EMF

Need for Financial Planning

2011-11-30T12:12:00.001+05:30

"With money in you pocket, you are wise and you are handsome and you sing well, too." ~ Jewish Proverb

Did we ever travel to another city or countrywithout a prior plan? We would think about when to start, what mode oftransport to opt, where to stay and how long to stay ………. questions galore. Ifone deliberates so much for a short trip/vacation then, how could we not have aplan for our lives? Could we just live and hope to achieve various goals/needsthrough the way?

Financial planning hence forms an importantaspect of our lives and in realization of our dreams. Most grosslymisunderstand FP is limited to the higher income individuals or HNIs but it’sno less important for any income earner and mostly for any dreamer. Everyindividual has needs/aspirations/dreams to achieve in their lives and for mostof these require money. FP doesn’t always mean Retirement planning or childreneducation/marriage planning but more mundane and diverse activities in life.

How about creating a corpus so that you may useit for charity/donation on a regular basis or a plan to create alternate revenueto supplement your monthly EMI or may be a corpus to finance entrepreneurialaspirations of your sibling/spouse? The list could go on, limited only to yourimagination. But, to achieve any of these one needs to plan. And likewise yourtravel itinerary, it involves quiet some deliberations.

Continuing the analogy of vacation plan, one firstneeds to decide upon the destination, here the financial goal. It involves intranslating into financial cost of the dream/aspiraton with some realisticassumptions. For instance, if one were to plan a pension of 20K per month atthe time of retirement, one need to consider the possible inflation rate andthen arrive at a realistic figure for the proposed time. This forms the firststep of identifying the goal.

Once the destination is decided, the mode oftransport is opted. It could be by rail, road, air or a combination of all.Similarly, once the financial goal is set the next step is to find the variousalternatives to achieve it. How could one pick the right one among the innumerableinstruments available in the market? This involves in understanding one’s limitationsviz., time period, risk appetite and comfort. One needs to dissect eachavailable option if it fits to the goal. This forms the Need Based Analysis.

As the old adage goes: Don’t put all the eggs inone basket, one needs to spread the risk so as to achieve the optimalrisk-adjusted returns. While doing this, one needs to diversify not just theasset classes but also get invested in the complementary instruments within theasset classes. This mitigates the risk of the entire portfolio without muchcompromising the returns. This part of the planning is called Risk Reduction.

Frank Hubbard once said that the safe way todouble your money is to fold it over once and put it in your pocket. Humorapart, if one needs to create wealth one needs to start investing; thisinvolves the most important step – action. One needs to move out of the inertiaand continue to allocate money to the agreed plan.

The next step is to monitor and review the planat regular intervals. Most individuals lose patience as either things didn’tpan out as planned or forgot to re-visit the plan, which could turn into acostlier mistake. One should regularly check how the planned portfolio isaffected to the ever changing market conditions and take steps to maneuveraccordingly.

As you rely on an experienced or establishedtravel agent or tour operator to plan & execute your important vacations,you need to also consult a reputed or recognized financial planner to help youdefine, determine and devise a formidable plan to achieve your goals.

Happy Planning, Happy Investing and HappyAchieving Dreams!!!

"If you can count your money, you don't have a billion dollars." ~ Jackie Mason

Time Travel...........in Investment!!!!!!

2011-08-23T12:22:00.001+05:30

"Have you ever wondered how nostalgia isn't what it used to be?" ~ Jasper Fforde (First Among Sequels)

How many times have we thought (if not regretted) that HAD we done? How many times had we wished we COULD have corrected/rectified part of our past in some aspect? Could we do it?

We have first heard the fiction in H.G. Wells and later thanks to Einstein we started to believe in it!!!!! Ever since, we’ve endured and enjoyed the slew of Hollywood churn on this concept from Back to the Future series to Time Machine and Timeline by Michael Crichton……

So, could we really do??? Yes, it is possible, at least in the arena of investment!!!!

The current market levels are at least 2-3 yr old lows and with market sentiment (read ET poll) assuming to fall by an additional 7-9% from the current levels, it’s all a picture of gloom….

But, could we spot an opportunity in this market, the answer is an affirmative. If you’ve thought you could’ve started a particular investment (such as SIP in ’09) you could as well bring in a lump-sum and continue it with a SIP at this moment. If not exactly but to a lot extent the returns would hence be similar.

And, if you still are jittery with the Equity market and don’t really have stomach for such a risk, pls try the Bond market (tradable) for a solace. These investments are better than the regular FDs (the risk scale is as similar) and tax-productive (in comparison)

And, then of course, you’ve certain alternate investment opportunities in Gold/commodities, Managed Futures and some interesting Real Estate opportunities for you to diversify, yet gain returns. Also, consider for Direct Equity PMS/structured products. Though, I believe Gold is entering into the 'bubble' territory, ideally restrict its usage as a hedge & limit to 5-10% of your portfolio.

And, those who’re already invested, pls top-up so you could average it (cost) out and gain as the market ripens.

Of course, we still need to stick to the basics – Choosing the Right Picks, Opting for the Right Funds and Making the Right Switches !!! But, for NOW - Invest.

So, do take the time travel and gain an upper hand in your life :)

"If I could somehow know the future, then now should not be like this time." ~ Toba Beta (My Ancestor Was an Ancient Astronaut)

Trading Stocks @ All Time Highs

2010-10-04T12:46:00.004+05:30

Every once in a while, the market does something so stupid it takes your breath away. ~ Jim Cramer

As the market trends into a clear sign of bulls thanks to the unabated inflows from Foreign Institutional Investors, every investor is caught in a catch-22 situation. Most of the domestic investors (retail/HNI) were anticipating a correction. Personally, I was hoping one and believed that a sense of reality sets in. But, contrary to everyone’s belief, markets started to test our disposition.

Till the run-up to the levels of 5600 in NIFTY, we’ve anticipated enough news flowing from the shores over the Bank stress tests and other EU economies’ debt woes to resurface and create an intermediary dip for all the hurt (Jan 2008) investors to participate, rather invest, for a long term rally. Like always, the markets have proved all wrong by creating a rally and likely to breach the earlier peaks.

So, more and more queries flood me daily on when to invest or not at these levels. And I’ve always maintained that there’s nothing called market timing but only time in the market, I believe still investors could make money. Sure, this week’s gonna be a defining one (like the 4th day’s play of 1st test b/w Ind & Aus of this test series), with markets likely to test their all-time HIGHS.

Now, to support these views I want you to consider some of the facts/sentiments:

• We sure know, that the ‘stress test’ on banks revealed fewer skeletons than anticipated.

• Don’t expect any further voluntary Sovereign debt default disclosures.

• All the Govts are doing everything to delay any bad news.

• The entire world wants to believe that we’re in safer situation than ever.

With this psychology running deep in entire sovereigns' DNA, the markets are exhibiting a merry-go-round streak currently.

As the sense and mood in the market changed to brash and bullish, people are ever more tempted to make fresh investments. Now, looking at the cues from the options market, the Oct 5900 Call rose by 154% in a single day’s transaction on 1st Oct. It clearly creates a sense of euphoria where the calls were earlier written @ 5600/5700 levels.

My logic however, always has been simple. We truly believe that stock markets have risk association. If we’ve to look @ 10% risk associated from 5600 levels it would mean a correction of 560 points on NIFTY which is 5140 levels. This is both quiet lower on the technical & fundamental valuations of NIFTY. So, when the run up started and reached 6000, I’d encountered quiet a large no of queries on withdrawing the investments exposed in Equities. I’d maintained profit-book instead of short at this point of time as my belief is that the markets have moved side ways for almost a year in a 5-7% band.

If we’ve to look at the premise of stock investments being risky then a correction @ 6K would reach us back to the levels we’ve enjoyed for a year; which means that enough risk has not been associated at these levels. So, to create enough returns (risk) the markets need to build in momentum and thus lure more investors in to the rally and then finally give in. This creates for a good rally to test the all time highs of the market (Jan’08 levels) and I believe we shouldn’t get scared at this proposition. But, DON'T expect a crash and correction as inviting as ’08 levels.

Also, always give credit to the appreciating value and so don’t expect the lower lows we’ve seen in the history and it also makes a point at looking newer highs on each of the stocks and the indices.

When coming to the picks, I would rather stick to the large cap (‘coz that’s where the money flows in) of Auto, Infra, Realty, Pharma, Banks and Metals/Commodities. You may hear some of these sectors have lost steam or already in the rally but pls hold on for a little more time before you go short. And moreover, don’t completely shy away from these at market highs as you might sell cheap to the foreigner – as the long term story of India is still quiet intact.

Only when the tide goes out do you discover who's been swimming naked. ~ Warren Buffett

The U...L...I....P of ULIP !!!

2010-07-20T11:45:00.001+05:30

“An investor without investment objectives is like a traveler without a destination” ~ Ralph Seger.

I’ve been bombarded with the same question since the IRDA – SEBI spat on ULIP: Inquiring about the good/bad, worthiness and also continue/exit the already owned instrument. Before, you jump to any conclusion; I would give certain inputs for your judgment.

What is a ULIP

Okay, the acronym describes Unit Linked Insurance Plan but what does it actually mean!

As the name suggests it’s an Insurance Plan (Life) and its Linked to Units which means that the premiums contributed would be allocated to units (invested in markets aka MF). I want to end the similarity of the ULIP with a Mutual Fund (MF) here.

Premise

These are long-term investment products, are not a replacement to any existing investment avenue and are quiet different from a MF

MF + Term

There is also an understanding of ULIP as a combination of MF and Term (insurance plan) which is completely untrue and naïve.

What is it then?

In India, the savings pattern has been limited to Bank deposits, Chits and Traditional Insurance plans. With the dwindling returns in these investments and also the transparency achieved over the last decade in the Financial (stock) markets the opportunity cost of not exposing to this avenue needed to be addressed. Unfortunately, we still don’t have genuine and professional help in finding out the right investment avenues for the investor. So, to fill in the gap, ULIP was initially envisaged to address this market segment.

I recollect as latest as 2005, most CEOs of the Indian Insurance Cos were preaching that the market it is not ripe, yet for the ULIP. But, suddenly within a year every insurer was forced to introduce. It suddenly seemed a pull market (where investors were asking) and the coincidence of the stock market rise for the next two years helped catapult the sales of the ULIP.

My latest TV Show on 'ULIP' precautions

The Thin Line:

I always insist that there is a thin, yet blurred line to distinguish a profit to greed. Thanks to the bull-run, investors crossed this line into greed and the resulting factor is the realization of “deceit”.

What now?

Though the rupture started on a rational basis it turned to an ugly brawl with both the apex bodies turned egoist. As it settles now, for the GOOD of the investor, we still need to look at the utility of this instrument.

How do I use?

No one investment avenue is “the” investment. Period.

Now, it more depends on the investor how he earns the best out of any investment. ULIP also comes with its own baggage of positives and negatives. Life Insurance is important for every individual. It could be sufficed through a Term insurance plan, these are low cost (premium) for a higher insurance cover.

For the same amount of contribution towards a combination of term plan and MF investment to a ULIP; what I’ve observed is that in SOME of the ULIPs have fared better. I know, I would be disturbing a hornet’s nest but it could work out better over a period of time.

What is more important for the investor is to check if the Need is matching with the instrument objective. If there is a mismatch then no instrument achieves optimal return. What I've found in my experience is that even the best of the educated are unware of some of the investments they made. They did 'coz they were told they were good. But, end of the day its their hard earned money and one needs to know the WHY?

And as the adage goes: Don’t place all the eggs in one basket, you need to find diversification and it might end up you having exposed a little into ULIP. But, it remains in your best interests as long as it suits your portfolio.

“An investment in knowledge always pays the best interest” ~ Benjamin Franklin

Budget Blues

2010-02-26T16:42:00.002+05:30

"It's clearly a budget. It's got a lot of numbers in it." ~ George W Bush.(when he was the President of the USA)

It’s fine for an American President to be dumb, but lets take a peak at what is it for us and how does it affect you, me & economy as a whole.

The important point is the soothing FM has done is on our psyche. The tax slabs have increased with the 0% rate being constant, the 10% rate has been extended till 5Lakh while the 20% till 8Lakh and thereafter 30%; he thus achieved the best of all the goodies.

Let’s now check out what’s becoming cheaper and what’s going costlier? A move beyond the budget is that fuel prices have been increased, expect long queues at the fuel stations this evening (I’ve filled it till brim in the morning, today)

Setting up new home with all the accessories then coming April, you would enjoy cheaper Electrical appliances like ovens, washing machines, dishwashers and juicers as reduction in customs duty on magnetrons (key component) reduced to 5% from 10%. Prices of refrigerators set to fall as exemptions were announced in customs duty.

As if the price war in the mobile space is not enough, we got double whammy with FM extending the validity of special additional duty till end March 2011 making mobile phones cheaper. And in a bid to encourage the domestic manufacturers, duty exemptions are now being extended to parts of battery chargers and hands-free headphones.

Ladies, you got your man cry at this: Gold Jewelry would be cheaper (though Gold seems to set to rise) as Rhodium – a precious metal used to polish, whose customs duty is reduced from 10% to 2%

Guys, nothing stops us: let’s splurge on our new time piece - watches set to be cheaper as an outright 4% exemption from special additional duty to pre-packaged imports for retail sales, that’s good news.

Guess going green has its own advantages with LED lights turning cheaper-central excise duty reduced to 4% from 8%, at par with Compact Fluroscent lamps.

New mommies add a cheer to your baby budget, as toys set to be cheaper with full exemption from excise duty. But, be aware of your purchase. (Recent China toy fiasco!)

Medical Equipment and Cable transmission are set to cheaper as the govt. gave sops on manufacturing of these items.

Following the tradition of the last few years, tobacco and its products are set to be costlier as Govt. proposes excise duty on all non-smoking tobacco such as scented tobacco, snuff, chewing tobacco etc. In addition, introduces a compounded levy scheme for chewing tobacco and branded un-manufactured tobacco based on the capacity of pouch packing machines.

So, save tax and invest wisely to buy the goods you wanted!!!

Happy Budgeting………

“A budget tells us what we can't afford, but it doesn't keep us from buying it.”~ William Feather

The Enemy Within

2010-02-19T12:43:00.007+05:30

"A nation can survive its fools, and even the ambitious. But it cannot survive treason from within. An enemy at the gates is less formidable, for he is known and carries his banner openly. But the traitor moves amongst those within the gate freely, his sly whispers rustling through all the alleys, heard in the very halls of government itself. A murderer is less to fear. The traitor is the plague. ~ Marcus Tullius Cicero"

How would one react when any Govt. encourages corporate fraud or even oversees such an action – the whole deal turns into a fiasco! This is what happened to the NTPC Follow-on Public Offer (FPO). Whenever an interested investor asked me for an advice I’ve quoted with a lot of sarcasm over this FPO. But, of course as always the retail investor only asks for advice and very rarely heeds to it.

The stock has hovered around 200 for most part of the last six months excepting for a brief period when it the announcement of the Govt over the FPO. If the Govt. plans to investigate the hammering down from 230-240 levels, by an alleged bear cartel then it should also investigate the spiking up to these levels; neither of which seem to happen.

It’s a complete sham the way the divestment program is being handled. Going by the reports more than 50% of the unsubscribed share was bought by biggies like SBI, LIC and other public sector banks & insurers. And now the government pretends as if the offer has been done on a fair process of French Auction and claims it as huge success. But, all through these actions the govt. just breached the line of legality. If a similar action were to be done by any private business group then by now the promoters would be behind the bars.

In contrast, all this transaction achieved is: transferred the assets from the bank and the insurance company to an unrelated activity owned by the promoters. I wonder where all have the corporate ethics gone and moreover it’s a clear case of illegal transaction. Now, it’s interesting to see how SEBI, RBI and IRDA respond and react. Would they act as mute spectators and another entity ruled by the whims & fancies of lawbreakers of the govt.?

"The accomplice to the crime of corruption is frequently our own indifference." ~ Bess Myerson.

Change - Yes you can Mr. President

2010-01-29T20:59:00.013+05:30

“I don’t care whether you’re driving a hybrid or an SUV — if you’re headed for a cliff, you’ve got to change direction.” ~ Barack Obama

In his first State of Union speech Obama, seemed quiet angry for unable to further the health care reform, amid loosing the Massachusetts seat to Republicans and his dwindling public popularity. And to gain back some points in his popularity he has resorted to the populist notions, giving up the reforms - which America dearly needs at this juncture. In a bid to increase jobs in the US he introduced an additional tax over the companies that outsource the jobs.

The biggest problem with politicians, incl. Obama is that the hindsight they employ in dealing with such tricky issues of business. Any corporate outsources only to increase the profits, period, but the moot point is whose? And another important aspect that Obama is either not aware of or not accepting is the fact that this outsourcing trend is only helping (my earlier article on New Outsourcing trend) America. The profits of the investors and who’re these investors: Americans mostly, individuals or subsidiaries. So, it’s like distributing an additional loaf to the crying baby from the same bread. It wouldn’t address the problem. Simple: let’s accept the fact that American won’t work for lesser wages and so they’ve to be performed by immigrants: legal or illegal.

Yes, it’s true that India or any other country would NOT wait for China to revamp its economy. Yes, we put more emphasis on Maths and Science. Yes, we do also save lot than probably any other nation on the Earth. Yes, we TOO don’t accept our nation to be second-place. So Mr. President, please stop the rhetoric and start concentrating on how America can better in Maths & Science, in savings, in its core competence of free trade & enterprise and in revamping the economy.

I guess the inexperience of politician in you is quiet visible. We love you and hail you for your oratory skills inspire us with the grand visions and frank speaking which is why at least there still is some popularity left. Now, don’t start the blame game. Just into your 2nd year and you complain of politicians stalling some of the best beneficial programs.

We would love your ideas in the speech about lending to SME and giving incentives on capital investments and of course, with the private sector seems nowhere near the self-sustaining recovery; more work has to be done than the $154Bn jobs bill the house has already passed. The irony of the situation is that America has to depend on the rest of the world for it to come out of the dumps. These measures will not only help but also the credibility as a Change Leader will be at stake. This is clearly evident in the way the Indian corporate heads reacted to his speech, most gave a damn.

So, Yes to your Yes We Can and Change certainly yes – YOU CAN, Mr. President.

“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” ~ Bo Bennett.

2012: A New Beginning II

2009-11-21T15:44:00.007+05:30

Instead of having a set of policies that are equipping people for the globalization of the economy, we have policies that are accelerating the most destructive trends of the global economy.” ~ Barack Obama, US President.

Who better else can put US perspective than their president himself? I did a research after I’ve received a forward on “a tale of two economies: interesting insight into the US economy” by economist Nouriel Roubini. Its quiet amazing that we tend to miss that the apocalypse is actually being unfolding right in front of our eyes and the timeline would be in coincidence with the Mayan calendar or earlier.

Though, there is a great hope and reverence to the current Obama administration, I still doubt if they’ve the capacities to control a snowballing storm about to unfold due to the accumulated past miseries. We all know how the US is being funded by the rest of the World through their investments in US Treasury bonds. And the latest turmoil in their financial system only cracked open the various weaknesses, pitfalls and huge un-chartered risks.

Increasingly the dollar has been under tremendous pressure at an unprecedented level and the questions perking up on the risks in being association with it. As policy measure the Reserve Bank of India has been reducing its exposure to US bonds and this creates for lesser vulnerability in the days to come as US $ faces strenuous pressure. The latest data shows that India has the least exposure among the BRIC nations as against their forex reserves with just 14.79%. And as a whole BRIC nations conjure for close to 37% of total US Bonds.

The unofficial news that China runs the show is being credited as the facts indicate as 38.36% of its total forex reserves of $ 2,272bn are in US bonds. All the big banks and Insurance cos like Citi and AIG never had any dearth for assets but they’re all long-term supposedly secure US bonds while they’d a huge credit crunch i.e. short term money/cash. For now they’re saved by US govt at its own peril.

The Mayan calendar is ticking and ticking pretty fast on US, only some very drastic measures would save it and the world subsequently as we’ve not yet found any better medium for US$ yet. There sure is a rush to acquire Gold and we would witness the Gold scampering to new highs that we’ve earlier witnessed in Oil as most central banks are hedging their risks in Gold. I'm not a torch-bearer for the Gold Standard to return, but seriously Gold is in the reckoning.

There may be a situation not far from here, that hedging investments would happen in Indian bonds something like that was witnessed during post 70’s of Japan. But, the silver lining of depreciating Dollar is that it only makes US competitive (after a certain point) as imports become costlier and probably set reduction in US consumption i.e. their dependence upon imports might come down which inturn kicks in local production triggering for more job creation.

This will call for a natural cycle which will create enough pain and sorrow on the lines of apocalypses and an ultimate change of order on the way world trades. But, knowing the US arm-twisting whether to create/erase protectionism on trade, environment or any other issue, the natural cycle could be ruled out which only worsens the total scenario.

“We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much” ~ Ronald Regan.

Generation of Foreverism

2009-06-18T11:30:00.004+05:30

“Life does not consist mainly, or even largely, of facts & happenings. It consists mainly of the storm of thought that is forever flowing through one's head” ~ Mark Twain.

In the process of catching up, I spent a record time yesterday, considering my almost absence in the last 8-9months, over the internet. I was going through lots of information from health to lifestyle to trends to finance to politics. I was also little worried on how I would manage once I get married, it seems most likely sooner than I’d imagined (my parents are moving on a war-footing after I’ve given them the green signal) as most of my earnings are spent for self. I appreciate and admire all my married friends on how they’d still maintained the way they were. I guess it’s my fear and as they continuously say I would get used to it.

Okay! Coming to some interesting thing that I’d stumbled upon, made me wonder in which of my blogs I should mention! It’s a matter related to personal finance while a similar idea is tossed as a trendsetter. So, one is a Forever Generation (of UK) and the other is Foreverism (global trend). Let me explain you.

As per Schott’s Vocab “Forever Generation” means a generation of (British) youth who, because of dearth of savings, face the prospect of working “forever”. This phrase was actually used by Aviva (an insurance major) to describe today’s children in UK as who’ll be retiring later, paying their mortgage and having their children live with them well into their twilight years. This is a risk without forward planning, today’s young adults could end up in work-to-live cycle for what feels like “forever”.

While “Foreverism” as per Trendsetting.com described as consumers and businesses embracing conversations, lifestyles and products that are ‘never done’. While the ‘now’ has never been more popular, with many consumers still keen on instant gratification, trying to maximize the amount of experiences they can collect in as little time as possible (and with as little budget as possible), there are equally strong forces promoting ‘forever’. Driving its popularity is the technology that allows them to find, follow, interact and collaborate forever with anyone & anything.

Going in a little detail, I saw a distinct connection between these two trends. Its possibly because of the foreverism, a byproduct of consumerism, this forever generation was created. I guess it could be true not just in UK but even in India (prob across the world) esp with our generation. My fears I’d earlier mentioned in this article is a direct derivation from the above trend. Technology only added woes to the current situation of indulging in excesses of all kinds.

Still the good old adage that our fathers and grand fathers told us remains: A penny saved today is a penny earned tomorrow. So, brotherhood Arise, Awake and Stop not until you indulge and save at least a little for our own good.

“They spoil every romance by trying to make it last forever” ~ Oscar Wilde.

Reckoning III - A Legend under scrutiny!!!

2008-10-21T02:12:00.006+05:30

"Legend: A lie that has attained the dignity of age." ~ H.L. Mencken

Irrational Exuberance – when he uttered this phrase, it took all of the world markets two complete days to stabilize, back in 2000. It was by none other than the longest served US Fed Chief, Alan Greenspan. I was a big fan of him during my B-school days, even read his biography and strangely I was also a Rand-ian, pretty much influenced by the objectivism. He was a close associate of Ayn Rand, who portrayed the collective power as an evil set against the enlightened self-interest of individuals through her novels, Atlas Shrugged and Fountain Head.

As promised in my earlier post, I expose one of the powerful lawmakers who’d successfully resisted the derivatives market out of the realm of financial regulators. George Soros, once the wealthiest man on Earth avoids derivatives “because we don’t really understand how they work; while Felix Rohatyn, the banker who saved New York from financial catastrophe in ‘70s describes derivatives as “Hydrogen Bombs” and Warren Buffet observed presciently five years ago that derivatives were “financial weapons of mass destruction.”

While in campus, I loved the idea of derivatives (the name comes from the fact that their value “derives” from an underlying asset like stocks, bonds, commodities, etc. – were created to soften or “hedge” risks) and really was keen to spend couple of more credits over this subject before my interest waned primarily ‘coz of the professor (I felt he’s not good enough to teach this subject) and secondly of the fact that the intricacies of calculations involved didn’t really excite me.

Greenspan staunchly rejected the idea to put derivatives under regulation whenever they’ve come under scrutiny of Congress or on Wall Street. Moreover, Alan was held in very high regard and it was an area of judgment in which the members of Congress have non-existent expertise. The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a recent speech at Georgetown University, intimating that those peddling derivatives weren’t as reliable as “the pharmacist who fills the prescription ordered by our physician.”

"We are made wise not by the recollection of our past, but by the responsibility for our future." ~ George Bernard Shaw.

The derivatives market is $531 trillion up from $106tn in 2002 and a relative pittance a decade ago. Some argued that these instruments became so vast, intertwined and inscrutable that required a regulatory oversight as on a larger scale such contracts allow financial institutions to take more complex risks that they might otherwise avoid – for instance, issuing more mortgages or corporate debt.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said. “There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said. But he called that possibility “extremely remote,” adding that “risk is part of life.”

Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It was never passed. As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed. Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway. “Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”

But the business continued.

"History repeats itself, first as tragedy, second as farce". ~ Karl Marx

And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.

Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn. The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.

“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.

In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent. His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.

“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon. “They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”

"All history becomes subjective; in other words there is properly no history, only biography." ~ Ralph Waldo Emerson

The Reckoning II - Why was AIG bailed out?

2008-10-15T00:44:00.015+05:30

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain" ~ Napoleon Bonaparte.

My confidence and faith in the sanctity & security of an insurance company was shaken last month when AIG almost collapsed before being bailed out by the US Govt. It only worsened with the Japan’s Yamoto filing for the bankruptcy last week. Its difficult to comprehend that just the housing crisis alone brought down such a large financial corporation! While the very US Govt. let Lehman die ended up bailing out AIG, the message was simple: Lehman was expendable but not AIG and so could be some of the mightiest enterprises in the world. Why?

A closer exploration of AIG’s demise reveals important intricacies and mystically connected interdependence of the corporations & financial institutions – and altogether an astonishingly fragile – financial world that is still imploding.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them. (In my coming posts, I would tread upon these complex derivatives and the successful resistance by one of the most powerful lawmakers to bring them into the regulatory framework)

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of AIG, it was a 377-employee unit in London that is synonymous for opulence with an average of over $1mn annually as compensations which believed blindly in the financial modules with lax oversight brought down one of most admired and profitable corporations with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities. The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G.F.P. was happy to book income in exchange for providing insurance. Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable. These insurance products were known as “credit default swaps,” or C.D.S. in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999. Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn. Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G.F.P. and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion. As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering four weeks ago with a plea for help.

As the group, led by Treasury Secretary Henry M. Paulson Jr., also had one of the Wall Street’s Chief executive, Lloyd C Blankfein of Goldman Sachs, of Paulson’s former firm. Though, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to highly placed insiders. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, these people said.

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning" ~ Henry Ford

The Reckoning !!!

2008-10-13T18:42:00.008+05:30

“Bank failures are caused by depositors who don't deposit enough money to cover losses due to mismanagement.” ~ Dan Quayle 44th US Vice President.

Looking at the faces of the G-7 representatives dealing over the global meltdown didn’t really throw any confidence. The only silver lining is the acknowledgement of the severity of the current crisis and agreeing that it can be contained / countered only with the collective effort of the global nations. But, to get an act together is tough, if not impossible, as each country in EU have independent socio-political considerations.

Customers, friends and my team members ask me on when would this global financial mess that we’re witnessing would clear up. With worries of losing more ground by day it’s difficult to hold on to the hope that things turn pink in the long term esp. when the most emotional thing in this world is involved - money.

But, before I blurt up with my “expert” (I would disassociate with it after Steven Levitt disgraced it thoroughly) advice, I would want to share how actually the world let loose of what could we’ve controlled or avoided. It’s not another account of blame game or regrets but a systematic failure of the corporates and in my observation the involvement of the Govt. that has led to what we’re now witnessing.

On Sept 30th 1999(exactly 9 years back), Fannie Mae (Federal National Mortgage Association) eased the credit requirements for mortgage borrowers, which was a pilot program involving 24 banks in 15 markets encouraged those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. This is exactly when Mr. Paul Krugman, (my fav cloumnist on NYtimes) the latest Noble winner in economics had warned of the government intervention in Fannie's business.

Fannie, the US’s biggest underwriter of home mortgages made this move due to a continuous pressure from the Clinton administration to expand the mortgage loans among low and moderate income people. In moving, even tentatively, into this new area of lending, it took on significantly more risk, which didn’t pose any difficulties during flush economic times.

Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.

So Fannie constructed a vast network of computer programs and mathematical formulae that analyzed its millions of daily transactions and ranked borrowers according to their risk. Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar-seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses; you may call them the premium.

With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010. Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers - more than three times as much as in all its earlier years combined, according to company filings and industry data.

These mortgage derivatives were like the Nylons for women introduced by DuPont in ‘30’s for the financial markets looking for easy gains. Now, you can see the catastrophe unfolding to burst with likes of Morgan Stanley betting aggressively. As treasury dept. started looking into the irregularities of Freddie, the corporate cousin of Fannie, Robert K Steel was sent to get firm commitments for the new loans. Instead Mr. Steel shook hands with no commitments to raise additional money.

Though, Fannie raised $7.4 billion in the next few days, it was too little too late. Within weeks Lehman Brothers announced bankruptcy, while Merrill Lynch was engulfed by Bank of America and AIG has to be rescued by the Fed Govt. with a two year loan of $ 85bn.

“An Optimist may see light where there is none, but why must the pessimist alwyas run to blow it out" ~ Rene Descartes.

Taare Zameen Par !!!

2008-02-06T11:56:00.000+05:30

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten. ~ Peter Lynch

I’m constantly grilled by my friends and customers alike are about ‘tips’, tips for investment. Frankly, none in this world, I repeat, none can predict the markets and if someone says he can then it’s a lie, a blatant one. Anyways getting back to the topic of tips; it’s always easier for me, for that matter anyone, to offer advice (tips) in a bull market ‘coz your credibility will remain almost the same as most of the tips work in favor of the investor. It might be true to a certain value ‘pick’ in case of a bear market. But, what we’re currently witnessing is neither of them.

The current markets are choppy though there seems to be nothing wrong with the fundamentals of the stocks or the growth pattern of the nation as a whole. Most of these fluctuations are out of our control, from that of the global parameters, signs of weakness in the sole economic power with an impending recession, its currency weakness and appreciation in the prices of most mundane resources. And I highlight these are completely out of our control.

"The trouble, in my opinion, with corporate America today, is that everything is thought of in quarters." ~ Henry Kravis

Like I’d mentioned in my earlier post, these are quiet testing times and one needs to be cautious. I still don’t rule out stocks as an asset class for investment. And after all I’d just commented they still remain as my favorite for this year as a major part of a portfolio to reckon. So, now what is the action: value pick and INVEST, that sums up for the mantra. Catch those taare zamein par! Though, there seems to be a lot of volatility in the market, it still doesn’t fit for trading. The catch is in staying invested. And investing in blue-chips.

The range bound market fluctuates between 5000 and 5500 (NIFTY) with resistances at both ends, with a stiff downward resistance at 4850. Yeah! now I firmly believe that most stocks are fairly valued (though a downward movement is not ruled out) and not ‘coz of the fundamentals of the individual stocks but due to the FIIs pulling plug to offset their loses elsewhere. This trend might remain for some more time with spikes at around the Reliance IPO listing and the budget time. Ofcourse, like always MF investment is the best bet and SIP is the most preferred route in these conditions.

"Only buy something that you'd be perfectly happy to hold if the market shuts down for 10years." ~ Warren Buffet

GOPI

2008-01-30T23:35:00.000+05:30

“The job of the Central Bank is to worry.” ~ Alice Rivlin.

Almost a year back the Thai central bank did a vault and our own RBI closely followed with a somersault to create hiccup in the capital markets and thus have established their presence. Though, this time around the RBI Governor has not gone for such a notoriety, has wisely put his words for the reasons for the action/inaction.

The acronym of GOPI, is a translation of Telugu phrase “GOda meeda PIlli” which means ‘cat on the wall’. The latest move by RBI in maintaining the status quo on the rates is reminiscent of the above expression.

It was clearly mentioned by Mr. Reddy that there are not much of inherent problems within the domestic markets but the global outlook doesn’t seem to be positive. While the measures are taken keeping in view of controlling the inflation at around 4.5% and maintaining the GDP growth rate at 8.5% for the year ahead till Jan ’09, he commented that the US and its policies are indicating a recession or efforts to avert such a situation. So, with this perspective in view, it’s too early for India to move either ways in determining the rates and also wanted to wait ‘n watch before jumping forward.

This disappointed many analysts who’ve anticipated a slight reduction in the interest rates. With the central government going for polls next year, the mood is currently to rule in the inflation as a higher growth rate might not win elections but surely a higher inflation can undo the power. Though, most predict a change by the coming quarter, it would be too early to take a guess any sooner. So, a there might be a long wait for all those awaiting for cheaper home loans.

The other problem at hand would be to control the excessive inflows as the US Fed reduced the interest rates and further more are likely to seen. With talk of impending recession in the US, depreciating dollar and appreciating oil prices; we are certainly in troubled times.

“Central banks don't have divine wisdom. They try to do the best analysis they can and must be prepared to stand or fall by the quality of that analysis.” ~ Mary Kay Ash.

Religare IPO

2007-10-31T15:31:00.000+05:30

Tomorrow being the last date for this IPO, here is my take on this listing. The promoters are from Ranbaxy Laboratories, which is a big name in the generic drug and pharmaceutical industry with holdings in 11 subsidiary companies.

Religare is a financial services provider targeting the retail and high net-worth individuals. The company’s operations span from the equity & derivative investments for individuals to portfolio services where the direct stock investment is done categorized upon the risk appetite to institutional broking services to investment banking.

The main objective of the funds raised through the initial offering is for the expansion of domestic operations.

The stock price is available at a 13x multiple which is quiet attractive in comparison with category stocks like India Infoline at 25x PE and Motilal Oswal nearly 25x-30x. I predict a good upward march at listing. The persistent bullish scenario might pronounce strong profits in sync with its peers like Indiabulls, etc.

ICRA rating on this IPO is 3 indicating average fundamentals. But, the growth prospects within the category seem to be high and with the low-base a CAGR of 40% is visible for the next three years in the bottom-line. The recommended lot for retail investors is 100 to 150 at the higher offer price of Rs.185

It will be a total rock ‘n roll

2007-10-15T23:32:00.000+05:30

Paul Tudor Jones II, a man with about $19 billon of short-term trading capital at his disposal, said “There will be some type of a decline, without a question, in the next 10, 20 months. And it will be earth-shaking; it will be saber-rattling” in 1986, when the US markets have witnessed a 508-point decline on Oct 19, 1987. That’s two decades and I guess this time around we can expect nothing less spectacular and would create more devastation.

Today as the markets scaled new peaks continuously setting and breaking records, many ask me on where they shall tread from here on. I’ve no idea for this one piece. There are some extreme views in the markets saying that we’re just being valued around 25 times while the Chinese stocks are hovering at times of 40. And India being the second fastest growing economy there is nothing wrong in having valuations beyond 30, allowing the Sensex to touch 25000 by year-end.

Now, that is something unheard of with no statistics and historical data to bolster the current mood excepting the only reason being furious foreign inflows. If not how would one explain the total inflows in past week have exceeded the total of a year in ’05-’06. It’s these monies from the hedge funds and some of the biggest banks which had higher exposure in sub-prime are trying to counter their losses.

The current Bull Run despite the inherent & not-so-hidden economic problems is something turning illogical and quiet dangerous. The depreciating Dollar and ever scorching crude are adding vows to the whole economic scenario. All I wish that this would not creep the world into a deeper recession and that would transform all lives upside down.

“People will be gasping.” Jones said referring to the ’87 crash. I believe this time it would be nothing less than pure suffocation.

Why is this insouciance?

2007-10-07T21:12:00.000+05:30

"The best investment on the Earth is Earth" ~ Louis Gilckman.

Stocks and stock markets rise above the existing levels over a long run. And this seems to be backed with evidence; if you take any 20 year period, Wall Street has always delivered positive real returns and not to count our Sensex. Research however, throws argument contrary to this popular belief. Take for instance, the Japanese stock markets, their popular Nikkei 225, peaked at 38,915 during the last trading day of the 1980; last week, almost 18 years later, it’s still around only 17,000; less than half of its peak. So, buying in that market during dips didn’t quiet yield; for eg. by 1994, the Nikkei had fallen to 21,000 levels – a point at which most analysts believed to be a great long-term buying opportunity.

The root of this post is out of the infinite growth of Indian & Asian stock markets over the past weeks esp. after the US Fed rate cut even ignoring the inherent housing problems as the latest gloomy statistic to emerge was a 21.5% annual fall in pending American housing sales, a figure that’s a leading indicator for actual sales. House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from “teaser” loans taken out in ’06.

The Fed’s reaction to cut the interest rates by 50 basis points has been taken as a government’s weakness by the market speculators and has given wrong signals that it always backs the losses by bail-out packages and add to this is the politicians’ attitude at announcing such schemes. Ohio’s state govt was the first to set up an explicit foreclosure rescue fund: it has promised $4.6mn to help distressed homeowners who earn up to 125% of their county’s median income. The state will put up to $3,000 towards mortgage refinancing.

Of course, I’m still bullish about the Indian operations, industry and as a success story but what is happening with our current valuations. If you observe, a significant proportion of the returns from equities came after the liberalization and re-rating of shares and investors were willing to pay a higher multiple for profits. But, re-rating can’t continue forever and how this Forward PEs can be stretched in further? If investors want a simple parallel with share prices, they need to turn only to American Housing market. Back in 2005, Bernanke (now, Fed Chairman), then an economic advisor to the President said, “We’ve never had a decline in housing prices on national basis. What I think is more likely is that house prices will slow, maybe stabilize.”

Lots of people who took the same view and were willing to borrow/lend on a vast scale on the grounds that higher housing prices would always bail them out are now counting their losses. Equity investors just have to ask the Japanese on over committing themselves on the basis of similar belief.

"Until you encounter the truth of God, everything else is speculation.”

Price of Peace ........

2007-10-03T12:06:00.000+05:30

“You get free cheese only in a rat’s trap ~ Russian saying.”

Did you ever inquire how much your paperboy makes out of his daily delivery of newspaper at your door-step or did you question your milkman on the cut he gets by distributing the milk packets? But why do people investigate on what financial products/services distributor makes through a sale and why does one ask to part his income? Does that not entitle for a bribe? Why don’t people consider it as another service they pay for and it is the charge paid for their convenience?

The answer, though, is simple it is the Indian psyche` and the attitude out of the past experience compound the whole issue. For instance, when you purchase a consumer durable or any article in a retail store, you mayn’t haggle over the price and at most instances you would just pay for the MRP, if there‘re no special discounts, offers, etc. this is ‘coz with the physical acquisition or ownership of the product comes the comfort while none of the financial instruments offer the physical acquisition though you’re deemed the owner.

Moreover, it is their usage that calls for a difference – these instruments promise certain benefits at / after certain period of time which complicates the things further. Forth presents the role of the intermediary here, educating the instruments and related financial instruments overall and in particular the suggested instrument. Interestingly, I’ve found in my limited experience that people rather believe friends/peers than expertise. I can recount numerous examples where people swayed decisions jus ‘coz their friends offered free lip-service.

Till now in this post, I’d been conditioning the reader, that’s you, on the recent views of no-load Mutual Funds. I would introduce to the various charges that encompass running in any MF, starting with the entry load – the charge which is a percentage of the investment that is used to compensate the intermediary by the Asset Management Co (AMC); exit load – a percentage charge of the fund at the time of redemption / exit of the investor from the fund; Fund Management Charges – an invisible charge which is levied for managing the investor’s fund, this is invisible ‘coz the NAV is decided taking this into account. In general, these loads/charges are competition-driven; are range bound and it is either of the entry or exit loads.

The recent SEBI proposal is not to charge the entry load for investors who would directly buy from the AMC, i.e. if you’re transacting online directly with the AMC. It is a novel idea, though one important aspect of the whole sale is missing ~ educating the customer. When the retail participation in the equity markets has just seeing an upturn and many of these companies are trying to expand the market, this move probably acts in as contrary.

Imagine, a new fund being announced or even you’re mulling to invest in a fund, how would you choose-is it just with the fund’s performance, the risk/return profile or on the advice of your friend and if so how would you know if that particular fund suits you or your needs. This surely requires the expertise and most importantly time. How many of the investors, their friends/peers possess such expertise and where is the time for acquiring such in-depth knowledge.

The need of the hour is to enhance the trust of the service providers like in the US, the regulator has to establish a public database of the qualified professionals providing such services and even their track record. This helps the investor to cross-check the credentials before gaining the confidence and for the intermediary part, they (we) have to believe that there is lot harm in mis-selling and believe that a happy customer always benefits in a longer run.

As per the investor, by not undercutting the intermediary's share one increases the responsibility and accountability of the service provider and there by gain mental peace of investing in the appropriate instrument suiting the needs.

Know to say enough !

2007-09-27T19:46:00.000+05:30

"OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February." -- Mark Twain, Pudd'nheadWilson (1894)

I’ve used this quote quiet extensively in the last 10 days, whenever I’m dodged with questions on when to invest, where to invest and even whether to invest at all? With the markets touching newer heights on end of every day’s session it has been pretty tough to advise the investors to stay invested for a medium to long term horizon i.e. at least for 2 years. It was easier earlier to convince for such timeline, unfortunately investors find it difficult to hold when the markets can grow over 7% in less than a week over a base of over 16K.

Despite its inherent risks, speculation isn't altogether unhealthy. Twain's biggest mistake was simply this: Investing more than he could afford to lose. It seems like a fairly obvious concept, but it is one that constantly gets overlooked by investors. We tend to focus so much on the riches that may await us that we refuse to consider the possibility of failure. I’ve opined my clients of the risk-return profile of the instrument that one needs to look at before investing.

Exactly how much you can afford to lose varies by individual. Some advisors say no more than 10% of your portfolio value should go toward speculative investments, but depending on your risk tolerance, that number can be higher or lower. For instance, if you're getting ready to retire, throwing 30% of your portfolio at a speculative play doesn't make much sense; however, 30% may make sense to investors in their 20s who can handle the risk and who have many working years ahead of them. This is out of the conventional wisdom but I prefer not to link with the age but rather with the surplus amounts he has. I believe that the risk appetite is borne out of the cushion one has.

Your goal in investing (besides making money) should be to enjoy it -- and not risk so much that you get discouraged by crippling losses as Twain did. That’s why I always define a goal first and then an instrument that achieves it while freezing upon the duration and the estimated (realistic) returns. It all boils down to value investing i.e. looking for growth opporutnity stocks, doing bottom-up check on each of these from fundamentals to market potential to management, etc.

So, what to look forward from here? I’ve been saying that the Sensex would touch 17500 by Diwali, in November and probably top 20K by year-end or early Jan. Now, it quiet seems possible with the US Fed rate cut and the huge influx of FII funds. But, I believe there is a correction bound to happen: could be a profit booking exercise, only to retain to these levels again. The markets however, will be range bound between 16.5K and 17K in coming weeks. This Bull Run has shown the “irrational exuberance” and 634 points of NIFTY’s 1K (63.4% in exact) being contributed by 4 stocks which are telecom, tube & pipe sectors.

Sure! There would be tougher times ahead – Twainian theory is by far very true about Ocotber month with Indian bourses which gave a highest negative return for any month cumulated in the last 17 years. So, one can’t expect such a party to continue and estimates also give cues that next year’s equity performance may lower to levels of 5-10% returns. But, hoping the global scenario at status-quo a 2 year horizon will surely yield for better returns especially the risk being petered down.

The dangers lurking under are: the rising rupee(follow this link on how the IT cos 're coping), the uncertainty in the central politics and the signs of US recession (India though is insulated to large extent, can’t quiet beat). I would end this post with another of Twain’s quotes.

"There are two times in a man's life when he should not speculate: when he can't afford it and when he can." - Mark Twain.

What Nxt???

2007-08-01T19:16:00.000+05:30

"When buying and selling are controlled by legislation, the first thing to be bought and sold are legislators." P. J. O'Rourke

After Freaky Friday, Marauding Monday, Tuesday Tremors and now Watershed Wednesday I guess we’re running out of words to describe how the markets have been creating bloodshed. With over 4% decline, Sensex witnessed its third biggest fall in its history. Nifty also followed a similar pattern.

What is the cause for such a sharp decline after 3% climb just the previous day? Global cues, esp from the US were not really encouraging and markets continued to fall with a 1-1.5% range overnight. Then the rising crude oil prices, shift in investor interest from equities to bonds, interest hike fears and US sub-prime woes. You might be hearing a lot about this subprime lending in the US. It’s a loan made to someone who couldn’t qualify for a more favorable rate. It’s also called “B-Paper”, “near-prime” or “second chance” lending, that refers to the practice of making loans to borrowers who don’t qualify for market interest rates because of problems with their credit history. These are associated with high risks.

In March 2007, the US’ subprime mortgage industry collapsed due to higher than expected home foreclosure rates, with more than 25 subprime lenders declaring bankruptcy. The stock of New Century Financial, the country’s largest supprime lender plunged 88% and attracted investigations by the US Justice Dept that lead to the filing for Chapter 11 of bankruptcy. The woes continued as the year progressed and by June, one of the largest hedge funds was in trouble for backing up with bad bets on subprime mortgages. Latest weak data released last week has affected the US markets as some of the largest banks will also be affected with this melt down.

So, how is this related to our markets? Investors remain worried about credit getting tighter because of the faltering housing market. On Tuesday, a housing index released by S&P showed that the US house prices reached steepest in 16 years with a fifth consecutive month fall. So, this may lead to a massive pull out of liquidity in the market. As you know, markets work on sentiments; it has lead for a down trend. On the NYMEX (New York Metal Exchange) crude breached $78 per barrel with news of fresh bout of violence in Nigeria.

What is in store for the future? There is no negative data coming out of EMs as of now and India especially remains good. There would be a 4-5% further correction on a broad range which means that there could be 4% in some places and 15% at some places. But, on medium term, EMs have a positive score. This mayn’t be the end of bull rally completely. Sure! A breather, a deep breathe. The liquidity mayn’t completely dry up but the price of liquidity and the price of risk rise. True! There aren’t any fundamental triggers, bad company earnings or bad data release emerging out of the Indian scenario.

This is the time for value hunting! I guess this correction brings us to normalcy. It doesn’t again mean all buy or all sell but a value picking is required. There are pockets of investment waiting. Trends now fail, sector allocation may not yield but stock selection remains important. And of course, there are other asset classes & commodities to gain advantage. Keep watching this space!!!

"Honey is Sweet but Bees Sting"- French Proverb.

The emergence of Indian FII

2007-07-30T19:49:00.000+05:30

Global funds have currently become a fad in the MF industry with a slew of launches by almost all the AMCs started with Fidelity. So, what are these global funds are? Recently I’ve attended a seminar conducted by an AMC on the eve of the launch of their global fund.

To bring in variety and interest in the investor minds, they have started launching these funds. But, with the increased competition and to create a perceived differentiation, a variation is being brought out in the funds. Whatever their talk about the variation is, the basis of these funds is to gain advantage of the global funds.

Now, as we witness/continue to witness an accelerated GDP and stock market growth in Indian scenario why look at any other markets? Are we really missing any opportunity? For most of us, talking about growth relates to India and/or China. A few more recognize it as BRIC (with Brazil & Russia as extensions). Are there any other countries that are either at same pace of growth or outpacing these?

For the facts sake: Russia, Turkey, Egypt, Hungary, Columbia and a few eastern European countries have outperformed the big brothers India, China, Brazil, etc in terms of % increase in GDP. The markets here have outperformed most of the other emerging and developed markets. And now you may become a Foreign Institutional Investor in another country by investing in these MFs.

Empirical data over the past shows that share of emerging markets (EM) in world GDP is now 27% as compared to 20% six years ago and the share of EM in world Market Capitalization (m-cap) is at 18%. India only accounts for 1.7% of the world m-cap. While the PE ratios are 18.3, 13.7 and 15.6 resp for Indian, EM and world markets; throws open the EM for exploration. Moreover, EM are growing at 3.6% per annum faster than that of developed world since ’99. With a higher weightage of 19.5% for IT in Indian markets there is an opportunity lying with 13.5 and 10.6 at the EM and world markets respectively.

Another interesting fact is the comparison between Nifty and EM during various phases:
Phase - Duration - Difference of EM over Nifty
Bull - Sep’02-May’07 - 20%
Bear - May’00-Aug’02 - 55%
Mixed - Dec’96-Apr’00 - 35%
Total avg - Dec’95-May’07 - 32%

So, by not investing out of Indian markets lies a potential opportunity loss for the investors. Now, let us see how these funds work? These are mostly fund of funds some with multi-national/multi-fund/multi-manager/multi-asset class. To make things simple: these funds don’t directly get exposed to the equity or asset class but invest in funds that trade in these asset classes (like commodities, stock, real estate, etc.)

This will help you to diversify the risk into various countries across different asset classes helping you to gain advantage of generating higher returns. Thus, the fund is expected to generate returns even when one particular asset class is not performing across countries or if one particular region/country has underperformed.

Now, the question arises: For whom is this targeted at? Ideally, it’s not for every retail investor. Not that everyone is allowed to take advantage of! But, it is suited for investors who’ve long invested in Indian MF and are looking to diversify their risks to gain better returns. Though, the whole concept seems to be enticing, these come with more than the usual warnings. Firstly, you’re exposed to some of the completely unknown markets and they could be unstable despite the recent bumper performances. Second, the performance is again dependent largely on the foreign funds that these invest at and their management. Third, the risk is dependent upon the asset allocation and the asset class one is exposed to.

Whatever is the analysis for these funds, it still sounds quiet good when you can say that you’re into Russian realty, Brazilian commodities and Chinese stocks. For now the flavor of the market remains the global funds and everyone clamors to take advantage of the opportunities in the EM to become a global investor.

Deciphering the MF code

2007-07-30T10:54:00.000+05:30

"All progress is based upon a universal, innate desire on the part of every organism to live beyond its income" - Samuel Butler.

My earlier post discussed about how one should build the MF portfolio, in this post, I would try attempt on what type of funds it should constitute viz. growth, dividend payout or dividend re-invest. So, how is each one different from one another and why/when one should opt?

Mutual funds generally provide their investors an option to invest their money either in a growth scheme or a dividend scheme. Dividend schemes are further classified as dividend payout and dividend reinvestment schemes. However, investing in dividend schemes does not imply that the mutual fund would distribute its share of profit as dividends. Getting a share of the profit has always been the privilege of shareholders. In case of mutual funds, those investing in the units are mere buyers of a financial product sold by the fund house. Investors gain only if the value of the stocks held by the fund appreciates over a period of time.

Since mutual fund dividend is nothing but the part payment of the investor’s money back to him, its NAV deflates to the same extent as and when the fund pays dividend. That is the reason why the NAV of the dividend scheme is always lower compared with the NAV of the growth scheme of the same fund.

For instance, you have invested Rs 10,000 in a fund where a unit of face value Rs 10 is currently quoting at a NAV of Rs 40. This would give you 250 units in the fund. Let’s say in six months, the NAV becomes Rs 50 and your investment is now worth Rs 12,500. Now, if the fund declares a dividend of 20% on face value, you would end up getting Rs 500 (250 units * Rs 2) as dividend. But post-dividend, the NAV will decline proportionately to Rs 48/- per unit. If you sell all your units now, you will receive Rs 12,000 (250 units * Rs 48). Thus, the total return in your hands would add up to same sum of Rs 12,500/- (Rs 12,000 + Rs 500).

While in the re-invest option the fund does not repay the dividend to investors. Instead, the dividend is used to purchase additional units of the fund at the NAV arrived at after the declaration of dividend. To continue with the above example, the NAV of the fund declines to Rs 48 post-dividend. However, since you have opted for reinvestment of dividend, the dividend amount of Rs 500/- shall be used by the fund to allocate additional 10.42 units (Rs 500 divided by Rs 48) to you. The total number of units that you would now have would be 260.42 (250 units+10.42 units). Redemption of these units at the revised NAV of Rs 48/- would again end up giving the same returns of Rs 12,500 (260.42 units * Rs 48).

In growth option, the earnings are ploughed back into the fund rather than distributing it to the investors. You can encash the profits only at the time of redemption. Unlike the dividend reinvestment option, the number of units will also remain constant throughout the period of investment. However, the NAV of the fund would always be higher vis-à-vis the other two options, thereby ensuring that you get the same returns as your peers from the other two options. In this example, as the NAV went up from Rs 40 to Rs 50 per unit, you would get Rs 12,500 (250 units * Rs 50) if redeemed at this price, thereby booking a profit of Rs 2,500. If you stay invested, the NAV would either increase or decrease from the level of Rs 50/-.

So, then when should one opt for which option? The answer is simple. If you are sitting on idle cash and looking for a long-term investment option, then go for a growth scheme. But if you are looking for a steady cash flow and cannot afford to tie up your money for long, dividend payout is the one to opt for.

It has been proven empirically that in the long run, markets don’t disappoint despite the fluctuations in the short run. This, however, is for investors who are willing to stay invested for at least five years.

However, if you are looking for a steady cash flow and cannot afford to tie up your money for a long time, the dividend payout is the one to opt for. Just remember though that declaring dividends is always the prerogative of the fund house and investment in mutual funds does not carry a guarantee card for periodic dividends.

As far as the tax part, dividends are tax-free and mostly annual. There is no capital gains when redeemed after one year of invetment, even in a growth scheme.

On road to MF Portfolio

2007-07-26T15:52:00.000+05:30

"Wealth is but dung, useful only when spread" - Chinese saying.

Following the series on financial planning and investments, I would address the issue of building up a portfolio on MF and also in making a choice. In my earlier post - intricacies of MF, I tried demystify the complexity of Mutual funds but didn’t really guide on zeroing on a fund excepting giving a direction of having a goal. This post helps one to fix up that issue and build a portfolio MF.

Like I’d earlier said it boils down to having a goal. Now, let me decipher a bit on this issue. One should always devote enough time to freeze up on what one wants. The goal should be realistic i.e. neither too optimistic nor pessimistic. If you observe, every MF has a pre-defined objective. This forms the basis of the fund. It’s like the philosophy of the fund, the dream/vision/goal, etc of the fund manager. So, the investments made and the assets managed under the particular fund are always in tandem with this objective.

Along while, one has to also decide on how much risk s/he is willing to take. One needn’t be too ambitious and undergo undue risks. The risk appetite must be in line with the current financial situation and not on the need alone. Recently, I was discussing with one of my clients regarding the Hedge funds and he was ready to pounce upon it. I stymied his unwarranted interest in going for the same as it didn’t suit his profile.

I always believed that the most emotional part of life always is money and the irony is that you need to be very rational in dealing with it. As you decide upon the goal and the risk appetite match which of the available funds suffice the bill. This might make you have different funds for different goals/needs. That’s the best part of the deal.

As the old adage goes, “Don’t put all the eggs in the same basket”. Diversification is the key. But, one has to be careful to not to have concentrated or over-diversified funds. The corpus can to be diversified into 4-7 equity-oriented funds while 3-4 debt and balanced funds. Study the portfolio mix of each fund to ensure they’re different. If not, the desired diversification is not achieved even with 6-7 funds.

You may build portfolio within the funds i.e. index funds, large/mid/small-cap funds, sector funds, etc. These will help in diversifying your corpus that give different returns - index/large caps give a steady flow of returns while mid/sector funds have the potential to rake in large returns. The percentage allocation however, would be different to the individual. But, these form the broad guidelines for building up a portfolio.

One more important aspect that can’t be neglected is the tax. Make sure your goal/target amounts are post-tax and calculate the investment returns accordingly, lest you miss the goals. Hence, choosing the right option – dividend payout, dividend reinvestment or growth helps you.

Rome was never built in a day. As you chart out and start investing according to the plan, be patient and also be vigilant. You’ll need to nurture it with regular inflows, sometimes additional funds to help you reach goals. Always avail the help of a qualified professional to help you plan, guide and execute the defined goals.

Retiring isn't about Re-Tiring !!!

2007-07-23T13:23:00.000+05:30

“When I was looking for solutions, I discovered the problems…!” - Anon.

I’ve been in the financial services for over three years and directly involved with personal financial planning. One thing that struck me most is the lack of planning by most individuals for retirement. Fortunately/unfortunately, over 90% my interactions were with the age group of 22 to 30 and my very mention of retirement spills them to laughs. Worse, is the situation, as I fall into that very group!

I generally, advise most of our generation to look to their dads in this one respect. I always like to take cues from my dad on personal finances - the way he planned, managed and succeeded. I envy at his foresight and the provisioning for various eventualities. There seems to be an existing plan for every of his need, wish or event. He somehow had provisioned for such a wayward son’s (that’s me) unexplained excesses. I’d always been an extravagant and impulsive at expenditures. This might be the majority report with our generation - blame the capitalists.

My dad is at least 6 years from retiring but I’m amazed at the visualization he shares with me about his retired life. There is a complete plan of events (of course, some disturbing ones like involving my kids, etc) and how he’d accommodated them in his visions. He works for the Government and so avails a fixed pension (not many of us are as lucky), though it alone mayn’t really suffice for his planned lifestyle. Tell me how many of us have really planned for the retirement? In this post, I would like to bring in the various financial instruments available and the various modes in achieving the same.

First ‘n foremost, one needs to have a goal of the kind of retired life he/she wants to enjoy. It might be something similar to what my dad had or quiet different with extremes varying like leading a peaceful life at a secluded environs to a jet-setting whirl tour around the world. Whatever may the dream is it’s all about money, honey! Retirement fund can be either a lump-sum amount/asset/source which gives an amount at intervals or various sources which can replace the constant inflows.

Ones you set a goal. Check what it costs to avail that on today’s date. Count how many years are you away from the retirement and Calculate what these costs would be at that year assuming an inflationary rate (approx 5% per annum). This is no rocket science and most of us are aware. The trickier part comes on how you arrive to the planned sum? You’ll need to save/invest on a periodic basis to achieve the corpus or make an arrangement such that receipts of those investments come in hand at the required periods. Now, that seems quiet proportionate, a planning involving much inputs than the life lived so far.

The various modes:

To reach the planned corpus, invest an amount at regular intervals (say monthly) which would give a certain return. This is a typical pension/annuity plan, Provident Fund. One may increase the investing amounts at a rate per year.
One may also look at an insurance policy which matures to a required amount that could be consumed for the purpose or part/whole of it could buy you a annuity which gives out a regular income.
Another variant of the above idea is to have multiple insurance policies maturing at consecutive years giving out lump-sums every year.
Procure assets like house/commercial properties which yield monthly income on regular basis through rentals.
Gain a portfolio of mutual funds/equity stock which would continually provide income through bonuses. This may be a source of secondary inflows as they constitute irregularity in both incomes and intervals.
Probably the best option however, remains is either one inherits a windfall of ancestral property or win a lottery.

Baring the last option, the others are quiet achievable. But, none of them can be a stand-alone options. It should be a mix of most options noted. And once again, never underestimate the power of compounding - start early, small but habit it for a long time and enjoy the fruits in abundance.

Another mistake I've seen people commit is to withdraw the EPF instead to transfer when shifting organizations and investing in a pension plan only to the limits specified for the tax obligation. Both habits tend to tread dangerous as they comprise the long-term savings and should not be vested in between.

One more important aspect one has to consider while planning for retirement is the allocation of corpus/provision for medical expenses. If we were to believe the reports; the average life expectancy of Indians is rising and increased life-span also calls for increased medical attention. With the inflating health-care costs one has to have more than a realistic outlook towards this provision.

All said and done, one has to be little selfish in planning the retirement. In life, we are always taken easily for the short-term benefits and hence one finds insurance & retirement planning as one of the least priorities in Indian psyche. But, if one is looking forward to continue a pleasant life and a lifestyle equal/better than the exisisting one into their twilight years, one has to plan from the prime age. After all, Retirement isn't about 're-tiring'.

To Buy or Not to Buy???

2007-07-13T11:15:00.000+05:30

“Fools build houses and wise men buy them.” - An English Proverb.

I’ve heard some of my friends saying that they would go for a housing loan so that their tax obligation is met. I always wondered at that idea. And my recent experience with building a house has been quiet interesting. When my mom had proposed to have a new house, all of our family was excited and a beautiful duplex-house turned up in a little over a year’s time. Our luxury to extend the budgets have soared the total cost by almost 100%. For obvious reasons, I would rather not tell the total cost and it continues to attract investments for refurbishments and embezzlements. It kind of left me with a learning experiencing on buying/building a house.

Thumb Rule
If you’re staying in a rented house, you could be paying a substantial amount as rent, depending on the location. However, if you buy a house by taking a loan, in certain cases, the total repayments on loan may exceed the actual value of the house.

Let’s take the case of Nikhil, who’s vascillating on whether to rent or buy a house worth Rs 25 lakh. Nikhil’s gross annual income is Rs 4 lakh. According to a recent HDFC report, on an average, individuals are taking loans worth five times their gross annual income. Accordingly, Nikhil takes a home loan of Rs 20 lakh @ 12.25% per annum for 15 years, and pays the remaining Rs 5 lakh from his savings. Nikhil’s gross monthly income is Rs 33,333, while his net monthly income may be Rs 30,000. His home loan EMI comes to Rs 24,326. So, Nikhil has to pay almost 81% of his net monthly income as EMI! Hence, taking a home loan is not feasible for him.

Now, suppose Nikhil takes a house on rent. The average annual rental rules at 4-5% of the property’s value. So, Nikhil pays Rs 1.25 lakh as annual rent, or Rs 10,417 as monthly rent, which is only 35% of his net monthly income. Here, renting a house works out cheaper than buying it.

So, is there a thumb rule to figure out till what level you should stretch yourself while paying rent or EMIs? Broadly speaking, your EMI should not exceed 30-50% of your net monthly disposable income. 50% is the upper limit, though the ideal figure is 40%,” he says. The exact percentage depends on your age profile. When you’re young, the EMI can go up to 50% of your net disposable monthly income. As you grow older and your liabilities rise, you should cut down your EMI to 40%.

Strategies

Before firming up a strategy to rent or buy a house, figure out how long you expect to stay in a particular locality. “If you have a long-term horizon, buying a house makes sense. But if your horizon is short term, go for the rent option,” says Apnaloan.com CEO Harsh Roongta. According to Mr Anuj Puri, chairman & country head, Jones Lang Lasalle Meghraj (a real estate consultancy), “The affordability of both rental and purchased property is location and project-specific.” For instance, someone in Mumbai who can afford to buy a home in Vashi, may not even be able to afford the rentals at Napean Sea Road.

It’s better to do a cost benefit analysis before buying a house,” says Mr Tilotia. An analysis by PARK Financial Advisors reveals it’s better to buy a house in the first year itself, rather than to pay rent for the first few years and then buy a house, since the total value of financial assets created is higher in the first case. Rental yields are currently low, at 4-5% of a property’s value. But if you’re paying rent as high as 10-11%, the rental option is not feasible — it’s better to buy a house instead.

Mr Roongta has a simple strategy for new home loan takers: “Borrow as low as possible and only as much as your savings will allow; make as much down-payment on your home loan as possible.” To avoid getting into a debt trap, Mr Puri feels that “borrowers should stretch themselves only to the extent that they realistically foresee their financial position improving in a given time frame.”

Some individuals take a higher home loan if they expect additional cash inflows in future. But Mr Puri feels home loans should never be based on anticipated windfalls, but on realistic factors such as scheduled salary hikes, maturing of insurance policies and investments. If you’re anticipating a salary hike, take a step-up home loan, i.e. pay a lower EMI initially and step up repayment of your loan in proportion to the percentage increase in income.

However, you should have a buffer if you’re taking a stepped-up loan, says Mr Tilotia. For example, if your salary is likely to rise by 15% p.a., your EMI should not rise by the same percentage — it can rise by say, 10%, so you have a buffer of 5%. You can even use additional cash inflows to prepay part of your loan. “Other strategies are: opt for home loan insurance and take advantage of tax benefits,” adds Mr Tilotia.

EMI Loop
A recent article has highlighted on how the spiraling interest rates have affected the home loan EMIs. With the increase in floating rates there are instances of increased EMI outflow or increase in the tenure of the loan repayment. With the maximum repayment period restricted to 25 years, most banks had no choice except for a pre-payment amount or increase in the EMI. Such a situation puts high pressure on the unplanned monthly outflows.

Tax Benefits
Interest on home loan is exempt from tax up to Rs 1.5 lakh p.a. under Section 24 (b) of the I-T Act. The interest component of a loan is higher during the initial years; so you can claim a larger amount as tax benefit. On the other hand, if you rent a house, three criteria are considered for tax benefits under Section 10 (13A): house rent allowance (HRA) actually received per annum; rent paid in excess of 10% of annual salary; or 50% of annual salary (in metros)/40% of annual salary (for other cities). The least amount among the above three criteria is exempt from tax. So, you can claim a higher tax benefit if you pay high rent.

According to a tax expert, if you want to get the best of both worlds, you can buy a house and then rent it out to someone else. This rent is part of your total income, which is tax-exempt up to Rs 1 lakh (for men) or Rs 1.35 lakh (for women). You can also claim tax benefits on the interest component of your home loan.

Final Verdict
All said and done, whether you buy a house or stay on rent is your personal choice. Financial and non-financial factors need to be considered while determining the feasibility of both these options. “It’s ultimately a trade-off between capital appreciation and flexibility. If you want to start building assets, buy a house. If you want flexibility, rent a house,”

Mr Puri feels that for a committed first-time buyer of a home for residential purposes, the right time to buy is always now. The wait-and-watch policy is only valid if there are informed reasons for anticipating a correction in property prices in a certain locality. “Ideally, buying a home should be your ‘final’ objective; it’s the ultimate investment option. However, until financial circumstances are favourable, and this coincides with the availability of a suitable property, a rental is a perfectly valid interim plan,” says Mr Puri. And that’s the ultimate home truth!

The intricacies of MFs

2007-07-12T21:50:00.000+05:30

With the rising markets, many of my friends wanted to jump into the bandwagon of investing in stocks. They even came up saying that they are ready to invest in particular Mutual Fund as it is best way to diversify risk and gain returns at the same time. And they are almost always clueless when I ask them the reason for investing other than for the returns.

You must have seen/heard, “Mutual Fund (MF) investments are subject to market risks. Please read the offer document before investing.” And how many of us really understand the inherent risks. How does one define a risk, risk appetite and how does it vary with an individual? Sure! MFs could be one of the best ways to get exposed to equity markets. They offer flexibility in investments, expertise, risk distribution, tax benefits, good returns, etc. But, how do you choose a fund?

On most occasions I hear people rattling names of the fund houses. They either hear from others or read about it somewhere. Many fail to understand is that there are 32 AMCs (Asset Management Companies i.e. fund houses) and each fund house has a number of funds and all of them total to over 750. Now, that’s an incredible choice. Add to this, you notice there are always at the least, 4-6 funds being launched every month.

Now that’s chaos. What most don’t realize is that the best performing fund from a fund house also may have a worst performing one. So, how can one arrive at the choice? One has to first understand what MF is? Simply put, it is a collection (mutual) of money (fund) from various investors. Imagine, buying 100 stocks of Rs.1000 each. That would require an amount of Rs.100000, which is quiet an investment. But, for 100 investors it amounts to just Rs.1000 per individual. Hence, large numbers of investors join hands to wrestle in the market with more investment muscle. That’s mutual fund for you.

So, why is a MF preferred over retail investment? The answer is simple, In case the investor is interested in gains through appreciation in the market price of the scrip in which investment has been made, direct investment in the stock market is indicated, but, in case the investor is interested in high dividend income more than appreciation in the investment made, investment through mutual funds is superior. In both cases, however, investment will move up or down as the stock markets rises or fall.

Another myth remains over the NAV. AMFI (Association of Mutual Funds in India) has done a great deal of work in bringing order. This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.

First of all what is a NAV? Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’. In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it is Rs 10 or Rs.100. There is no such thing as a higher or lower price. We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.

Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.

A wise investor should be a long-term investor in both mutual funds and in direct investment in the stock market. Both forms of investments need expertise and guidance, but direct investment in the stock market requires greater expertise, up-to-date knowledge and long expertise of dabbling in the market. Those investors, who do not have this kind of expertise, should prefer to move into the stock market through mutual funds. Even in selecting the mutual funds and a mutual fund scheme in which investment is being made needs expert guidance.

So, before freezing upon a choice, one has to follow the age old method of defining a goal and see which of the funds fits it. This remains the golden rule.

Performance holds key...........

2007-05-08T18:09:00.000+05:30

It’s said that life teaches lessons for those willing, only for those willing to learn. Though, I’m not averse to marketing with team India, my take now is only due to the pungent criticism they received for their debacle in the WC and the board’s insensitive steps in bringing things to order. Now, with the Bangla tour in the offing, marketers have queued up to get their pie, this time of course, with little brains worked out.

After accusing and counter-accusing the parties involved in the ad-deals during the ICC Cricket WC over the loses due to early exit by India in the tournament, the sponsors are now applying differential pricing for the first time with advertisers also building in performance-linked clauses in contracts with players. Going by advertising rates that are mostly TRP-led, media professionals say that sports broadcasters such as Neo Sports and ESPNSTAR, could likely charge a premium if the Indian team performs well.

In bilateral series, the pricing will depend on India’s performance in the first few matches, while in multi-nation tournaments the rates will be based on Indian’s presence in key matches. The rates could swing by 20%-25% depending on the team’s performance. Despite, the dismal performance and the subsequent criticism the advertisers mayn’t yet give up on men in blue.

While there is no dramatic drop in the spot rates which are hovering around 1.2lakh for 10 sec. for the England tour in June, analysts believe that heavy spenders like soft drink majors and consumer durables will surface. Another advantage ESPN has is that the matches being slated during the prime time, which begin at 3:30 – 4 pm. Shashi Kalathil, CEO of Neo Sports says that advertisers’ interest doesn’t seem to have waned out. While World Cup advertisers have stayed away, other clients have shown interest with the same gusto. The expected total revenues for this series would be around Rs.40-50Cr.

So, for now life goes on, goes on teaching lessons. It’s up to the individuals to pick lessons. Performance holds the key for team India and like I’ve quoted in my earlier posts its just couple of more wins and the cricketers take the stage of gods, again. But, for every reason this is a welcome sign.

A Positve move by RBI

2007-04-25T11:02:00.000+05:30

For the first time in months, I couldn’t stop but appreciate the measures taken by the RBI in the much awaited ‘Annual Statement for 2007-08’. From his earlier moves of stifling the rampant growth of the economy, Dr.Y V Reddy has given growth a chance taming inflation simultaneously.

RBI made it a lot easier for the small businessmen to cover currency risk, encouraging individuals to invest up to $100000 a year overseas, and allowed airline companies and users, producers of non-ferrous metals to hedge their price risks in international commodity exchanges. All this with virtual stagnation in the interest rates (risk weight on housing loans of up to Rs20lakh cut to 50% from 75%). The other important indicator is the aggressive inflation target of 4-4.5% with GDP growth forecast pegged at 8.5%.

So, by relaxing various investment patterns for the individuals and organizations, the central bank might be able to suck out the additional money in the economy as growth drivers. Look at this: companies are now allowed to prepay ECBs up to $400mn along with the increase in investment cap for listed cos to 35% of the net worth. The corporate investment limit to float a subsidiary abroad has been raised from 200% to 300% of the net worth, while mutual funds can now invest $4bn in foreign markets, up from $3bn.

This measure is unlikely to increase the dollar demand as international experience points out that a permissive currency regime improves inflow more than outflow since foreign investors feel it would be easier to pull out.

Despite the continuous appreciation of rupee, RBI has taken no new steps in the exchange rate policy. This is in tandem to my earlier post on how the appreciating rupee is helping in control of the inflation. These measures are a positive sign and the confidence of the Central Bank over the chugging economy.

Inflationary Measures !!!

2007-04-18T21:43:00.002+05:30

I couldn't keep myself off from the inflation topic. I think it has figured probably the most number of times on both of my blogs. So, after every expert on Earth disected and discussed the steps taken up by the Central Bank to reign in inflation, an unsual happening came as a respite to contain it.

I was critical even in my last post of the ways the RBI is handling the inflation issue. India's central bank appears to have stepped out of the way of a rising rupee, after buying almost $20 billion in four months trying to cap it, and is instead using the currency's strength to help fight inflation.

Its the rising rupee, a nine-year high, became the savior for the RBI in its fight against inflation. A stronger rupee would ease inflation as it brings downthe cost of imports - paritcularly crude oil. Indians will also not feel the global rise in gold prices as most of increase will be offset by a cheaper dollar. For individuals, the weaker dollar means cheaperforeign holidays and the possibility of a fall in prices of imported electronics.

RBI had kept the rupee in a broad range of 43-47 per dollar for the past three years by intervening whenever it neared those limits on worries about a widening trade deficit and fearing a sudden destabilising reversal of capital inflows. When RBI sold rupees for dollars, it added funds to the local banking system fuelling rampant credit and money supply which it tried to rein in with interest rate hikes.

But these measures created short-term cash shortages, whcih banks overcame by selling dollarsto raise rupees-adding to the pressure for the currency to rise. And with foriegn investorsbuying rupee to invest in the fast-growing economy compounded this problem. The cap on externalcommercial borrowings (ECBs) at $22 billion per financial yearcould reduce capital inflows without hurting portfolio or FDI flows.

The government says it needs infrastructure investment of $350 billion over the next few yearsto build better roads and ports and to overcome growth-stunting supply bottlenecks. So, any move like I've noted in my earlier post should be very cautious and not hurt the budding economy.

Central Banks – their tricky thinking

2007-04-12T14:59:00.000+05:30

The role of most central banks has gone into a tremendous change from just tweaking the Keynesian formula to a more understanding and futuristic oriented one. The recent decisions taken by the RBI, somehow has not shown those signs. In its bogged down view of containing the inflation, it reverted to adjusting the interest rates by hiking the CRR and Repo rates, which hasn’t yet translated to the expected results, in almost a year. Interestingly, historical data for money supply and inflation for India from April 2002 to March 2005 indicate a negative correlation between these two variables.

Now, ofcourse, there is every chance of the inflation figures toning down as a result of higher base point and not completely because of the measures taken. But, there has been a continuous damage to the robust economic growth, though unintentional. In its latest slew of measures it has circulated a draft within the banking circles, a new capital rule. According to the draft note the banking sector may be required to raise at least Rs.25000Cr from the stock and bond markets to fulfill the proposed capital condition. It could also slowdown the fierce loan growth since most banks will be left with lesser resources to finance companies.

The key change indicated by RBI involves a significant increase in risk weightage on a big chunk of unrated loans in banks’ books. Current rules say that for every Rs.100 loan a bank gives, it must have a capital of at least Rs.9; this means a risk weightage of 100%. As against this, the note has proposed a weightage of 150%, which would mean a capital of Rs.13.5 for every Rs.100 loan.

The proposal would affect as much as 30% of the total loan outstandings of banking industry. Besides, there are tricky operational issues. Loans, unlike bonds and other debt instruments are unrated. This would apply for all unrated loans above Rs.10Cr. If it comes into effect this year, the market could be inundated with follow-on equity offerings by banks. This might push the already higher loan rates up. And loans to the SMEs which are growing fast would be the hardest hit since these loans are in the range of Rs.10-30Cr and SMERA-SME Rating Agency which rates the SME segment is not recognized by RBI.

So, the proposals and directives the Central Bank takes should help for the greater development and not stunt the existing growth. In news recently, is a visit by the Chinese economic team to India, to discuss and understand various institutions here, should help us to gain some inputs on how Chinese managed to contain the over-heated economy.

Sizing SEZs

2007-04-06T17:01:00.000+05:30

The brave protests and sacrifice by the people of Nandigram against the state along with propaganda by media and numerous blogs have made government to put in brains in the SEZ policy. The new policy which overhauls the existing one, if at all was there, lifts freeze on 83 new projects.

The new policy makes room for certain welcoming decisions like providing employment for at least one member of the displaced family in the project in addition to the compensation paid. No SEZ would be allowed beyond 5000 hectares of land. Most importantly neither states will not acquire land for industry nor will form joint venture with private developers to offer the project. States, however, can acquire land to develop SEZ provided they stick to the new relief and rehabilitation package. States would be empowered to reduce the size of SEZs below the 5000 limit.

But the larger question still hangs on whether India requires SEZs in the same number. The latest move by the central government has created hurdles for mega projects by Reliance, DLF, etc which have proposed to the tune of 10000 hectares of land area of which most of land has not yet been acquired.

The other two news items I couldn’t control my intense reaction were the inflation and individual health. With elections looming in UP, central government turning no stone unturned to reign in inflation. The new step they’ve taken is to restrict the ECB (External Credit Borrowing) by the corporations to a cap of $22 billion. The cheaper funds raised abroad are used to pay back loans taken at higher rates in the domestic markets thanks to the rate arbitrage. But with the cost of borrowing raised significantly due to the interest hike, it is to be seen how it would affect the economic growth as capital requirements are huge in the current scenario.

And the other is a price of economic prosperity India is enjoying. It is hard to see a report that says that more than 35000 women die due to breast cancer every year which is 50% of the total cases which are consulted at the advanced stages. This was the third big disease two years ago turning to be the first important cause of deaths. The simple and a most amicable solution the report sites is to get married and have children as there is a higher risk of having a breast cancer for mothers beyond age 35.

Do you think being lean and slim makes you free of diabetes? Recent research shows that there is an internal fat that is decomposed over the organs like liver, etc which puts a strong case for the incidence of diabetes in the later stages of life? The simple solution is to have a regular exercise to one’s body.

Its 'Dear' Money, Honey !!!

2007-03-31T12:18:00.000+05:30

“For I don’t care too much for money. For money can’t buy me love.” – The Beatles.

RBI in its latest move has increased the repo rate by 25 basis points raising the rate to 7.75%. With foreign fund inflow expected to surge and the government about to step up spending at a time when inflation fears continue to haunt, the RBI has planned to suck in the extra liquidity by making it more dearly.

The move however might benefit in cooling off the already over-heated property market. The main fuel of this is the housing loans, funded by the banks. This creates the automobile loans to be dearer and unaffordable. This might percolate negative spirals below the line into the other businesses as well. There is every chance of banks profitability being hit. This will also increase in the India Inc.’s overseas borrowing. The earnings of cement, automobile, realty and steel companies might take a hit due to slowing of housing. This might also discourage spending and may lead to more encouraging in the savings.

But, the effectiveness of monetary policy adjustments in this context is still questionable. RBI also has hinted the phased increase in the CRR over the next few months. I remember mentioning about the same in my earlier post @ http://narenspace.blogspot.com/2007/02/inflating-dilemma.html

The other thing one has to take into consideration is the hot demand being witness currently. Interest rates on bulk deposits surged to a high of 17% as banks rushed to meet targets. Despite third in the series of tightening measures by RBI in the past four months, the year-on-year credit growth was 29%. And the latest CRR hike has dashed all hopes of any immediate easing of rates.

Most of these measures are highly perceived to be the government’s influence as it is facing an election in UP with setbacks on the OBC front and coupled with the inflation might dent the ruling party’s chances. So, its not all economics but politics too…..

On a Stronger Wicket .......

2007-03-29T07:34:00.000+05:30

The gains due to the Team India’s loss at the Cricket WC are turning out to be innumerable. After a report suggesting the increased productivity of man-hours of the Indians, it’s now the turn of the gains due to control of resource usage. The major cities in the country are breathing a sigh of relief at the beginning of the summer as peak-hour electricity demand has shown a significant drop after India failed to qualify for the second round.
In Mumbai, which has around 3.5mn electricity consumers, television usage, along with lights, fans and air-conditioners, would have accounted for an additional 200 mw if citizens were watching cricket during the peak hours of 6-10 pm. After India’s defeat, the city has shown a remarkable drop in the consumption pattern.

While watching cricket, consumers also switch on additional equipment pushing up electricity consumption. Second, most hotels arrange for special screening of the India matches. As the world coup matches and pre-match shows o TV start during evening hours, cricket fans used to be glued to their television sets, leading to a sudden spike in electricity use.

Meanwhile, power utilities in Mumbai – Tata Power, Reliance Energy, BEST and the Maharashtra Electricity Regulatory Commission have launched a joint campaign to reduce consumption with a six-member energy conservation committee. As part of the campaign, they have put up hoarding and launched a media campaign to enlighten consumers. That makes it India stand on a strong wicket and not Team India.

Credit Squeeze - effect on the Indian Capital Markets

2007-03-28T10:36:00.000+05:30

Inflationary pressures and rising interest rates have started taking their toll on the Indian capital markets. Though emerging markets as a whole have been underperforming for the past three months, the fall in the Indian markets has been four times that of other emerging markets. Since January 2007, while the Morgan Stanley Capital Index (MSCI) for emerging markets has fallen by 2.4%, Indian markets have fallen by 9.2%.

According to MSCI data, while markets in Malaysia and China have risen by 10.1% and 7% resp, Brazil and Russia have fallen by 3% and 7% resp. Capital markets in Mexico and South Korea have remained at the same levels. “The biggest difference between India and other emerging markets is the current liquidity position. With the hardening of interest rates and a slowdown in government spending, short-term money has become a scarce resource. This is manifesting itself in the difference in the fall in market rates.”

Direct and indirect tax collections have also squeezed a lot of money out of the markets, leading to further tightening of money supply. Though inflation has come down from its two-year high of 6.76%, it continues to hover around the 6.45% mark. With the recent rally in the Sensex, some say the valuations of most companies have reached unsustainable levels and the correction in the capital markets was waiting to happen.

“The Indian markets had witnessed stronger run-up compared to other emerging markets last year and the current correction is seeing them fall in line with other markets. While the P/E multiples of other emerging markets was in mid- teens, the Sensex has touched levels of 20-22 times, which was on the higher side, said ICICI securities senior VP Ravi Sardana. Experts say thought the long-term growth story continues to hold good for the Indian markets, the weak trend may continue for the next few quarters.

Negative MF Returns?

2007-03-25T11:45:00.000+05:30

When only 37 out of more than 300 equity based mutual funds (MFs) give positive returns in the past three months, investors may be justified in feeling nervous. But industry experts are quick to highlight the very basics of investing in MFs. According to available data, only 37 equity funds out of a total of 323 managed to gain in value in the period from January 20 to March 20.

But experts say that this three month period is just too small to evaluate performance. “Mutual funds are meant for small investors who can have advantage of investing in a wider basket of stocks for a long period,” Rajan Krishnan, Business Head (Asset Management) at Principal PNB Asset Management, said.

“We can state that only 37 funds could manage to give positive returns and we can also say that at least 37 funds could manage to give positive returns when the markets are down by about 11 per cent. The main difficulty, while evaluating the funds’ performance, is the benchmark that we consider. Sectoral and speciality funds might have given positive returns, but when other sectors were down along with the BSE’s 30-share Sensex itself, it becomes difficult to generalise whether funds are doing better or worse,” he said.

Rajan pointed out that, from February 8, the Nifty lost almost 12.5 per cent but Principal’s Global Opportunity Funds gained 2.5 per cent. “So, the debate remains inconclusive. What investors should look at is the fact that investments in MFs are for a longer horizon of about 3-5 years and three month’s performance would not give a fair picture.”

Sanjay Santhanam, Vice-President (Marketing & Sales) at Sundaram BNP Paribas Mutual, also maintained that the three-month period is too small. “I feel that even a year’s time is very small too! The mutual fund industry, while not older than around 15 years, have given good returns so far. I cannot talk about the future, but I can still say that the outlook is positive and investors should keep patience.”

New I-T law may target exemptions

2007-03-24T18:50:00.000+05:30

The new income tax law – Direct Tax Code – is likely to target exemptions. The process of removing exemptions, which has been set in motion in the 2007-08 Budget, will be taken forward by the government during formulation of the new law.

“The new law gives another opportunity to build political consensus at the national level on tax exemptions”, a senior revenue department official said adding that it would be an occasion to look at exemptions afresh. He said the main objective behind the overhaul of the existing law is to simplify it. But, since the law is being reworked after more than four decades, it gives an occasion to clean up. More so, since it would be debated and discussed in the parliament.

The Standing Committee on Finance, which comprises members of other parites as well, had favored removal of exemptions. Removal of exemptions can lead to lowering of statutory tax rates besides bring equity in tax rates. At present, the effective tax rates for some of the big corporate is as low as 19.2% but for others it is much closer to the statutory rate of 33.6%

The total revenue foregone for 2006-07 on corporate tax and personal income tax is estimated at Rs.65,587 Cr. The total revenue foregone including excise and customs stood at Rs.235,191 Cr. If these exemptions are removed, the government would find flexibility for lowering tax rates.

In the 07-08 budget, the government has withdrawn the tax exemptions available for airline companies on rentals paid for leasing aircraft. The break available to construction companies building small houses has also been discounted. Both exemptions were expiring on March 31 and have not been extended. The government has also brought in software technology parks and export oriented units under minimum alternate tax.

Need for Financial Literacy

2007-03-22T22:55:00.000+05:30

While the reform initiatives over last decade and a half have strengthened the Indian securities markets in terms of the institutional infrastructure making it one of the best in the world, adequate attention, however, has not been paid to the development of this knowledge infrastructure. With the increased introduction of complex financial instruments into the market and the growing number of investors, the skill/knowledge deficit has been widely accepted as a critical bottleneck to the vaulting ambition of the nation, and financial literacy in India not among the best, it is high time to focus on this bottleneck to sustain and nurture the reform process. And obviously, the acadre of securities market professionals along with a base of well informed and educated investors is a key infrastructure for a healthy and orderly securities market.

While most markets try to reduce the intermediation, to achieve productivity gains, etc. securities market uses the services of a larger variety of intermediaries to achieve the same. In addition to the exchanges, depositories, clearing houses, etc., brokers, MFs, merchant bankers and so on form the additional layer in bringing the suppliers of funds and users of funds together for a variety of transactions. The quality of their intermediation/service determines the shape and health of the market. As of now, formal educational programmes on securities markets, particularly in the area of operations are rather limited. No academic course teaches how to maintain depository accounts, how to sell MF products, how to issue contract notes or how to trade, clear and settle trades on a stock exchange.

Several countries with mature markets ensure quality of intermediation services through a system of testing and certification of persons working with market intermediaries . In the US, for example, as part of the registration process, securities professionals must pass an examination administered by the NASD regulation to demonstrate their competence in the areas in which they intend to work. This sort of arrangement ensures that a person dealing with financial products has a minimum standard of knowledge about them, market and regulations so as to assist the customers in their dealings, and bars ill-equipped personnel from providing intermediation services in the securities market.

On account of low financial literacy, many investors do not have enough expertise to make the right investment decisions . They do not have enough understanding /time to comb through the plethora of information available from various sources. They depend on the advice from others who may not be competent to render such advice and be accountable for the same.

Sweeping changes are happening in the society. Increasing life expectancy necessitates people to do their financial/retirement planning prudently. The financial system is getting increasingly market-based and globally integrated involving complex products - where risks are being transferred by institutions to individuals. These markets offer huge choice in terms of products and individuals have to choose the best combination of products to meet their needs and take the responsibility for the same. In order to prepare individuals to take such responsibilities, the system needs to provide an arrangement which enables an individual to learn personal finance.

The US Congress has enacted the Financial Literacy and Educational Improvement Act of 2003. This Act has established the Financial Literacy and Education Commission and charged it with the responsibility to improve the financial literacy and education of persons in the US. India needs a similar initiative. It is desirable to introduce in a phased manner a subject on personal finance in the syllabus of schools and colleges . This would empower tomorrow's investors to make informed investment decisions and reduce transaction costs in an increasingly complex market place.