Where to park your money

For anyone who is lucky/wise enough to be cash-rich and investment hungry at this point: I suggest the following:

1. Go Long India Debt Mutual Funds: Ideally, it is better to put the funds in a short term fund and start shifting towards longer term funds when RBI's money market tightening measures are rolled back.  For any reason, this can't be done (like tax considerations), it is advisable to go long in dynamic bond funds and not direct duration funds. Dynamic funds are better; it can be hoped they would alter the duration of the portfolio suitably while letting the investor park the money tax efficiently.

2. Go Long on US Funds: I can identify Franklin Templeton US Feeder Fund and ICICI Pru US Equity Fund  as potential opportunities. With the withdrawal of Quantitative easing on the anvil, it is likely that US economy will do well and US Dollar will do well. The latter especially will be hard on Emerging Markets like India and a choice of US equity denominated in US Dollars will act as a strong hedge against Indian equities which most of us would anyways have.

I am not suggesting totally ignore Indian equities; all I say is, incrementally increase the above two asset classes while choosing Indian companies who mainly export and are debt-free.

RBI: Money market rates and Rupee Defence

Having the benefit of a late response: RBI followed up the Jul 15 measure with further tightening this week: restricting the LAF borrowing by banks to 0.5% of the banks' individual NDTL - this does two things:

(1) Restrict overall LAF borrowing max at 35k Crs
(2) Making funding of excess SLR by banks and Primary dealers expensive and/or uncertain.

The excess SLR holding of banks is close to INR 4 lac Crores and that entire portfolio's funding cost can now swing between 7.25-10.25 which effectively means banks with excess SLR will not venture into adding to their portfolios at this point: good illustration is yesterday's and today's Tbill cutoffs of >11%, last week's devolvement og G-Sec auctionand likely devolvement this week as well. The yield curve could remain inverted till the measures are reversed and markets clearly perceive that inflation & currency risks are addressed and that the focus of RBI will shift towards growth. With the impact of the fresh reporting fortnight kicking in from next week, the movement in overnight rates could be interesting - one solace would the Govt's month end spending.

To see the impact of the RBI measures to FX market: the Forward premia and MIFOR levels have shot up in line with other rates curves effectively making it prohibitively expensive for anyone to buy forward dollars. This means different things for different players:
(1) If FII flows do come into debt, these would have to be unhedged by the sheer unattractiveness of the hedge - meaning RBI is directly signaling the long term players amidst FIIs like Pension funds, Sovereign wealth funds are welcome and not the arbitrageurs (aka hot money) playing the interest rate differentials.
(2) With an explicit support to INR spot, exporters still can forward sell their dollars at almost the same levels as in the 2nd/3rd weeks of July (despite the 90p downmove since Jul 15). This effectively encourages exporters to hedge and importers not to hedge.

From behavioural front, the sheer pain of most banks in their bond books would make them speculate much less in FX. After all, quarterly results and NIMs matter. 

Going forward, I would be keenly tracking how much redemption pressures come to Debt mutual funds. If that turns out to be material, along with the relentless supply till end August and queasy funding costs, yields can head higher even from these levels - we are already in uncharted zone in this currency cycle. On my personal HTM portfolio, I would put more money in debt funds than in equity funds at this point.

At the risk of being an hyperbole, money markets have got a step-motherly treatment to bring some stability to the favoured FX spot. All said and done, INR Spot will remain the cynosure of the central bank in the near term

Resumption

It is quite a while since I blogged and it is not the first time I have tried to restart blogging but surely hope it it's the last time.

This time around blogging from my phone.Let's see how it goes.

Why I don't like REC Tax Free Bond Issue

Today is the last day for subscription for the REC's (Rural Electrification Corporation) tax free bonds - which many analysts have recommended as a good investment option. I disagree to the basis of the recommendation which seems to be just the tax angle.  Only naïve fixed income investors use Fixed Deposit as investments and hence the rest of the post assumes this extent of sophistication.

Most analysts who recommend the tax-free REC bond issue convert the coupon of the bond to a pre-tax yield adjusting for the tax bracket (taking the highest tax bracket of 30%) making the 7.88% p.a. yield to 11.26% (=7.88%/(1-0.30)) and claim it is higher than the pre-tax yield of most other fixed income instruments.  The tax adjustment rate used in the calculation above should be the tax rate that makes the "Tax-free" bond yield comparable to "Normal" bonds in the market and not simply the tax slab of the individual/company.  Fixed income instruments are taxed at 10% without indexation or 20% with indexation - which makes the recommendation of the analysts totally flawed.

If the long term taxation rules of Fixed income instruments are to be observed (Link) they are either 20% with indexation or 10% without indexation.  This practically puts a cap on the potential upward revision of the pre-tax yield of the "tax-free" bond to 1/(1-0.10) and not 1/(1-0.30) - using this base case the pre-tax yield of the REC bond for 15 year turns out to be 8.76% (=7.88%/(1-0.10)). This is not screamingly higher than the other available instruments available in the market.  Just to give a sense, SBI Dynamic Bond Fund (Link) has an average YTM of 8.60% and average maturity of 11 years; no comments on the liquidity angle where the mutual fund route is definitely more liquid. There are other bond funds with longer duration and equivalent credit quality.

If the indexation angle is taken into consideration, (data here), the indexation benefit for the last 1, 5, 10 and 15 years are 8.5%, 10.92%, 9.06% and 10.49% per annum respectively. This practically means the interest income from fixed income instruments after adjusting for the indexation benefit, there is hardly any income and hence hardly any tax payable.  There could be instances of tax credits in some of the years.  It is to be noted even in the Direct Tax Code, the indexation benefits are likely to remain intact. Hence after the indexation angle, I do not see any advantage of subscribing to the REC bond vis-a-vis the fixed income instruments available through the Mutual fund route.

The main risk to my recommendation is that the fund manager drastically changes the duration/credit profile. Having said that, the bond funds have the diversification benefit.

Bottomline: REC Tax-free bond is inferior to other available fixed income investment routes with respect to the net tax free yield at the hands of the investor.

Update: Market seems to echo a similar sentiment as mine with respect to these Tax Free Bonds (TFBs). Here is a Business Standard report of why TFBs have been disappointing this year.

Olympics and my Ignorance

Considering the cynosure corned by cricket in our country and relative reticence for the rest, the interest in social/mainstream media covering Olympics was definitely remarkable. It brought to notice some of the greatest athletes of our times, enlarged the circumference of our scope which had been, in a way, circumscribed by Cricket, Tennis, Football.  There were some who knocked on the door of the greatest ever, at least in their respective sports.

The discussion on the greatest ever sportsperson would be incomplete without the names of Phelps or Bolt in it. Just for the record, Phelps has a total of 22 Olympic medals including 18 Golds which includes the successful defense of the Gold medal in 4 events in 3 Olympics.  His individual medal tally is better than 105 countries out of a total of 144 countries that have ever participated in the Summer Olympic games (Interesting Article here). Usain Bolt has done an abridged version of the same in the toughest of Sports - defending the Gold medal in 3 sprint events; it is also noteworthy that in the last 4 years, Usain Bolt has come first in every major race he has competed and completed (excluding one disqualified start).

The local interest has also been rising with India doubling their medal tally which is a brilliant outcome for our contingent notwithstanding the 1.2 Billion population argument (Interesting Article here). 

When I went for the eye check-up two years back and figured out my eyes had a decent number, the doctor told "Young man, you didn't know what you had been missing".  I got the same feeling about my own assessment of great sportspersons, after this Olympics. கற்றது கை அளவு, கல்லாதது உலகளவு.

Funny India

 

> > > > > > > > > >

Defeatism - defined

If I have to give an anecdote for defeatism, this should be it:

"And what could man control when he is unable to control his own birth, the starting point of his life? And what could man control when he is unable to control his own death, the ending point of his life? When man is unable to control the beginning point and the ending point, how could he control the in-between, illusory story?"

My Son - Sachin

White Board

When nothing is there on a white board,

it is clean, spotless

When a line of poetry is written,

it is admirable, comprehensible

When a hundred lines are written,

it becomes blurred, hazy

When a hundred thousand lines are written,

it becomes clean, spotless

Ponniyin Selvan

Just completed reading my first Tamil novel "Ponniyin Selvan". It was a good read with good characterizations but without any significant central theme or noteworthy philosophy. At the end of the 3 month duration of reading the 2000+ page novel, I am definitely not disappointed. I am getting a sense of contentment which I normally feel after watching a good masala Tamil movie: sans logic at many and important places.

Overall, it was a good beginning to my Tamil fiction reading; would have cherished the novel had I read it 10 years back.

Life’s goal

The Raison d'être of life is to achieve. This might insinuate everyone has to achieve something worthy in his life: I am not denying it; however, I would go further to say one has to keep on achieving in every stage of his life; every year, every month and so on. This brings to an even further important quest: what to achieve; what is the goal.

There are stages in life when the goal is pretty obvious during that phase and hence no intellectual introspection is required for most. This generally applies till one completes his studies; some really excel in this part of life and get to a professional career of choice.

Once into the career which he has painstakingly gotten into after so many years of studies and other related activities, does he really believe whether the career he is into is worthy of all the goals so far in his life? Doubtful. The goals then shift to reaching “a particular level” in the organizational hierarchy, own a house, raise a family, international vacations etc. Depending on multiple variables, all these can be achieved over a period of time as long as he does not fritter away opportunities coming his way and does not keep goals beyond his reach. Now what next?

The next stage is the one where the goal is to look for a goal. Now the person looks beyond him or within him. Some get involved in social activities – not because they become more concerned about the society than before, but just because they need a goal. Some start exploring spiritual thoughts and get lessons like “living in the present” is the key, fitness of the mind and body etc. No complaints, but what is the goal here: the person is trying to find happiness within him in the latter or provide contentment/happiness to others in the former.

In the three broad compartments of life mentioned above, there are three distinct goals, not one of them linked to the other. The above division of life is just an example: a person can have any number of stages in his life and that many different goals. Nonetheless, what strikes me is the huge inconsistency in targets as we move along in life. If anything, I would prefer a single goal to have in life right through. The sub-targets in each stage should lead one step closer to that single goal.

What can be that one thing worthy enough to be a goal? Since it is one’s life in question, the goal should be such that it demands more on moving closer and be a mirage in a positive sense. The goal should be something which upon achieving a portion makes one want more of it. What can be that goal? Two things come to my mind that can fit this description: Money and Happiness.

Remember we are thinking about a goal from childhood to old age. Can money be the goal in the early stages of life: not possible. Hence, the only possible goal to have is happiness. All the achievements we target are tools towards this goal; but in pursuit of the tools, most of us lose sight of the goal. It is time we take efforts to change.

Be happy: that is life’s only worthy goal.

To be continued.

Optionality of Cash

A blog post after some time: Optionality of Cash

Indigo Cancellation Process Sucks

I have read from multiple sources that Indigo is one of the best, if not the best, managed Airline company in India. However, it came as a shock to me when I learnt I cannot cancel a booking and get refund for the canceled journey. Instead I can only use the money from the cancelled ticket in subsequent journeys which was a procedure infamously started by Air Deccan which even they got it changed (or so I hope). If not getting my money back is one issue, the fact that Indigo has not even sent an email acknowledging the cancellation and interest-free money they have got is unprofessional and IMHO should be penalized for such a cheat-all tactic. Bottom-line, Indigo sucks, just like other Airlines in India.

Amul - the butter ads!

The Amul hoardings are probably the only good experiences in a traffic jam (argh!) in Mumbai

Standard Chartered IDR issue: To apply or not?

I have done a bit of research on the Indian Depository Receipt (IDR) issue of Standard Chartered PLC. My analysis is based on following three high level concepts which need to be looked when we want to decide on an IDR:

• Business Risk: It refers to the overall expected performance of the firm considering its portfolio composition, geographies of operation and its standalone performance metrics.
• Systematic Risk: It refers to the correlation of the underlying stock’s performance with that of FTSE. Since the IDR’s value is ‘derived’ from the stock price of Standard Chartered PLC in FTSE, there would be a component of the IDR’s price impacted by the movements in FTSE – which would be captured in the Systematic risk associated.
• Currency Risk: It refers to the relationship between the underlying stock’s currency and the IDR’s currency. Any big, multinational financial institution will have exposure to multiple currencies and there is an inherent currency risk element which should be analysed at a business-as-usual risk; however, since the investment in IDR is in Indian Rupee while the underlying is GBP, there has to be a considerable amount of analysis to assess the GBP/INR movements

Business Risk
Lots of research articles have come on this; in particular I read and liked the content in the following ones – however, not all of them addressed the systematic and currency risk components of the IDR issue.

• Article 1
• Article 2

The primary areas of focus of these articles have been:

• the diversification benefits offered to an Indian investor,
• the geographical coverage of Standard Chartered with presence in some of the faster developing countries. Following is the distribution of operating income across countries

• Though it is understandable to state India and China (as captured in Other Asia & Pacific) and Korea are among the better placed economies coming out of the financial crisis; more thought and analysis needs to be undertaken before stating the same for Hong Kong and Singapore as both these city-states’ health is, more or less, derived from outside – an effect that can be gauged only after looking into the portfolio composition of Standard Chartered in these countries.
• lower cost of capital,
• better risk management system enabling it to be not adversely impacted by the financial crisis,
• healthy proportion of fee based income contribution (22%) to the total operating income.

Systematic Risk
Though the business of Standard Chartered is more concentrated outside Europe, the current IDR represents 10% of the Standard Chartered stock traded in the London Stock exchange (Link). Through all of finance literature, it is continuously found that a major portion of risk-return profile of a stock is systematic factors – which is linked to the overall market – and the remaining portion of risk-return profile is the stock’s own – a.k.a. unsystematic factors. The unsystematic factors are addressed in the ‘Business Risk’ section as outlined in the previous section. Next the investors have to look into the systematic component of the risk in the Standard Chartered IDR issue.

With FTSE 100 being the major index for Standard Chartered, I computed the beta, using data from beginning of 2003, which came to about 1.46. Statistically speaking, a beta of 1.46 infers a high degree of impact of FTSE 100 is in the price of Standard Chartered. Considering the commotion in the Euro zone with respect to Greece and the fate of Euro as a currency hanging in balance and the obvious correlation of FTSE 100 with rest of Europe, the negative impact of the Greece crisis on FTSE 100 would be much more than that on the Indian indices. Numerically inferring from the beta number, a drop of 10% in FTSE 100 would lead to a drop of 14.6% in the Standard Chartered’s stock. This is a major risk which many articles I have come across have missed.

Currency Risk
By currency risk here, I am not referring to the risk the banks encounter as a result of foreign exchange currency movements of its assets, but to the difference in currency of the underlying stock and the IDR – the former being in GBP while the latter is in INR. This means the returns from the IDR is very much linked to the GBP/INR movements. Any appreciation in the INR value against GBP will adversely affect the returns from the IDR. Consider a simple scenario, say Standard Chartered PLC moves from 1630p today to 1800p in a year’s time – giving an appreciation of 10%, but the INR appreciates from 68 INR/GBP to 60 INR/GBP (an appreciation of 12%), the net return from the IDR would be, approximately, a negative 2%. It is very much open to question whether INR would appreciate so much in the next year, but considering the drop of GBP from 80 INR/GBP to 68 INR/GBP now, such a 12% drop does not seem incredulous. However, it is mandatory that the investors look into this factor as well before their decision on investing in the IDR is taken.

Final Call
Considering the above three broad categories of risk, the investors need to make a holistic view of the IDR in relevance to their respective portfolios and then take the final call on investing in the issue if and only if it serves to mitigate certain specific risk for their portfolio. For an individual investor, I would suggest not to invest in the Standard Chartered IDR, but do so with Indian banks.

Wedding Invitation

It is with great pleasure I invite you for my wedding with Aarthi Shanmukhi on the 7th of June in Tuticorin (Directions from Chennai)

Please treat this as a personal invitation and grace the occasion as we celebrate the start of our marriage and move forward to the next phase of our lives.

Wedding Invitation - Selva

R.S.V.P.
Regards
Selva
+91-9819975057

Book Lists - building a personal library

With gift coupons worth INR 5000 that can be used only for buying books, I have been actively searching for building my personal collection of books which I can keep in my 'library'. In this quest, I have been looking at multiple lists - here are some, in no particular order:

• Modern Library Top 100 Fiction and Non-Fiction
• BBC - The Big Read: Top 100
• TIME - All time 100 novels
• Telegraph - 110 best books: The perfect library

The following books are in my wish-list for now:

1. "Out of my comfort zone" by Steve Waugh
2. "Watchmen" by Alan Moore & Dave Gibbons
3. "Beyond the blues" by Aakash Chopra
4. "How chess imitates life" by Garry Kasparov
5. "On the interpretation of dreams" by Sigmund Freud
6. "Plato and Platypus walk into a bar" by Thomas Cathcart & Daniel Klein

Any recommendation is welcome for inclusion into or exclusion from my above wishlist. TIA.

Mockery of Sentiment, Law and Public Money

It is hardly fathomable that the Indian legal process took 18 months to indict a person who committed mass murder  on live TV. The excuse that Indian legal process is typically slow - should not apply to such an open and shut case. Now there is a search for the hangman; going by the hysteria of the mainstream media, especially the Satellite News channels, we might even end up having a reality show to identify the most eligible hangman. 

Why could not the police / National Security Guards or whosoever nabbed Kasab kill him on the spot?

The last 2 years of his trial has been a total fiasco, wasting public money to the extent of INR 8.5 lacs per day; Going by the law minister's statement it might take about a year more before Kasab is hanged - which translates to INR 31 Crores of expense to house a manic killer.

Resignation Letter

Dear Sir,

As communicated in my earlier mail (20th April) and during our telephonic discussion, I have decided to resign from the services of xxx Bank. I would like to be relieved from the bank’s services by May 26, 2010.

I fully understand the significance of the xyz project for the bank and my role, in particular. However, given the nature of the initial phase of employment with my next employer and my wedding scheduled for the first week of June, it would be very important for me, both professionally and personally, to be relieved from here on the date specified above. Drawing confidence from my work so far and contribution to the success of the project till now, I also would like to earnestly convey that I will put in double the effort I have spent so far to ensure close-to-complete knowledge transfer does happen from me to whosoever is identified to take up the project further. I do regret for not taking this project to full completion; I would try my best that the project is handed over comprehensively to the successor. I take it as the toughest challenge posed so far in xxx Bank and fully believe I would succeed in that.

Thanks for your support all through since the commencement of this project and look forward to having successful last days at xxx Bank closing with mutual satisfaction.

Regards

IPL - a Bad Habit

There have been lots of positive and negative reviews on and about people involved in IPL. Be it the cricketing angle of the cannibalization of the longer forms of the game or the excessive physical demands on the players or the razzmatazz of the owners, promoters, cheerleaders or the rigmarole of the moronic commentators or the power fight between the commissioners and the ministers, IPL has got too much variations of below-par stuff.

Just like a bowler specializing in not-having-a-speciality, IPL which provides good quality of nothing still manages to garner eyeballs and mindspace. Nonetheless, I feel IPL is like smoking; just like the inability of the smokers to get rid of smoking even if they want to, I find it hard to let IPL go from the real estate of my mind. I hate watching/following IPL in any form of media but I am ending up following it in all.

IPL is a very bad habit.