Remittance) to avoid Exchange fluctuation?

While living in Hong Kong, I came across hundreds of instances from local people who always complained about exchange loss due to currency devaluation against USD. They also tried to time the remittance, and always failed. I used to tell them to send the remittance periodically taking out advantage of weaker destination currency. See the following example (we used Indian Rupees for illustration purpose. You can replace it with your national currency.)

Say, you remitted USD 10,000 @ Rs 50, 46, 44, 39, 43, 48, and 49 on seven occasions.  The average works out to Rs 45.57, marginally lower by 7% over 7 years or just 1% per year.

The people always average down, never average up. This is where they lose profitable opportunity.

Anil Selarka
Hong Kong, 21st August, 2009

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Another article SR 05  on Bonds (Zero Coupons) in continuation of series ” How to Invest into Anything? “will appear on 31th August.