Speculation on tulips in seventeenth-century Holland-Phool's GOLD

Bubble Rap

Phool’s GOLD

Speculation on tulips in seventeenth-century Holland severely damaged the country’s economy

ASILVER drinking cup, a suit of clothes, a complete bed, one thousand pounds of cheese, two tuns of butter, four tuns of beer, twelve fat sheep, eight fat swine, four fat oxen, two lasts of wheat, four lasts of rye. That was the price a merchant paid for a single tulip bulb in Holland circa 1635. The total value of all those goods at the time was 2,500 florins (the average annual income of a family was 150 florins).
    The early 1600s were a golden age in Holland. The region had recently gained independence after a war against Spain. Resources that had been used for war were now available for trade and commerce. Country had a well-established banking system, stock exchanges, and a well-governed society. Amsterdam merchants dominated the European trade in the East Indies. Sometimes, their profit from a single voyage would be 400%. Wealth was being created—and flaunted.
    Tulips, originally from Turkey, had been brought to Europe in the mid-sixteenth century. By the 1600s, Europe’s wealthiest would send their agents to Constantinople to procure tulip bulbs at exorbitant prices. As the fashion caught on, it was considered “a proof of bad taste in any man of fortune to be without a collection of them” according to Charles Mackay in his book Extraordinary Popular Delusions and The Madness of Crowds.
    The passion for possessing tulips, which was initially restricted to the upper class, soon caught fancy of the middle strata of society. Small shop owners, traders and merchants all started buying tulip bulbs. A trader in Haarlem parted with half his fortune for a single bulb. His main motivation was not to trade, but to earn the admiration of his acquaintances.
    Passion soon engendered greed. People started dabbling in tulip bulbs, not to sow them in their gardens, but to sell them at a premium. Prices rose moderately until 1634, but then grew exponentially in the last leg of tulip mania. Trading was so frenzied that a tulip bulb might change hands about 10 times in a single day. Like too many bubbles, things reached a stage where general trade and commerce were neglected, because everyone was busy trying to cash in on the tulip craze.
By 1635-36, regular markets had been set up for tulips, near the stock exchange in Amsterdam, Rotterdam, Haarlem, Hoorn, and other cities. In small towns, the largest tavern would double up as a “show-place”. Tulips would be set up in large vases, and highs-lows traded. Often, 200-300 people turned up at these tavern shows in a single day. The tulip trade was so intense that a code of trade was considered necessary, and tulip notaries appointed.
There was a general assumption that rich people from around the world would come to Holland to buy tulips. Everyone thought the demand would last forever. People converted their homes, land, and personal possessions into cash so they could trade in tulips. Sometimes, they used their assets as guarantees for future payments for tulips. The result of increased speculation was a “shortage” of bulbs; people now started trading tulip roots. They even started making forward contracts.
Visitors to Holland sometimes found themselves in awkward or funny situations. Abraham Munting, a seventeenth-century author who wrote more than 1,000pages on the tulip mania, tells the story of a sailor who had brought a consignment of silk for a Dutch merchant. The silk would bring large profits to the merchant, so, as a reward, the merchant offered the sailor a sumptuous breakfast. Now, the sailor loved onions. When leaving the merchant’s house, he saw a tulip bulb lying on the table. Mistaking it for an onion, he took it, thinking generous merchant would not mind. But before long, the merchant noticed that his prize tulip bulb was missing. Orders were given to scour the entire house. Nothing was found. Then the merchant remembered the sailor. The rich man and his servants hunted all the taverns in town, and eventually found the sailor sitting on a pile of ropes, quietly munching the last morsel of the “onion”. Little did the sailor know he had eaten something worth the cost of maintaining an entire ship crew for a year! The hapless seaman was sent to prison for committing a crime against the merchant.
    Between 1634 and 1635, tulip prices shot up by more than 10 times. The bubble peaked in the winter of 1636. This was when people started entering forward contracts, because of the shortage of bulbs. A speculator would promise to pay the cultivator a price agreed in advance, for the delivery of tulips that would grow at a future date. This was called “wind-trade”, because such contracts occurred only in the air, for flowers that did not exist.
    Eventually, a few people realised that the craze—which was just fools buying bulbs, and selling them at a higher price to greater fools—could not last forever. Prudent investors sold off their holdings as quickly as they could. And before long, “greater fools” could no longer be found. The market crashed. People reneged on their forward contracts. Cultivators were stuck with huge piles of flowers. Prices fell to a twentieth of their peak value.
    The list of defaulters grew by the day. People who had expected to become rich for life only a few weeks before, now found themselves on the brink of poverty and even bankruptcy. Their homes, land, and possessions had been traded for tulip bulbs—which were now worth a fraction of their earlier price.
    Cases piled up in the courts, but the courts refused to hear them, arguing that debt contracts in gambling were not debts in law. Several meetings were held locally, and even nationally, but no one could come up with a satisfactory solution. The government couldn’t find a way out, either. Those who had made profits got to keep the money. Those who were stuck with heaps of tulips had to watch them wilt. The country’s trade and commerce took such a severe beating that it was years before the economy recovered.

Times of India Mumbai, 19th Feb 2008, Page 46

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ARBITRAGE FUNDS

Better alternative to bank FDs

ONE of the most important features of our equity markets is the successful introduction of derivatives. It has been so successful that daily volumes have propelled the market to become the second biggest equity derivatives market in the world. India possibly has the largest number of traded stock futures globally, with over 300 listed stocks in the derivatives segment. Derivatives have improved liquidity, but they have also heightened volatility, due to the huge leverage capabilities for investors. An ordinary investor may find it hard to trade in derivatives, but can safely invest through arbitrage funds, to get superior returns with seemingly no risk.
    Arbitrage means taking advantage of a price differential between two or more markets. It is the practice of simultaneous purchase and sale of an asset in order to benefit from the discrepancy in prices. The profit earned is known as “riskless profit”. Arbitrage mutual funds follow this principle, and seek to capitalise on mis-pricing opportunities in cash and derivatives markets. As arbitrage funds generate low-risk returns, they are seen in the same light as other low-risk options, like liquid funds or even bank fixed deposits. Hence, arbitrage funds are an excellent avenue for short-term investors with low risk tolerance who want slightly higher returns.
    The major attraction of arbitrage
funds is the near risk-free returns. Arbitrage funds have no open exposure to equities—all equity positions are hedged. A buy position in a particular stock in the cash market is hedged by a simultaneous sell position in the futures market. So, irrespective of the share price, the fund earns the spread between the purchase price of the shares and the sale price of the futures contract. Hence, although arbitrage funds predominantly invest in equity and equity derivatives, the returns are generally in line with those from debt-oriented funds, averaging between 8% and 12% for investment periods of 3-6 months.
    Arbitrage funds strive to generate fixed income using a mix of hedged stock futures, debt and money market instruments. To put it simply, arbitrage is the action of buying a stock at Rs 100 and selling its futures contract at Rs 105, giving a riskless profit of Rs 5, which also becomes the interest cost of funding the transaction. This is also called the cost of carry. So if a mutual fund holds 10,000 shares of Reliance Industries with a current market price of Rs 2,400, to create an arbitrage opportunity, it will sell the near-month futures contracts at Rs 2,500. The fund thus nets an arbitrage or differential of Rs 100, which also becomes the cost of funding the purchase of shares at Rs 2,400 for one month. This transaction has no risk, as it is hedged through simultaneous buy-cash and sellfutures actions. So, no matter what the closing price of Reliance Industries on the contract expiry date, the profit or differential of Rs 100 is locked at the time of executing the transaction.
    Taxation is another area where arbitrage funds score over debt-oriented funds. Barring a few schemes categorised as debt-oriented funds, most arbitrage funds are categorised as equity funds for taxation purposes. Accordingly, arbitrage funds attract 10% Short-Term Capital Gains Tax (STCG), whereas Long-Term Capital Gains (LTCG) are exempted from taxation. And dividends are tax-free.
    Thus arbitrage funds are much superior to debt-oriented funds, where STCG is taxed at 30%, and LTCG at 20% with the indexation benefit (or 10% without the indexation benefit). Other fixed-income products like bank FDs are similarly subjected to the investor’s marginal rate of taxation. So post-tax returns of arbitrage funds tend to be higher than from FDs.
    Although the purpose of arbitrage funds is to generate risk-free returns, these funds are not without risks. Futures contracts are traded in lots, so risk arises from lower liquidity in the cash or futures segment of a given stock. If a stock lacks liquidity, all the shares bought against its futures contract may not be sold. Similarly, on the date of expiry when the arbitrage position is to be unwound, it’s not necessary for the stock price and its futures contract to coincide, leading to imperfect execution of the arbitrage strategy. But such risks are negligible, and most fund houses have an online mechanism to monitor liquidity in stocks and futures contracts where they are invested.
    Arbitrage funds are relatively new in India. The first such fund was launched in 2005 by JM Mutual Fund, called JM Equity & Derivative Fund. These funds have shown robust growth, with cumulative assets under management growing from around Rs 3,605 crore in January 2007 to around Rs 6,000 crore in January 2008. The largest of these funds is ICICI Prudential Equity & Derivatives Fund, with assets of over Rs 1,200 crore, followed by Standard Chartered Arbitrage Fund with a corpus of around Rs 1,000 crore as of January 2008.
    Arbitrage funds have fared well, averaging an annualised return of 10%, 9% and 9.50% respectively for the three-month, six-month and one-year periods. HDFC Arbitrage Fund, ICICI Prudential Blended Plan, Kotak Equity Arbitrage Fund, Lotus India Arbitrage, JM Arbitrage Advantage Fund and SBI Arbitrage Opportunities Fund are some funds which have consistently delivered good returns.
    From an investment perspective, arbitrage funds are ideal for investors wanting to park their short-term surpluses. The returns of arbitrage funds are dependent on the prevailing cost of carry, which can be volatile depending upon market conditions. It is observed that during bullish market phases, the requirement of funds shoots up thereby giving higher cost of carry whereas in bearish market conditions, the fund requirements are low thus offering low cost of carry. Investors are thus expected to invest with a minimum time window of at least three-six months to enjoy stable returns.

Times of India Mumbai, 19th Feb 2008, Page 45

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Bonus Shares

All that brouhaha about bonus

    THE Reliance Power bonus issue is finally out. The company declared a 3:5 ratio on Sunday giving three extra shares for every five shares held by a shareholder. These shares were issued to only non-promoter shareholders. The record date for the issue is still to be declared by the stock exchange.

• What is a bonus issue?
Any company, which has excess reserves that it may have build by retaining part of its profit over the years, may decide to convert some amount into its share capital by issuing bonus shares. This doesn’t change the market value of the company. “It is one of the ways, in which reserves of the company get capitalised,” said PN Vijay Financial Services managing director PN Vijay. In case of Reliance Power, the company is converting its share premium reserves into bonus.

• What is bonus ratio?
New shares are issued in the proportion of their holdings. If the bonus ratio is 1:2, for every two shares held by the shareholder, he will get one extra share. This means, if someone was holding 100 shares of a company, he will get 50 free shares making total holding of shares in that company to 150 instead of 100. Rajesh Exports was another company to issue bonus. The ratio declared by the company was 2:1, which means every shareholder got two extra shares for each share held.

• Why a bonus issue?
It is one of the ways for
companies to
capitalise their excess reserves and reward its shareholders. “Rajesh Exports has reserves in excess of Rs 500 crore and so the company decided to pass on the benefit to the shareholders in the form of bonus issue,” said Rajesh Mehta, the chairman of the Bangalore-based jewellery maker Rajesh Exports. Also, a bonus issue is seen as a sign of a company’s good health.

• How do shareholders benefit?
The shareholders get the bonus shares for free, thus bringing down the cost of owning the shares and the company’s profit too remain intact. “It’s a winwin situation for both the issuing company and shareholders. While the company doesn’t need to generate free cash and issues the bonus shares from its accumulated reserves, the shareholders get free shares,” said JP Morgan Asset Management India chief executive Krishnamurthy Vijayan.

• How does the company benefit?
Corporate actions like dividend payouts and bonus issues are ways of rewarding shareholders. While dividends are paid from profit after tax (PAT), bonus shares are issued from excess reserves the company may have. This means in case of the latter, the company is able to reward the shareholders without touching its profits. Also, from the company’s point of view, it is more of an accounting entry that moves money from one accounting head to another. “Except for the sentiment among shareholders, there is no change in the company’s valuations after the bonus issue,” said Birla Sunlife Mutual Fund CIO A Bala Balasubramaniam.

• Record date & ex-bonus
Record date is the date set by the company for determining the holders entitled to receive bonus shares. For Rajesh Exports, it was February 5, which means that anyone who had shares of the company till this date were entitled for free bonus shares. For Reliance Power, the date is yet to be declared. After record date, shares of the company become ex-bonus.

• What about Reliance Power?
Anil Ambani holds 45% stake in Reliance Power and another 45% is held by Reliance Energy. Mr Ambani said he will be transferring his own 2.6% stake in Reliance Power to REL so that REL’s holding in Reliance Power remains intact.
    For all those who are still wondering how the cost of acquisition for retail shareholders came to Rs 269, here’s the math: Suppose you were allotted 17 shares, making the total amount you invested to 430*17 or Rs 7,310. After the 3:5 bonus issue, most likely you will get 10 ‘free’ bonus shares, which means you now have 27 shares still keeping the invested amount at Rs 7,310. Now divide 7,310 by the new total number of shares you own (27) and you will get the answer.

Economic Times, Mumbai, 26th Feb 2008, Page 19

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Myths about Insurance

Some commonly held misconceptions result in people blindly buying products that leave them dangerously underinsured

FOR many people, insurance is just another form of investment. They buy one or two life insurance policies, and then forget all about them. Ask them about other insurance covers—accident, health, or household valuables—and they will tell you that that’s a waste of money. Why pay a premium for a health insurance cover, when you’re in the pink of health, they will argue.
    Insurance advisors say mistaken notions about insurance are surprisingly widespread and persistent, and that this is the reason an alarming number of people are underinsured or even uninsured. “Most people have picked up certain
assumptions over the
years, and it is very difficult to convince them
otherwise,” says an
insurance agent of
the Life Insurance Corporation of India. “Even after the opening up of the insurance industry, some of these wrong ideas continue to play an important role in the decision-making process.”
Two life policies are enough
Insurance agents say this is one of the most common statements they hear from clients. However, when probed further about the amount of the cover, agents say, it turns out that they have a total life insurance cover of Rs 2 lakh, which is not enough for any earning person. “Insurance companies never effectively convey the basic idea behind life insurance. They push expensive products like unit-linked plans, and the real message is lost somewhere,” says an investment advisor.
Insurance is like investment
Says the insurance agent, “For most people, insurance is about saving on taxes, or about pocketing the money and returns when their policy matures. They don’t consider the real reason behind buying life insurance cover, which is what would take care of your dependents if you were to pass on.” In other words, when clients treat insurance products like investment products, they end up buying the wrong product for wrong reasons.
Healthy people need no cover
Another popular misconception is that health insurance is not required if you’re healthy. In fact, the small premium you pay to buy a health insurance cover is the price you pay to be prepared
in case of an eventuality in life. “People don’t realise that premiums are lower for younger people. Also, if you were to have a sudden medical problem, you would be forced to spend out of your pocket,” says the insurance advisor. “And if you had a pre-existing disease, the premium rates would go up, or you’d have to pay part of the cost of treatment. You could even be denied a cover if your illness were serious.”
Insurance is a waste of money
Another refrain that insurance salesmen encounter often is that spending on insurance is not really necessary, especially if it will yield no returns. It seems people are not comfortable with the idea of buying renewable insurance for their health, valuables, and other general cover. If they don’t make a claim in a year, they feel the premiums are wasted.
    “Most people don’t fully grasp the fact that annual premiums are a small price to pay for taking care of a medical issue or a mishap,” says the insurance agent.
    “For example, you can get a health cover of around Rs 5 lakh for an annual premium of around Rs 5,000. Only you can decide whether you want to fork out the rather modest sum of Rs 5,000 a year, or
    cough up Rs 5 lakh when
    you have a medical
    emergency,” says the
investment expert. He points out that your financial or investment plan would be derailed if you had to shell out that kind of money to get medical treatment or to replace an expensive possession.
    Many people are unaware about the specific covers available in the market to take care of specific insurance needs. For example, insurance advisors say, most people don’t know they can insure their expensive televisions or laptops. “Apart from life and health insurance, most people know little about other covers, such as for their business establishment. For example, even qualified professionals like doctors don’t know that their clinic can be insured,” says an insurance agent.

Times of India Mumbai, 26th Feb 2008, Page 41

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FIXED MATURITY PLANS

Mutual Funds

Beating fixed deposits by a huge margin

PERHAPS you have heard the Chinese curse that goes: “May you live in interesting times.” We are certainly doing that, what with the turbulence and volatility in the market. Gone are the days of slow and secular trends; they have now been replaced by sharp movements, accompanied by tremendous volatility. We in India and Asia swing between the coupling and de-coupling theories floated by experts to try and rationalise erratic and extreme market behaviour often led by forces beyond our control and boundaries. In such times it often pays for investors to dig a little beneath the surface to find products and investments that protect capital while seemingly offering higher comparative returns. One such product which is a direct clone of Bank Fixed Deposits (FDs) but offers much higher returns accompanied by much lower taxation is Fixed Maturity Plans (FMPs). They are also known as Fixed Interval Plans in some case.
    FMPs essentially are closeended debt oriented funds having a fixed maturity horizon. The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio consisting mainly of debt and money market securities. Thus, debt instruments like government bonds, corporates bonds and money markets instruments like treasury bills, certificates of deposits and commercial papers form part of FMPs portfolio. The maturity of the portfolio of a FMP coincides with the pre-specified tenure of the product. The tenure of FMPs can be of different maturities ranging from one month up to three years. To put it simply FMPs are like FDs which have a certain maturity period like one or two years and offer a certain indicative rate for the same.
    FMPs are similar to FDs in nature. As the maturity amount of a fixed deposit in a bank is “guaranteed”, similarly the returns or yields of FMPs are indicated when the FMP is launched though they are not guaranteed in any manner by the fund houses. The actual returns delivered by an FMP are generally in line with the returns or yield indicated at the time of investing. Conservative or riskaverse investors with low risk appetite, who predominantly invest in Bank FDs and other such riskfree investment products, should certainly invest in FMPs and earn better returns on their investments.
    FMPs are very popular with mutual fund investors,
especially with retail and high net worth investors due to their seemingly risk-free nature coupled with high posttax returns. Further, FMPs of different tenures right from one month up to three years are available in the market. Thus, individuals can select an FMP according to their investment horizon. It is as simple as investing in FDs. Just check out which FMPs are currently available in the market along with their tenures and returns indicated and invest in the same. There are no other hassles and it is much convenient for all investors.
    The biggest advantage of an FMP is that unlike a regular bond fund where returns are market related and hence uncertain, in FMPs, the returns are pretty much indicated at the time of investment. Thus investors are aware at which indicative yields their investments are locked in and therefore do not have to worry much about any volatility in returns. The actual returns are more or less close to the indicative yields or returns declared at the time of launch of the scheme. Further, FMPs also do not carry any tangible credit risk as they are generally invested in high quality debt and money-market instruments having good credit rating.
    It works in quite a simple fashion where fund managers ascertain at what rates they can invest the money for certain tenure. Once they have an indicative rate, they deduct the fund management expenses from the same and offer the balance to customers. It is worth noting that due to intense pressure amongst fund houses to sell their FMPs, the management expenses deducted by them are quite low thus offering high comparative returns to all investors.
    FMPs also assert superiority over bank fixed deposits with respect to taxation. The dividend distribution tax for FMPs in case of individuals is 14.16%. Thus, even though an individual may belong to the highest tax bracket, the distribution tax that is applicable in a FMP for that individual is only 14.16% as against over 33.99% (highest marginal tax rate) in case of FDs. Similarly, for corporates the dividend distribution tax for FMPs is 22.66% which is lower than maximum corporate tax rate, again at 33.99%. Hence FMPs are extremely tax-efficient for all investors and score tremendously against other competing products like FDs.
    Thus, FMPs deliver a superior combination of higher returns, tax efficiency and safety of capital. The tax attraction increases when the term of the FMP is one year and above. Longer term FMPs offer indexation benefits to investors, which is not available in case of FDs. Let’s consider an FD offering 8.00% and an FMP offering 8.00%. In case of FD an investor would have to pay tax at rate of 33.99%, assuming the investor falls in the highest tax bracket. Thus, the post tax returns would come to paltry 5.28%. While in case of FMPs, investors are subjected to long term capital gain tax at the rate of 10.33% without indexation benefit and 20.66% with indexation benefits. Thus, the post tax returns would be 7.17% without indexation benefits and 7.20% with single indexation benefit for a period of 1 year. Thus, FMPs deliver unbeatable tax efficiency.
    FMP returns are dependent upon the underlying market returns at the time of their launch. It has been observed that returns of FMPs peak around March every year and start declining from April to September. Last year many FMPs offered one year returns of over 10.50% in March thus delivering posttax returns of over 10% to investors. This year the trend is no different and FMP returns are already high at over 10% for 90 days and 9.50% for over 365 days as against FD rates of 5.50% and 6.75% respectively. It is a no brainer that FMPs are significantly superior to FDs and investors should strive to take maximum benefit of the same.
    Sameer Kamdar is Country Head, Mutual Funds, Mata Securities
Times of India Mumbai, 26th Feb 2008, Page 39

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Investing in gold doesn’t guarantee glittering returns

Investing in gold doesn’t guarantee glittering returns

Richa Kapoor, a 32-year-old vice-president with a consumer goods firm, was on the look out to diversify her investment portfolio. Since she has invested in mutual funds, stocks and post office schemes, she decided to invest in gold, traditionally considered to be a secure and safe investment. After doing research on the pros and cons of buying gold coins and bars, Kapoor had a mild shock. Though there are a couple of options to buy gold from either a bank or a jeweller, when it comes to selling the yellow metal, the fine print is different, as Kapoor discovered. It is a little known fact that when it comes to selling gold coins and bars, there is a 4% deduction. In case, it is not 24 carat, the deduction is 8%.
    With many banks venturing into the gold coins, customers can now buy the round shaped coins and rectangular shaped bars from them. But the banks do not buy back the gold, thanks to the RBI guidelines. Though a jeweller accepts the gold, it can be only exchanged for jewellery after taking a hit of 4% deduction. No cash is offered against the gold. However, if the gold is purchased and sold back to the same retailer,then there are no deductions if one exchanges the gold bar for jewellery. But there is 5% service charge levied when sold for cash. Experts say that it is cheaper to buy gold bars and coins from a jewellery retailer as compared to a bank. This is taking into account the market prices of the gold and the comparison between the banks’ transaction charges and the jewellers’ conversion costs, the deal works out to be sweeter with the jeweller.

Source: Times of India Mumbai. 25th Feb 2008, Page 25

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Bonus shares do not enhance the value of a company

Markets mostly go ecstatic every time some company issues or is likely to issue bonus shares. The ecstasy provides an example of market-irrationality. What does issue of bonus shares mean to the shareholder?
    Companies are allowed to use their undistributed profits, certain reserves and share premium amount for the issue of bonus shares. After the issue of bonus shares, such profits, reserves or share premium amount, as the case may be, go down and the share capital and the number of outstanding shares correspondingly go up. Companies do not receive any funds. No difference is made to the capital employed by the company and its net worth, and, as a corollary, no difference is made to its earning capacity. Thus, effectively, the company now will have more outstanding shares than it had before the issue of bonus shares.
    As the result, the book value of share will stand reduced proportionately. For example, suppose you have a share, whose pre-bonus book value is Rs 200. You get one share as bonus against one original share. The new post-bonus book value of share will be Rs 100 and you will have two shares instead of one. The total value in your hands pre and post bonus remains the same Rs 200. One thing should become clear here: that issue of bonus shares in no way enhances the value of the company.
    If undistributed profits are used for the purpose of issue of bonus, it means the shareholder is getting what he sacrificed as dividend. If share premium amount is used for the purpose, it means the effective cost of share is brought down, something Reliance Power is trying to do. If it is accepted that the issue of bonus shares in no way enhances the value of the company, then the post bonus value of Reliance Power as a company should remain the same.
    Then why should share price go up before announcement of issue of bonus shares? And why should it go down after announcement of bonus shares is made? If it is accepted as a basic premise that issue of bonus shares is nothing but a further division of the total value of the company which value is presumed to have been correctly determined, then the value of one share is nothing but the number arrived at by diving the total value of the company by the number of outstanding shares.
    Thus, if the value of the company remains constant, then a larger number of shares will reduce the value of one share proportionately. Thus, theoretically, there is no reason, except irrational behaviour, why share price should go up before announcement of bonus. However, once issue of bonus shares is announced, it has reason to bring down the value of one share as there will be more outstanding shares competing for share in the total value of the company.

Source: Times of India Mumbai, 25th Feb 2008, Page 25

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Should you invest into real estate or financial instruments

BUILDING BLOCKS
Should you put your investible surplus into real estate or financial instruments? E Jayashree Kurup helps many potential young investors find an answer
SO YOU are a young Indian who earns well, has spent wisely and drive your own car, live in your own house and are able to meet daily expenses without too much effort. Now you are concerned with the investible surplus that you have in hand and are confused whether to put it into financial instruments such as mutual funds and unit-linked insurance policies (ULIP) or whether you should buy a second house to capitalise on the current real estate boom. “Anybody looking at real estate as an investment option is currently at least in the post 35 year age group,” says chartered accountant Raghu Marwah. “In the current scenario, other financial instruments score over real estate as a long-term investment option. The returns in the short and long term are more attractive.” Portfolio advisor Sanjay Mittal too agrees. “Investment in mutual funds and stock markets is liquid. But investments in the property market are not. Mutual funds yield at least 40% year-on-year returns. One of my investors put in Rs 20,000 per month in the Reliance growth fund and his returns are currently over Rs 3.6 crore in 10 years.” This is way above that in real estate. In fact, he gives a thumb rule based on the worst performing systematic investment plan mutual fund over the last 10 years. If you have invested for over seven years, returns are normally the amount invested multiplied by the number of years it was invested for. So why are people investing in real estate at all? Where did all the hype come from? Explains Arun Vikram Goel, CEO of Dewan Housing Finance Venture Capital, “The hype around the real estate market comes primarily from speculative extremely shortterm investors. They have bought at launch prices and sold as the values of each subsequent release by the developer was raised and encashed their investment in the short term. These would have yielded very high gains. Nobody who has invested for the long term has contributed to the hype because chances are that they have not exited the market and their computed returns are notional. A long-term investor should not look at hyped gains.” Explains another property investment adviser, “At the height of the boom, I had advised various investors to put money into multiple projects and to recycle the investments for maximum returns. In fact, I managed portfolios of investors who had up to Rs 1 crore to invest by putting in the 10% that was required to book a property and then to exit when the next instalment was due. The gains were then reinvested in newer launches and the money was constantly increasing.” But the current scenario is different. Today after almost 8-10 months of slow-down in transactions, developers are completing projects rather than launching numerous new ones. Even the rate of hike of value is steady and therefore the short-term speculator is kept at bay. Goel explains this phenomenon. “Immature markets tend to behave erratically. Initially rental markets are not stable and more users think of purchase rather than rentals. Once the supply comes in the rental markets pick up and those who do not want to occupy, lease out property. This hike in demand brings in the speculators and short-term buyers. Finally when there is a glut and capital values stop rising, the rentals will rise. But typically yields from residential real estate investments is only 5-6% in stable markets and 3-4% in unstable markets.” So again why invest in real estate at all? Why not only in mutual funds if you are a retail investor? “To diversify your portfolio,” says Goel. And he has a simple mantra for the retail investor: • Do not make investments on the basis of hype. In a market correction hype comes down and you get a realistic picture. • It is wise to hold a diversified portfolio with real estate as one of the options • Time your entry correctly. The hype typically starts when the peak is reached. If you enter at the peak, you will not get the best rates and you may be part of the slide During investing for the long-term remember that returns average out. The property adviser who does not wish to be named, maintains that normally even in weak market cycles property values double in five years. So if you are in the 35-plus age group, your property value will at least double every five years and you will never lose out. However, the rate of enhancement of the mutual fund investments are greater in the short term. Sanjay Mathur of Pearls Infrastructure says long-term returns on real estate investments can be up to 200-300% if you choose your destination correctly. If you invest in what is the periphery of the city today and hence cheaper, andif there is good economic activity there, the returns in the long term are definitely positive. Goel agrees that the choice of investment destination is important. “But real estate decisions are often emotionally driven too. Aspirational considerations may drive the investors to look at property purchase than yield analysis alone. But if the investor reads the future potential of markets correctly, he can get good returns. The retail investor has more to look forward too from real estate markets. The Sebi has already issued draft guidelines for Real Estate Investment Trusts (REITS), a sound financial instrument in developed real estate markets around the world. “This will open up a class of investment to the real estate retail buyer that was earlier not possible,” says Goel. He sees younger investor opting more for systematic investments in mutual funds that is more speculative but has greater returns. The REITS, expected to be functional by next year, will attract an older investor who takes less risks, but opts for steady returns.
jayshree.kurup@magicbricks.com
Economic Times Mumbai,24th Feb 2008, Page 10

How to send heavy files using your email

Pando (pando.com), a free, cross-platform program, lets you transfer files up to 1 GB To use this service, both, the sender and the recipient, have to download Pando. There’s no signup, no registration, no fee. You open this program, drag your file—or even ordinary, uncompressed folders—into Pando’s open window, and click Send. It asks you for the email address of the recipient, and off you go. The recipient gets a tiny attachment in their email box; click on it to launch the Pando program, which begins downloading the file. Its servers are fast, the whole thing is anonymous and secure. The free version maxes out at 1 GB files; the upgrade costs $5 a month.

Times of India Mumbai, Page 25, 7th Feb 2008

Freeware to save time & money

Don’t waste time trying to recover lost files. There’s freeware that can do all that far more efficiently
Kavita Kukday TNN

No matter what operating system you use, some tasks remain as cumbersome as ever. For instance, it is still fairly common that one deletes files by mistake or that one is stuck with a lot of duplicate files. Often simply finding a file among the hordes of similar data files on your computer can be a task. Not only can these tasks take hours of your time, but they are also extremely frustrating activities. Of course, there are plenty of applications that you could buy to simplify these tasks. But then again, why pay good money when there are similar applications that are available for free? So here, get a load of some brilliant freeware applications that could save you a lot of time and money. Recover deleted files: So you deleted an important file by mistake. Worse still, you emptied the recycle bin too. Now what? Well the easiest answer is Undelete-Now (www.undelete-now.com). This utility attempts to recover all or parts of deleted files whose data still lurks around on your hard disk. The utility will, of course, work better if the files have been recently deleted, mainly because Undelete-Now can’t recover the data if other files or programs get overwritten on them. Another similar free utility that does a good job of un-deleting files is called Restoration. The best part about this utility is that it also doubles up as a shredder to completely destroy sensitive files. So this can be used on all those bank account details or important documents that you wish to erase completely. The entire utility is very small (about 4 KB) and can even be run off a USB drive, so you can carry it on you all the time. For a quick peek inside files: Probably one of the most tiresome tasks is hunting for a lost file. Unfortunately, file names most often don’t tell the whole story about the contents. Sure, you can open files in the programs that created them and check them one by one. But why waste hours opening dozens of files when all you need to know is the basic contents of a document? This is where a utility called Alexey Torgashin’s Universal Viewer (www.uvviewsoft.com) comes to the rescue. This free application lets you peek inside a variety of common file types (PDF, graphics, HTML and more) just by right-clicking and choosing the Universal Viewer command. And if it’s a Microsoft Office file such as Word or Excel, that you want a quick look at, then the application also comes with a separate plug-in for Microsoft Office. To get advanced features however—such as an Explorer-like tree structure—you’ll have to buy the advanced version, which costs $20. Get rid of the duplicates: We do it all the time—make copies of files for back-ups or simply to edit while retaining an original copy. These duplicates lie around, hogging precious disk space. Big Bang enterprise’s DoubleKiller (www.bigbangenterprises.de/en/doublekiller) is a handy freeware application to have in such cases. The application gives you plenty of control over which files you need compared or ignored. It also lets you pick detailed criteria for looking at duplicates. After it completes its analysis, the utility’s results list provides helpful buttons to simplify selecting the first or second duplicate plus others to move or delete selected items. DoubleKiller can also hunt for duplicates on networked drives for your office computers. Online office suite: There aren’t too many people around who can do without the office suite. Isn’t it nice then to get the same functionality online? Google Docs (docs.google.com) is a good option of course, but another online office suite that is worth looking at is Zoho Suite (www.zoho.com). This online application makes collaborating and editing documents, presentations and spreadsheets simpler and easier—you do all this from within the browser. So if collaborating and editing office documents from your browser is what you are looking at, give Zoho a shot. Encryption and security: In this age where online thieves are always on the prowl, it’s always a good idea to add a little extra security to your sensitive data. Androsa FileProtector (www.androsasoft.net) is one such free application that lets you password-protect files with up to 256-bit Advanced Encryption Standard encryption. It’s a tiny utility that can be run off your USB drive. The program is simple to work with, where you just drag the files or folders into the FileProtector window and assign a password. FileProtector program can also compress files as it is encrypting them and create self-extracting archives. The utility also allows you to scramble the names of the encrypted files for extra privacy.

Times of India, 7th Feb Page 25

Compounding investors’ wealth -SIP

Compounding investors’ wealth - SYSTEMATIC INVESTMENT PLANS

MUCH has been said about taking a systematic approach to investing. Most investors appreciate the need to save systematically, but forget to actually do so in the hurry-scurry of life and work. Only a wise and disciplined investor takes the trouble to build a reserve. We fret more readily about buying the right model of television, or a washing machine at the right price, than we do about our long-term financial wellbeing. Result: we are vulnerable to difficulties later on in life, and realise too late that saving in advance would have eliminated or reduced our pain. Lay investors do understand that their wealth generation potential is at its peak from the age of 25 to 45 years, and starts dropping as they approach retirement. A cardinal sin of investing that many investors make is not saving enough at a young age, and waiting too long to build a nest egg. Things may look chipper in terms of career and health when you’re young, but they may not stay that way. As you grow older, health risks increase. Changing business dynamics may slow your career’s progress. Even if you’re lucky to avoid those problems, you’d still need to plan for life events like your children’s education and marriage, and your retirement. This requires long-term planning and saving. So there is really little choice for investors besides systematic investing. All mutual funds offer Systematic Investment Plans (SIPs). A SIP is a disciplined way of investing. It allows you to invest a pre-specified fixed amount of money at regular intervals, generally monthly or quarterly, in a mutual fund scheme. The money is invested at the thenprevailing Net Asset Value (NAV). Once you have picked a mutual fund scheme and the monthly investment amount, you can write out post dated cheques or instructions for an automatic debit from your bank account. So a SIP is a staggered form of investment. The systematic approach of SIPs ensures you attain your long-term financial goals, if you do disciplined investing from a young age. Generally, our investments seek to fulfil financial goals such as buying a house, marriage, children’s education, and so on. These entail a huge one-time outgo. Most of us cannot raise such amounts at short notice, and need to build the desired corpus over a long period. SIPs do exactly that. They cultivate a savings habit, just as a “Piggy Bank”does for a child. So SIPs can help us be disciplined investors. Ideally, one should start saving and investing early in life, but sometimes financial constraints prevent us from doing this, especially in the case of middle-class investors. SIPs enable investors with low investable surpluses to start with amounts as low as Rs 500 per month. They need not strain your monthly finances. SIPs work on the basic principle of compounding. As the saying goes, “Time in the market is more important than timing the market.” Long term investing through SIPs lets us realise the power of compounding, especially in equity schemes. Compounding increases the value of an investment exponentially over time. In other words, the interest earns interest. For example, compounding at the rate of 15% means your Rs 100 becomes Rs 115 at the end of year 1, on which another 15% is added. That makes it Rs 132.25 at the end of year 2, which is then reinvested at 15%, until maturity or redemption. As time passes, the money grows more rapidly, and in the opposite direction to inflation. Here’s an example to show how compounding makes money grow increasingly rapidly. Let’s say investor A starts investing Rs 1,000 per month from age 25, and investor B starts investing Rs 1,000 per month from age 30. We compound their investments at 15% per year, until each investor is 55. Investor A will get Rs 69,23,280, while investor B will get Rs 32,43,530. A mere difference of five years can lead to a wealth difference of over Rs 36 lakh—more than the entire sum investor B will receive. This is the beauty of compounding. How else do SIPs help investors? We all want to buy stocks when prices are low, and sell them at a higher price. But timing the market takes a great deal of resources, which retail investors lack. Systematic investing continues irrespective of market conditions, which makes for “rupee cost averaging”. When you’re investing the same amount at regular intervals, you buy more units when the NAV is down. Over time, this reduces the average purchase cost per unit. So SIPs can smoothe out ups and downs in equity markets, and protect you from volatility. Some investors are not convinced about SIPs, and prefer to invest as and when they think the markets are ripe. This works well sometimes, but can backfire badly. Recently, the BSE Sensex dropped 29% in only 9 trading sessions. If you had invested a big chunk of money just before the fall, you’d be sitting on a huge loss in your portfolios, and would take a long time to recover. SIPs invest in markets at all points of time, whether bullish or bearish. Investors tend to feel psychologically comfortable in a rising market, and scared during downturns. Many try to stop SIP investments when markets fall. This is totally contrary to the logic of systematic investment. Such investors are depriving themselves of the important benefit of rupee cost averaging. There’s no question of whether to invest through a SIP. Any investor who wants to create wealth in the long term should do so. Every household should have one or more SIPs running simultaneously towards the family’s future needs. Small amounts tucked away every month won’t pinch much, and they will provide you much-needed wealth in the long term.

Sameer Kamdar is Country Head, Mutual Funds, Mata Securities
Times of India, Mumbai 5th Feb 2008, Page 45

Virtual keyboards keep online hackers at bay

Virtual keyboards keep online hackers at bay
Banks like HDFC Bank and Citibank have introduced ‘Virtual Keyboard’ function in online banking to protect against frauds, reports Vidyalaxmi
DO YOU know that it is possible to hack your password by capturing keystrokes on the keypad? Programs such as Spy Ware and Trojan Programs are designed to capture keyboard strokes. And it is often installed in the computer system to capture confidential user data without the user’s consent. To do away with such frauds, some banks have newly introduced the concept of Virtual Keyboard to protect your account or card information and password (IPINs) from getting hacked. Rajiv Chatterjee, vice-president of ATM, net banking and mobile banking products with HDFC Bank, explains: “Whenever you avail of the net banking facility through shared computers or a cyber café, there is a high possibility of a fraudster hacking your password. This happens through key logger attack. It’s a foreign software used for making fraudulent online credit card transactions or steal your IPINs”. Experts say these softwares often get downloaded by the victim’s PC through some free downloads or MP3 or even movie downloads. Now, these programs are used for a number of destructive purposes like erase, overwriting or copy data from the infected computer, corruption and encryption of files. To add to you woes, you cannot remove Spyware or Trojan with the regular anti-virus software. In fact, some of these programs have the ability to partially or fully disable the anti-virus tools. So, be it your email password or internet banking password, it is exposed to such risks despite all protective measures uploaded on your desktop. Thus, some banks have introduced Virtual Keyboard to protect account or card information and password from the hands of fraudsters. How does it work? Virtual Keypad is an online application, which substitutes the actual physical keyboard with a mouse. When you click on the virtual keyboard option at the time of net banking, the monitor flashes a keyboard on your screen. You have to use the mouse to click on the relevant keys to sign into your net banking ID. Another way of hacking your password in a shared computer or a cyber café could by placing a hidden camera. In such cases, you can opt for a scrambled virtual keypad. In a scrambled keypad, the position of keys on virtual keypad keeps changing every time you sign in. “This makes it difficult for the camera to capture the exact letters for the password,” Mr Chatterjee added. Security tips to follow Never part with your personal information No bank asks for personal details such as your PIN/IPIN or TPIN either via mails or a phone call. If any bank official asks to part with some confidential information you have a right to complain at quality control or surveillance department of the concerned bank. In the recent past there have been some emails titled ‘security measures’, which have been sent on the bank’s behalf. Often these mails ask you to click on a link, which leads you to a fake website. Often customers get deceived and part with some confidential information like an IPIN or net banking password, which has led to some online frauds. Change your password frequently Changing passwords often helps in protecting your account even if inadvertently you may have disclosed it to someone. Moreover stay away from keeping obvious ones like your spouse’s name or your pet’s name. Alpha-numeric passwords along with some special character like * or # are a safe bet. Avoid cyber cafes/public computers for net banking PCs at cyber cafes may be infested with viruses and Trojans that can capture and transmit your personal data to fraudsters. The easiest way to grab information is key logging software, which record all the keystrokes you typed, to be retrieved later for fraudulent usage. Beware of typing passwords on unknown PCs. Look out for the ‘s’ factor Whenever you have to submit some sensitive information online you have to check if the site uses encryption to protect your personal data. The URL in the address bar should start with ‘https://’ and not just ‘http://’. So the next time do not get wary of online transactions. Just follow these security measures for a safe online banking experience.

vidyalaxmi.v@timesgroup.com

Economic times Mumbai 5th Feb 08, Page 25

A dependable winner - GOLD ETF

A dependable winner
Ever wondered why we say something is ‘as good as gold’? Perhaps it’s because it stays strong even through bad times
Devendra Nevgi

RECENTLY we moved into a new house, which was an uphill task for all of us, taking into account real estate prices these days. While cleaning up the old house, I discovered an envelope in a dilapidated condition, in a corner of a cupboard. I opened it with great curiosity. I found an Rs 1,000 note issued in the 1970s, and around 20 grammes of gold. Had I struck gold in finding the gold, or in the currency note? I wasted no time in seeking out my father and asking him about it. He said he had forgotten all about the gold and the note lying in the cupboard. But now that they had been found, he remembered everything quite clearly. In the 1970s, he had a surplus of Rs 2,000. He bought gold worth Rs 1,000, and left the balance Rs 1,000 in the envelope. Unknowingly, he had taken what in market parlance is called a long position on gold and on the Rs 1,000 note (or rather, the purchasing power of it). I was eager to work out how my father’s “long position” was faring now, after more than a quarter century. In 1970s, a Rs 1,000 note was lot of money. It could have bought my father at least 4,000 samosas (at 25 paise per samosa). My father said, “For Rs 1,000, I could have treated the whole neighbourhood to a sumptuous lunch.” Or he could have bought around five square feet of real estate in Cuffe Parade (at Rs 200 per square foot). Wow, I thought—the good old days! Now back to reality. How many samosas would Rs 1,000 buy today? I made a couple of quick phone calls. The local Udupi restaurant said it would supply 100 samosas for that amount. And our real estate agent, after a few quick sums on his calculator, said Rs 1,000 would buy me an utterly underwhelming 0.025 square feet of property in Cuffe Parade. So the question is, why is the number of samosas less by 40 times, and the square footage in Cuffe Parade less by 200 times? This is what economists call “inflation”—a rise in general price levels. You just cannot buy the same amount of goods for the same amount of money after 25 years, since the paper currency loses its purchasing power. Usually, paper currencies are issued by countries’ central banks, like our Reserve Bank, on behalf of their governments. Central banks are expected to have control over the money supply, and currency is part of it. Theoretically, the money supply can be infinite. As you might expect, anything is in infinite supply loses value over a period of time. Central banks try to ensure, however, that money supply levels are proportionate to economic growth. In the event of a financial crisis, such as the one in the United States, or a geopolitical crisis, such as a war, central banks may print more money to tide over difficulties. Indeed, the US central bank has stopped declaring money supply figures, so they can print any amount of dollars. More money chasing the same amount of goods can lead to inflation. And too much paper currency or inflation leads to the loss of purchasing power. Zimbabwe is a classic example of paper currencies losing purchasing power. The International Monetary Fund recently estimated Zimbabwe’s inflation at 150,000 %! In effect, a Zimbabwean dollar loses value between the time you leave home, and the time you reach the shop to buy a loaf of bread. It’s better to hold real assets in such a situation—like gold. Which brings us back to the contents of that dilapidated envelope I found. What can the 20 grammes of gold my father forgot in the cupboard buy today? At the current prices, we could choose between 2,200 samosas, or at least half a square foot of property in Cuffe Parade. This means the gold fared much better than the Rs 1,000 note. So gold is a hedge against inflation, and limits the losses that would be incurred due to the eroding value of paper currency. Gold also acts as a kind of “insurance”, since it tends to fare well in the face of uncertainties, such as the ongoing global market crisis. During periods when the Sensex has yielded negative returns, gold has given decent returns. If this logic holds through the current uncertainties in the markets, holding gold will help investors stabilise portfolio returns. With the US on the brink of recession, inflation not abating on higher food and commodity prices, and the dollar depreciating, conditions are ripe for gold faring well as an asset class. The uncertainty of the current fragile financial situation will help gold. The most appropriate way to buy gold is to buy a low-cost gold exchange traded fund (ETF), ideally one in which there are no entry loads. Entry loads and higher costs eat into investors’ returns. Acquiring gold through ETFs, as opposed to buying gold itself, eliminates the hassles of storage, security, quality, insurance, transportation, goldsmith’s charges, and so on. Besides, you would have easy liquidity and price transparency, as the fund would be listed on the stock exchange. In 1690, the Massachusetts Bay colony issued the first paper money in the colonies that later became the United States of America. The US dollar as a paper currency was first issued with the inscription “In God we trust”, as required by the US Congress in 1957. The inscription appears on all US currency since 1963. Given the direction the US economy has taken lately, perhaps that should now read “In Gold we trust”.

Devendra Nevgi is CEO and CIO, Quantum Asset Management

Times of India, Mumbai,5th Feb 2008, Page 43

FAITH & FORTUNE

There’s no dearth of charlatans on Dalal Street, leading investors to panic and losses. If only the gods themselves would guide us all...
Suresh Sadagopan

THE conditions in which Lord Krishna expounded the Bhagavad Gita to Arjuna were hardly conducive to clear thinking. A war was raging, and Kurukshetra was witnessing a bloodbath. Arjuna was perturbed and wanted to call it a day. Krishna sought to put things in perspective and counsel him. That advice became the Bhagavad Gita, which millions now consider a guide to living. There are some similarities to the situation in the stock market today. In the bloodbath on Dalal Street, many have lost money. Global events have taken the wind out of the sails of the Indian stock markets, despite good corporate performance. Investors are despondent and dejected. Fear is the dominant emotion—fear of losing money, and of changes that will sweep the markets. They despair of good times returning. Now, more than ever, they want sage counsel. Global bigwigs probably crave a seer even more than we do, right now. Perhaps no one knows this better than Merrill Lynch CEO John Thain! The Colonial Cousins, Hariharan and Leslie Lewis, beseeched Krishna to come to this world in their famous rendition of Vyasaraya’s composition “Krishna ne begane”. Well, if he did show up, what would he say? Nobody really knows, of course, but there’s no harm in imagining his take on the situation. And that’s exactly what we have done below. Early one morning, Lord Krishna appeared before stock market devotees, sending them into a tizzy. They wanted to know when the good times would be back. Now, Lord Krishna often answers in parables and stories. So it was this time. He said: “A man was overcome by despair, as he was beset by a series of disasters. He wanted to end it all, so he went to the edge of a cliff. Standing there, on the brink, he remembered his father, who had given him a ring. His father had advised him to read the inscription when things went extremely well in his life—or extremely badly. He took off the ring and read the engraved message: ‘This too shall pass.’ The man thought for a minute, and resolved to fight back. He did, and eventually became very successful. Life was good, and he was at the pinnacle of his career. Then he remembered the ring once again. Life is a cycle. Didn’t you check your ring six months ago?” ended the Lord. Seeing how confused people were, Krishna would probably have had to repeat much of the Bhagawad Gita. It was, of course, relevant to these times. He might have remind them that “What has happened, and is happening, and will happen, is for the good.” But it is difficult to soothe scalded souls sanctimonious words, when the really want balm. Still, it’s true: the storm in the US has been brewing for a while, and it’s in everyone’s interest that the system is purged of the poison, painful as that may seem the short term. Now the investors were clamouring for tips, and badgering the Lord to name his picks in this difficult time. Krishna just told them another story. “A man followed a regular practice of bathing in the Yamuna early every morning, and going back home to do a puja after that. One night, there was a fierce storm. But the faithful man did not want to break his routine. Unfortunately, he lost his way home. He was worried that he would not make it in time for his puja. Presently, a small boy with a lantern came by and volunteered to take him home. As the man reached his street, the boy (who was actually the Lord) walked away. Now, what does faith have to do with stock markets, you may wonder. A lot, actually. Invest in companies whose management you consider able, and in whom you have enough faith that you will give them time to perform. Do this, and you’ll have invested in a winner,” said the Lord. Many investors saw sense in this. But some were anxious about the right time to sell their holdings. It seemed pretty clear that this was no time to sell. Keshav replied, “You should sell when you reach your goal.” Sounds simple, but to do that, we need to know what our goal is. Of course, Krishna was aware that we are often confused about that, so he continued: “Why fret about selling and buying, when you came into the world with nothing! What have you lost now? And what are you going to take with you when you go? Life itself is fleeting. Why time the market?” Afraid the Lord would vanish before he had got his answer, one stock devotee blurted out, “Will I get a Reliance Power allotment, my Lord?” Shyam simply said, “When the company exists only on paper, you apply, thinking of reliance and power. Don’t you see the maya of this?” Maya it is, for those who have applied for less than 225 shares, for they would have nothing to show for their efforts, while others wait on tenterhooks for listing gains! “What is your Stock-upadesh on day trading, my Lord?” asked a Dalal Street maverick. The Lord answered, “When I said what’s yours now was someone else’s yesterday and will be someone else’s tomorrow, I was not talking about day trading. Wealth creation takes time, and you need to give it time. A child takes nine months to develop in the womb—you cannot hasten that process. Just think what would happen if I started day trading, options and futures in my dealings!” The morning was getting on, and the Lord wanted to leave. The devotees of Dalal Street were loath to see him go. A bull operator persisted: was the bull in the foyer the real cause of all the trouble? Troubled, the Lord said: “I am the creator of all creatures. Bulls or bears, they are the same to me. A statue can’t change the course of events. I control the world. Still, if you want, move the sculpture and see if the bull charge is revived. I want you all to be happy, after all. But remember, the only certainty is change.” With these words, Lord Krishna entered the stock exchange building and vanished in a blinding flash. And the devotees who had heard the “stockopadesh” attentively saw the light.

Suresh Sadagopan is Chief Financial Planner, Ladder 7 Financial Advisories

Times of India Mumbai, date:5th Feb 2008, Page 43

Risk Appetite

No books or periodicals offer you a theory on risk appetite and investment
GAURAV MASHRUWALA

Try searching the phrase “risk appetite’’ on Google or Yahoo among others. All the search result would most likely refer to risk appetite for non-individuals. A few websites would have made reference to risk appetite for individuals, but you would note that none has a formula to measure an individual’s risk appetite. Next, pick up books, journals on investments and search for chapters or sections on risk appetite. If you are an enthusiast who attends seminars on investing, ask the speaker to teach you science of measuring risk appetite. In fact, there is no formula to measure risk appetite for individual investor. ‘Advising investor based on their risk appetite’ is the biggest humbug coined by financial distributors to ‘sell’ higher commission products. If your financial distributor is handing over a risk appetite questionnaire, ask him who designed it. What experience does the individual or team has in understanding investor psychology? Which psychological theory has been relied upon to develop the questionnaire? Imagine a patient sitting in a surgeon’s cabin. Before proceeding with examination, surgeon hands over a questionnaire to patient. Initial questions are about patient’s name, address, contact details, age, gender etc. Next, there are questions about patient’s health history. Last part is most important. Here, the surgeon examines patient’s surgical appetite. In this section there are questions like (1) How do you react to anaesthesia (2) Will you get scared if you see your own blood (3) On scale of 1 to 5 rate your reaction to pain at day and pain at night (4) do your prefer to suffer from illness or do you prefer going through the pain of treatment etc. Surgeon then explains to relatives of patient how the questionnaire has been designed in consultations with ‘experts’ and how it helps in gauging surgical appetite of patient. Surgeon further states that he would perform surgery only if a patient has surgical appetite. Do you find the above scenario humbug? Yes, it is. No surgeon ever decides whether to perform surgery or not by asking questions to patients. Nowhere in the medical books there is any theory on surgical appetite. The surgeon performs the surgery based on patient’s symptoms, conditions and necessity for surgery. The point is there is no concept of either surgical appetite or risk appetite. No books, periodicals or any other form of literature on investments have theory on risk appetite. However, the word risk appetite is frequently used by so-called investment consultants. Questionnaires are given to potential investors. Investors fill those questionnaires and, based on the feedback, financial products are offered or sold to them. The replies stated in questionnaire have no collations to individual’s capabilities to withstand volatility. All of us react to risk and volatility of our investments differently at different point in time. One of my clients was aghast in 2001, when I told him 50% of his portfolio should be in equity. According him investing in equity is like speculating. Same client wanted to invest 100% of his funds in equity in Sept 2007. As a financial planner I did not see anything surprising in this behaviour. The way whether to perform surgery or not has to be decided by surgeon, similarly an investor should invest in equity or not has to decided by the advisor. If advisor feels that investor will have to invest in equity to reach his/her desired goals, he should recommend equity. Recommendations should be solely dependent on investor’s future financial goals. It has nothing to do with his or her risk appetite.

Times of India Mumbai, Page 25, 4th Feb 2008

Salary Account

From zero to 5k in 3 months

Zero balance salary accounts could lose their status on job switches. Also, they will be liable to pay penalties like a normal savings account on non-credit of three salaries, finds Atmadip Ray
HAVE you switched jobs recently or are you on your way out from one? If you say yes to either of these questions, then you would need to check out a few details on your bank account. This is especially true if your bank account happens to be a salary account. Salary accounts are typically zerobalance accounts with numerous freebies. For salary account holders, banks offer facilities like free-of-cost phone banking or internet banking, free demand drafts and even preferential interest rates on personal loans. Account holders also receive instant credit of salaries. The most striking benefit is, perhaps, the maintenance of zero balance. Many account holders, however, often tend to overlook the fact that they are not entitled to get these benefits attached with salary accounts once they leave their present jobs. WHAT HAPPENS THEN? Explains ICICI Bank's head of retail liabilities Maninder Singh Juneja: “If salaries don’t get credited for three consecutive months in any salary account, then the particular account gets converted into a normal savings account. This means, the customer needs to maintain Rs 5,000 quarterly average balance instead of keeping zero balance.” In most cases, banks set the QAB (quarterly average balance) at Rs 5,000. However, there is no uniform rule on QAB. It varies from bank to bank. Axis Bank’s eastern operation head Kakali Majumdar says: “We have introduced a system which detects non-payment of salaries for three months and converts these accounts into normal savings bank accounts. Then, customers are treated as per savings bank account norms and are liable to pay fines for non-maintenance of QAB.” WHAT SHOULD YOU DO? So, if you happen to be one of those who quit jobs recently, you would first need to know the QAB and quickly check the available balance on your salary account. If your account balance is more than the required amount, you would need to keep this for adhering to the QAB norm. Otherwise, you may be fined heavily. Or, you may follow what Nilkamal Sen, Anirban Dasgupta and Susenjit Chanda have done. These three enterprising Kolkata-based IT professionals quit their respective jobs recently and set up their own graphic designing firm. “I withdrew all the money from the salary account soon after I received the last salary from my previous employer. I don’t know what happened to the account after that,” Mr Sen told ET. This is certainly one of the ways of avoiding the possibility of being fined. Mr Dasgupta has chosen the other way: to keep the minimum balance and continue as a normal savings bank account holder. “When you are into an relationship, you tend to get some added facilities. So, I’ve decided to continue the relationship with the bank.” Mr Susenjit Chanda turned to be a tad smarter. “I know that for three months, the bank will entertain my account as salary account. After the three-month period, I will decide on what to do with the account.” EXCEPTIONS DO HAPPEN... Although banks maintain that the conversion of a salary account into normal savings bank account is “automatic” in case salaries are not being credited for three consecutive months, ET found numerous exceptions. In one particular case, the account was being treated as salary account even after four years of non-payment of salary! “This particular one is an internal lapse,” says the concerned banker, cautioning: “Any day the account would become a normal savings one. So, the account holder needs to be alerted.” ICICI Bank’s Mr Juneja tells ET: “We follow a very transparent policy. We inform our customers once there is a conversion of such accounts.” Most bankers, however, feel that customers should also inform the bank in case of a job switch. THE BEST STRATEGY It would be prudent to not go by exceptions. You may opt to close your salary account once you out of a particular job. Or else, you may decide to maintain the QAB. Whatever you do, take your decision well within three months and avoid paying hefty fines.

The Economic Times, Mumbai 2nd Feb 2008

Take a BREAK

Before you decide to hang up your shoes and chase your dreams, it’s important to do some financial planning so that you can enjoy the golden age to the fullest. Aman Dhall & Dheeraj Tiwari find out how
THE definition of golden period in one’s work or professional life has now assumed a new meaning. Today, the ‘golden age’ is one when at the peak of your career, you decide to snap your ties with competitive work and spend time on what you always wanted to do. In terms of jargons, some prefer to call it — semi-retirement. Take the case of 42-yearold Mitesh Semwal. He was doing well for himself as a marketing head in an MNC when he decided to take a break from the daily, hectic work schedule and started to learn pottery. Semwal, who use to head a team of B-school graduates, is now enjoying his stint as a pottery teacher to young kids. But before you decide to hang up your shoes and follow your dreams, it’s important to do some planning so that you can enjoy the golden age to the fullest. FIRST THINGS FIRST Analysts believe that though there are no thumb-rules to follow, keeping a few things in mind can help you chart out your life better after semi-retirement. “It depends on individuals and on your background and enthusiasm as well,” says Kartik Jhaveri, director, Transcend Consulting, a financial planning firm. However, it is of utmost importance that you should check out the following aspects — immediate and near future financial requirements, including loan re-payments or EMIs, past savings to support the household expenditure, estimated time when the regular flow of income (part-time income) will start, and in case of married individual, whether the spouse’s income will be sufficient to meet the day-to-day needs. Also, any major expenditure such as admission to education institutions, marriage in the family and major medical treatment should be borne in mind. Another factor you must consider is adequate insurance coverage, especially medical, household, disability, and loss of income. Inadequate insurance can adversely hit your retirement plan. Says Mukesh Gupta, director, Wealthcare Securities: “The focus should be on keeping your EMIs as low as possible. Second, you must try to pay off all debts before retiring. To retire early, you need a sufficient financial cushion to cover the unexpected, such as medical bills, higher than expected inflation, higher taxes and lower than expected returns on your investments.” STRATEGY AHEAD According to financial planners, retirement is the time to review your existing portfolio and take a call whether you want to stay invested in the equity market, move out or balance your portfolio. “You must evaluate your position as equity investments are always subject to market risks, though they might give better returns,” cautions Vasal. Agrees Gupta, who believes that you should play less in the secondary stock market and play more with mutual funds. “You should have a long term investment horizon. Speculation in stock market should be avoided completely. A small portion of the total investment portfolio should also be kept in the liquid fund,” he says. Gupta sees no risk in playing with investment in the primary market as it has fewer hassles and the chances of making a loss are very remote. From the point of view of investment planning, Gupta thinks the aspect of liquidity should be top of the agenda. “Do remember that where there is liquidity, there is mobility. Hence, during semi-retirement period, investment planning should be so done that liquidity of funds is maintained,” he explains. INVESTMENT MANTRA Financial planners don’t see any problems with investments in real estate if you are doing it with the purpose of wealth distribution. However, if it is for generating ongoing income, then you should be clear about liquidity issues. “Too much dependency on only rentals on the property value may have a negative impact, though it can also bring security. So, if there are no liquidity issues, then exposure to the tune of 15% is reasonable,” says Zankhana Shah, a certified financial planner and CEO of Mumbaibased Moneycare Financial Planning. Shah feels that the rules are still not clear in reverse mortgage schemes on how the property is valued or revalued, so it should be considered in a worst-case scenario. Vasal, however, thinks that reverse mortgage is too early for this age. “Keeping in view that average life expectancy has increased, this may not be an advisable option at the semi-retirement stage, unless you have more than one house property,” he says. Jhaveri is of the opinion that options such as reverse mortgage and fixed investment sources such as the rental housing may well fit in your scheme. “The rental housing concept is a great favourite amongst people in the semiretirement period. And if you can get a 4-5 % increment in rent on an annual basis, it may well provide you the money required for monthly consumption,” he says. TAX & LIQUIDATION To start with, financial planners believe that you should gift your funds to different family members so as to achieve optimum level of income tax planning. However, you should not gift your funds to your spouse and minor children. “This is because their income would be clubbed with your income as per section 64,” explains Gupta. Similarly, if you want to achieve full tax deduction by way of tax deduction in respect of investments made within the purview of section 80C of the Income-tax Act, then Gupta thinks the best option would be to invest in shares or mutual funds, which are specifically demarcated for the purpose of section 80C deduction. You should also evaluate the option of repayment of housing loan vis-à-vis tax deduction for housing interest. On the liquidation part, Vasal cautions that you must think twice before diluting your assets in the mid-age, especially those who have planned and invested for their retirement. Analysts recommend that you should first liquidate hazardous and risky investment options during the period of semi-retirement. To summarise, keeping a few basics intact can help you plan your semi-retirement in a much structured manner and like Semwal, not only you can enjoy your new job but also afford to take those yearly vacations! The choice is yours • Keep your EMIs as low as possible and try to pay off all your debts before retirement • Review your existing portfolio and take a call whether you want to stay invested in the equity market, move out or balance your portfolio • Gift your funds to different family members to achieve optimum level of income-tax planning • Speculation in stock market should be avoided, though you ccould consider investing in primary market which has fewer hassles and less chances of making a loss