ICICI Money Multiplier

Create Auto Linked Fixed deposits
If you have more than  Rs 15,000  in your savings account in ICICI, you should better make use of the Money Multiplier facility in ICICI. ICICI allows you to invest the extra money in Fixed Deposits that can be closed prematurely. In a Resident Savings Account, ICICI pays you a interest rate of 3.5 percent, with a fixed deposit of one year you can make as much as 9- 10 percent. Interest rates for different durations can be found at the following link.

http://www.icicibank.com/pfsuser/interestrates/interestrates.htm

What happens if you break the Deposits prematurely
As soon as you balance goes below 10,000 , your Fixed deposits are broken in reverse order of their creation, the one that was created last is broken first. You can easily earn more than a couple of percent more in interest rates. ICICI official guidelines for the money multiplier features can be found at the following link.

http://www.icicibank.com/pfsuser/icicibank/depositproducts/quantumoptima/features.htm

One bad thing about this is it says you cannot avail this facility if your account is linked to a ICICIDirect demat account. I am trying to figure out a way to use this along with your ICICIDirect account. Will update the post once I find out.

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How is an 'Asset Bubble' created?

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was $2 as there were only two pieces of $1 coins circulating round. There were 3 citizens living on this island country. A owned the land. B and C each owned $1. Now the following series of events happen: -

1. B decided to purchase the land from A for $1 . A and C now each own $1 while B owned a piece of land that is worth $1. The net asset of the country = $3 
2. C thought that since there is only one piece of land in the country and land is produce-able asset, its value must definitely go up. So, he borrowed $1 from A and together with his own $1, he bought the land from B for $2.  
       A has a loan to C of $1, so his net asset is $1.
       B sold his land and got $2, so his net asset is $2.
       C owned the piece of land worth $2 but with his $1 debt to A, his net asset is $1.
       The net asset of the country = $4.
3. A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a $1 loan to C. He then borrowed $2 from B and acquired the land back from C for $3. The payment is by $2 cash (which he borrowed) and cancellation of the $1 loan to C.
   As a result,
       A now owned a piece of land that is worth $3. But since he owed B $2, his net asset is $1.
       B loaned $2 to A. So his net asset is $2.
       C now has the 2 coins. His net asset is also $2.
       The net asset of the country = $5. A bubble is building up.
4. B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for $4. The payment is by borrowing $2 from C and cancellation of his $2 loan to A.
   As a result,
       A has got his debt cleared and he got the 2 coins. His net asset is $2.
       B owned a piece of land that is worth $4 but since he has a debt of $2 with C, his net Asset is $2. 
       C loaned $2 to B, so his net asset is $2.
       The net asset of the country = $6; even though the country has only one piece of land and $2 in circulation.
5. Everybody has made money and everybody felt happy and prosperous.
6. One day an a thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan? There is only $2 in circulation, I think after all the land that B owns is worth at most $1 only." A also thought the same.
7. Suddenly, nobody wanted to buy land anymore.
   In the end,
     - A owns the $2 coins, his net asset is $2. 
     - B owed C $2 and the land he owned which he thought worth $4 is now $1. His net asset became -ve $1. 
     - C has a loan of $2 to B. But it is a bad debt. Although his net asset is still $2. 
     - The net asset of the country = $3 again.
8. Who has stolen the $3 from the country? Of course, before the bubble burst B thought his land worth $4 and the net asset of the country was $6 in paper. However, now his net asset is $2.  
   The net asset of the country = $3 again.
9. B had no choice but to declare bankruptcy. C has to relinquish his $2 bad debt to B but in return he acquired the land which is worth $1 now. 

At the end of all  this: -

• A owns the 2 coins, his net asset is $2.
• B is bankrupt; his net asset is 0 dollar. (B lost everything )
• C got no choice but end up with a land worth only $1 (C lost one dollar)
• The net asset of the country = $3.
  

*****************End of the Story***************** 
The net outcome of the above bubble is a redistribution of wealth. A is the winner, B is the loser, C is lucky that he was spared.

Few points worth noting from the above story: - 

1. When a bubble is building up, the debt of individual in a country to one another is also building up.  
2. This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
3. An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below $1.
4. When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.
5. If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game, at the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
6. When the bubble was in the growing phase, everybody made money.
7. If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
8. Instead of land, the above applies to stocks as well.
9. The actual worth of land or stocks depends on psychology to a great extent. 

 

The above narration is an excerpt from a public web site. I don't recollect the web site name and hence cannot cite the source for reference. The excerpt has been reproduced here with slight modifications for better clarity.

MasterCard inControl and Healthcare Industry

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Mastercard is planning to introduce a corporate card through which employers can set a limit on expenditures as well set up locations where the card can be used (Check the Businessweek story here ).

This incontrol Card represents a great opportunity for Healthcare Insurance companies that provide it's members with Cards to be used at Pharmacies(Humana provides a card for its Spending Account Members). In the current scenario, if the member misuses the card and uses to refuel his car or something other than what he qualifies. The Insurance company needs to reject this swipe or adjust in future claims for the member.

With the Mastercard inControl, the Insurance provider can program where the card can be used and for what it can used for. This can result in significant savings by saving all the effort that is required once a bad purchase has been made.

On Financial Independence

Laura Rowley in Yahoo Finance has written an excellent piece on financial freedom and how to use it responsibly. I think it’s a must read. Here’s the link.

One of the interesting excerpts from the passage:

A study by Thornburg Investment Management in Santa Fe, found that from 1976 to 2006, $100 invested in the S&P 500 in a taxable account would have grown to $3,225 -- a 12.26 percent nominal rate of return.

Factor in fees, taxes, and inflation? The real rate of return is a meager $456, or 5.19 percent.

Something on the same lines I had written some time back can be found here.