You could be teased soon!

End of the financial year in sight. Everyone’s also preparing for their corporate budgets to get set, and of course personal appraisals, ratings and more importantly salary hikes. Yikes!!! They are back, aren’t they? Well, “I am keeping my fingers crossed” you might mutter, but it is all the leading dailies and popular business magazines are saying so. For the record, they all seem to predict between 15%-20% salary hikes over the 2009-2010 salary levels.

So is there a grand merit to be happy? Well not really if you belong to the great Indian middle class. The tax dole that was handed out by the FM in the February 2010 budget will taken away by a host of price hikes that are coming from various sources. Remember “One hand giveth, other taketh away” seems the ‘mantra’ of the UPA government.

Home (A)loan

But the greatest of the shock will come for those who are the most sacred group; termed in the US as “homeowners”. This category is also upcoming in India in a big way over the past 15 or so years, thanks to a host of factors; growing nuclear families; migration from towns to cities (urbanization) and higher workforce mobility (people moving from one city to another due to change in job).

Nothing wrong in creating an asset, in fact, there is a totally a different kind of pleasure owing a dwelling unit for yourself. The problem, however, lies in two aspects; one taking a loan to fund the purchase1 (how else do you own a home, you might ask) and more importantly inability to determine the capacity to pay the loan correctly. The latter is extremely critical because more than 50% of the people cannot exercise judgement while taking the home loan due to the nature of the tenor (a 10 year plus) and any ordinary human’s inability to predict what lies ahead, leave alone for the next 10, 15 or 20 years.

So getting carried away by current disposable income (twin income households are the most vulnerable here), taking fancy assumptions (such as last 5 year salary increments should continue in the next 15 years) and lastly not accounting for even expected changes such as growing family and its needs (kids and their expenses).

All this and you have a disaster in the making.

You could be teased by your bank soon

This could be a reality soon enough (maybe this year or early next year) if you have relied on reckless borrowing to fund that large house and worse still bought it by taking the special interest rates. We are talking about the teaser loan rates offered by a clutch of banks starting with SBI. These loans have clauses such as 8% for 1st year, 9% for second year and third year and floating thereafter. Mind you that people who have already completed 1 year on this scheme (this scheme was launched early last year) will now reset their interest rate by 1% and have already 12 months before the next reset. The worrying aspect is that over the next twelve months, giving the way the rate environment is hardening, all these teaser loans could very well get reset at more than 250-300bps taking the rate charged to 12%p.a. These very banks (SBI and their likes) which looked like angels who provided you with that dream house could turn in demons who are hell bent in making that homeownership like a noose around your neck.

Homeowner could be teased so badly that they might feel like they are molested. Obviously, not all of them could feel the pain of this and only those who have not been prudent in planning for their EMI could face the stick. For the unlucky lot we only have one advise, you guys still have time on your hands, check with your financial planner on what is the worst case scenario in terms of higher EMI payout if the rates rise and how much of the disposable income squeeze do you get. If you are shocked by the result there is hope in terms of restructuring and whole host of options that are there before the tornado strikes.

All the best till then and yes don’t forget to check your finances today for income and expenses of the EMI’s you pay today, because you could be teased tomorrow.

Until next time!!

1 Just 25 years ago when we were yet to reach the sophistication levels with financial products that are offered today, homeownership was mostly self funded with retirement money; families were less mobile and people therefore compromised on the location of the home to suit the budget.

Bondman Returns: Revenge of the yields

2010 could as well go down as the year of debt markets in India. For investors in debt instruments it would be akin to being part of the Akshay Kumar’s reality TV show “Khatron Ke Khiladi” which started to be aired sometime ago. Or better still it could also be like watching the latest Hollywood Super hero flick in which our Super hero toils against the evil powers throughout 80% of the screen time but in the last 20% part of the movie we get thrilled with the climax which more than compensates our waiting time to get to this part of the movie. Our Super hero has the last laugh and not before he awes us with the kind of fire power only he could manage, making the evil powers look meek and without any iota of class.

So where’s the connect, you might ask?

For people who are used to making 2+2=5 you could skip because any amount of persuasion is not going to suffice. However, for those like me and who like to keep the game fairly simple, read on.

The above situation or parallel is likely being played in the bond markets in India currently. Rising yields are back with a vengeance. They are bleeding portfolios and investors are scurrying for cover. There is blood on the portfolio statement of an average debt investor. The last few months have been a double whammy. For one, there was low return on traditional instruments like bank FD’s. Second, debt mutual funds offered returns with commensurate higher risk but ended up hurting as risk free rate inched up higher due to higher borrowing and resultant inflation. Third and last, there were only liquid funds that offered hope, but investor’s patience waned as the situation persisted for long.

 

Come 2010, and there was more bad news. The evil forces of yields are back to their menacing best. Rising fast, staying there, declining and trying to tell us they are going away and striking back when we think it is a good time to invest and make money.

So what does a pre-dominantly debt investor do after being subject to such a mauling over a relatively short period?

We believe that it could be a best time to invest in debt funds over the next couple of years. We also believe that this would be a golden period for debt funds, a period which one witnesses in 5-7 years. The last time this happened was in 2002-2003. Annual returns from medium term debt funds could average 8-12% on a gross basis for the next 18-24 months.

In light of this, we think it would be a good strategy to forget the red ink on your current debt portfolio statement (if you have a reasonable debt portfolio already). But if you are not a debt investor, then we think its winter in India and a good time to hit the beach in Goa.

Invest sizeable amounts of money in a staggered manner in star rated Income funds and wait till our Super hero – the Bondman (as we prefer to call him) vanquish the menacing yields and prevail upon them. The movie is still reaching the interval and the climax is set up for the end of 2010.

Long Live the Republic - Happy 60th Birthday

Happy Republic day India!!
Its been 60 long years and we are sure we all grew up reading a lot (or are growing up reading a lot) on how we went about changing as a country in these years. The transformation has been slow (to say the least) and we believe at an appropriate way. Think about it, we always think that we could have done what we acheived in as many years in half that time. Just look at China they seem to be getting everything right, they are working at twice the speed, executing projects at breakneck pace and they just transformed the country in less than 25 years from 1985 to today. We on the other hand haggle about petty things, seek mandates from all and sundry and lose precious time just for making it all inclusive development.

Over the long run, we believe, only time will tell which model is right and which one proved a little bit dangerous but the fact of the matter is; there is no right or wrong model. This game is a marathon and not a sprint and above all looks like in this game we are the tortiose and China the hare. And we all know that story by heart, don't we?

There are a few point why we should be able to get an home run in this game. First, as a model we should be able to broadbase the pyramid more than China. That means that the people at the bottom of the pyramid (the destitutes, home less & landless labourers) should be able to move up gradually as a result of combination of public-private initiatives that seem to be taking root over the past 20 years. The evidence is more pronounced right in the middle of the pyramid; the class dubbed as the great Indian middle class.

Second, the ability of individuals and corporations to have a free hand; ability of freedom of rights; journalism and expression will over time take care of the sections that were hitherto neglected for decades. This process will gain speed and accelerate.

Lastly all of the above lends larger role for its people for participation in discussion, growth and enrighment of lifestyles.

Therefore is this model ultimately prove right at the end of this marathon. Prima facie seems so. But lets not get overboard on this. Sticking to basics, making the right calls in terms of educating the masses, allowing for proliferation of media and encouraging entrepreneureship are key to success over the long term.

So is India the next US? The answer to that question is whether the US is the role model. We think not. There are far greater vices hidden in the US system that seems apparent. They are increasingly becoming visible over the last 15 years. Do we therefore need to morph into such a system? Clear no.

Therefore, we believe that the next decade will come with its set of challenges and our ability to grab its more firmly that the 2000's; take full advantage and move the next level in this marathon, which would be the key to our success. It is also important to 'Do our own thing'; believe that we are doing the right thing and the world will sit up and take notice. This is already happening.

Until 2020, which can be looked as the next milestone; we think that we should see a newer India, an India which has come a long way ahead and becoming slowly, very slowly the role model for the rest of the world.

Until that time, however, lets get our head down and start off to do what we aimed at finishing long time ago. Let's build a strong, resilient and wonderful India in the decade ahead.

Jai Hind.

Approach gold the traditional way!

Gold finds place in an Indian’s asset basket with or without a conscious asset allocation strategy that might be in place. This tradition of having some of it stashed away for the rainy day or for a family function (mainly children’s marriage) need not be elaborated at all. However, in today’s context gold find place in an individual’s asset basket as a result of more formal means of inclusion. This has happened over the past 15 years with India getting more closely knit globally, proliferation of advisors and knowledge transfer on currencies and resultant need to hold real assets.




As a result, gold is now held more in an sophisticated form (ETF’s) or more complex to understand ‘Gold funds’ (a quasi form of holding gold through long position on gold mining stocks). The need to hold an alternative or real asset is now fulfilled by allocating 5%-8% of an individual’s portfolio by exposure through these means. In addition, positives like liquidity, ease of transacting and low/no storage costs make the case stronger taking exposure via this route.

The question then arises is should exposure to gold move completely to holding it in these forms. The answer to this question lies in looking at both pros & cons of holding it in the traditional (physical) form and making a choice according to personal needs and goals.

• Amongst the biggest advantage of holding gold in physical form is its absence of daily valuation which is evident in holding it as an ETF. This sets the stage for increasing the holding period as a result of absence of mark-to-market.

• Secondly, the notion of liquidity might be misunderstood when holding it in physical form; since in the ETF mode it would still take t+2 days to realise cash, while in the physical for its just over the counter (at least in the Indian context). This normally acts as a liquidity booster during emergencies and a last line of defence for any household.

• Third, unlike other asset class which require constant monitoring and periodic re-allocation depending upon investor’s asset allocation, gold can continue to be held for pre-specified goals such as daughter marriage (since it would be cost neutral when jewellery purchases are to be made under anytime horizon).

Amongst the disadvantages could remain its cost of holding and security, both of which are a big hurdle for today’s investor.
The need to propagate and communicate benefits of gold investment to his/her client’s asset basket lies ultimately with the advisor. More often than not gold investment is either too little or too much and depends upon investor’s psyche and outlook towards holding it. Advisor’s role in maintaining the appropriate level (ideally between 5%-8% of the asset basket) will have its advantages in the long run.