If you believe the rumors, Amazon.com is going to enter the mobile phone business this week, with most pundits guessing that a mysterious video suggest that it will release a phone with novel 3-D viewing capabilities.

There are obvious reasons for Amazon to be eying the category. The mobile phone industry is massive, with close to 2 billion devices shipped annually and total spending on wireless-related services of more than $1.6 trillion across the world. As mobile devices increasingly serve as the center of the consumer’s world, their importance to a range of companies is increasing.

What should you watch for on Wednesday’s launch to see if Amazon is moving in the right direction? It is natural to start with the set of features that Amazon includes on its phone.

One of the basic principles behind Clayton Christensen’s famous conception of disruptive innovation is that the fundamental things people try to do in their lives actually change relatively slowly. The world advances not because our needs, hopes, and desires change, but because innovators come up with different and better ways to help us do what we were always trying to get done.

Take the big shifts in the music business. People have enjoyed listening to music for all of recorded history. But the biggest industry transformations came when innovators made it simpler and easier for people to listen to the music they want, where they want, and when they want. Thomas Edison’s phonograph was the first big democratization of music, allowing individuals to listen to music without having to hire a live performer, train to be a musician, or go to a concert. Sending sound through the airwaves, received in a radio, furthered this trend, enabling people to hear live sound remotely, or hear a wider variety of pre-recorded music.

Floor-standing radios were relatively expensive and consumed a lot of power. So it was hard for individuals to listen to what they wanted where they wanted until Sony popularized the highly portable transistor radio in the 1960s. The fidelity was low, but teenagers eager to listen to rock music out of earshot of disapproving parents or to baseball games late at night flocked to the device.

It’s difficult to enjoy music if everyone is blaring transistor radios on the subway, so Sony again made it simpler and easier for people to listen to what they wanted, when they wanted, when it introduced the Walkman in 1979. The device, and its offspring the Discman, had one obvious limitation — when people were away from home they couldn’t easily access their music collection. People compensated for this by making mix tapes or lugging around cases with dozens of CDs.

MP3 players, most notably Apple’s iPod, made it simpler and easier to listen to the precise music you wanted when and where you wanted. The first commercials for the iPod highlighted the value of having “1,000 songs in your pocket.” Finally, streaming music services like Spotify removed even the need to build a music collection.

Mobile phones follow a similar pattern. The first wave of growth came as devices from Motorola and Nokia made it easy and steadily more affordable for people to make phone calls and send short messages when they were on the go. Blackberry’s rise came from releasing office workers from their desks by making remote e-mail easy. The next wave of growth came as Apple and Android-based smart phones put productivity and entertainment applications from computers in the palm of your hand.

Leaving aside the hype of 3-D technologies, the big question about Amazon as it enters into this seemingly crowded arena will be whether its offering makes it easier or more affordable for people to do something they’ve historically cared about. Pundits are skeptical, with some calling the potential idea “silly.” But one job a 3-D phone might do better than existing alternatives is enable shoppers to see something before they buy it. People like finding and obtaining new goods, and replicating the in-store experience anywhere in the world could allow more people to shop more conveniently.

Of perhaps even more interest is Amazon’s business model. Market disruptions typically combine a simplifying technology with a business model that runs counter to the industry norm. The prevailing mobile phone model involves service carriers subsidizing the devices in return for locking consumers into two-year phone service contracts and charging them based on usage.

If Amazon were primarily interested in driving more retail purchasing it might come up with completely different pricing and usage models, subsidizing both the hardware and the phone service, perhaps in conjunction with a more disruptively oriented mobile carrier such as T-Mobile, and reaping its profits by taking a cut of transactions enabled by its 3-D platform.

Finally, remember that the true impact of an innovation isn’t always fully apparent when it launches. When Apple launched the iPod in 2001 it was interesting, but when it added the iTunes music store in 2003 an industry changed. Similarly, Google’s super-fast search technology caught people’s attention in the late 1990s, but the development of its AdWords business model a few years later is what made the company what it is.

So on Wednesday look to see if Amazon has found a way to make the complicated simple or the expensive affordable, pay particular attention to the business model it plans to follow, and, most critically, once the dust settles from the pundit reactions, watch what the company next has up its sleeves.

Guess what's the leakage in American health care paid for by the tax payer? $272 billion of  1.7% of GDP! That's nearly as large as the total subsidy budget in India. The Economist reports that a lot of ingenuity goes into perpetrating the fraud:

Patients claim benefits to which they are not entitled; suppliers charge Medicaid for non-existent services. One doctor was recently accused of fraudulently billing for 1,000 powered wheelchairs, for example. Fancier schemes involve syndicates of health workers and patients. Scammers scour nursing homes for old people willing, for a few hundred dollars, to let pharmacists supply their pills but bill Medicare for much costlier ones. Criminal gangs are switching from cocaine to prescription drugs—the rewards are as juicy, but with less risk of being shot or arrested. One clinic in New York allegedly wrote bogus prescriptions for more than 5m painkillers, which were then sold on the street for $30-90 each. Identity thieves have realised that medical records are more valuable than credit-card numbers. Steal a credit card and the victim quickly notices; photocopy a Medicare card and you can bill Uncle Sam for ages, undetected.

The Economist says that the way to tackle healthcare fraud is to simplify it and to cut out unnecessary treatment. It says the NHS in UK does a better job. Perhaps the journal has got it wrong. The problem could well be that healthcare is private sector dominated. It may be easier to control leakages if the state has a larger role in direct provision of healthcare.

What lessons might the US experience hold for our welfare programs? One obvious lesson is that we can't close down our welfare programs because of leakages- America is not shutting down healthcare because of the scale of the fraud. Another is that getting the private sector to provide a service and reimbursing the costs could prove most wasteful than the state providing the same services. Switching to private healthcare and trying to provide insurance for the same is quite the wrong way for us to go. It's difficult, it's challenging but we need to do more to make state institutions efficient.

First of all a heartiest congratulations to everyone for giving such a clear mandate. It was the need of the hour for our country and society to have a better and stable government. It is heartening to see that this time the election has been won on the agenda of development. From inaction and scams, lets hope the economy gets back on track.

The markets have witnessed a major change and upliftment in its mood over last few weeks. Those who were invested from before must be enjoying the gains. One should be careful, however, to not get carried away. These broad rallies are very useful for portfolio reconstruction – i.e. getting out of ideas or mistakes where the conviction levels were not high and moving into companies with a better clarity and visibility.

Lately, we have not been posting much because the companies we have discussed earlier are performing quite well fundamentally and continuing to grow consistently. We feel they still have a good long term potential.

Brief updates on our existing ideas:

Astral Poly – While the company continues to deliver an expected growth of about 30%, the stock keeps surprising everyone through a regular re-rating. Though the stock does trade at high valuations now, we recommend reading this article for some insights about the company’s high quality of business, management and growth prospects going forward.

Ajanta Pharma – Ajanta has once again come up with an excellent quarter – it continues to surprise everyone with the quality of its numbers. Do see their latest presentation, which gives a lot of insight on the brands they own and other qualitative aspects of their business. The slide number 14 is very interesting and is one of the key reasons behind their good growth and superior margins.

Shilpa Medicare – Shilpa Medicare too has reported a good quarter:

Particulars	2013	2014	% Change
Turnover	328.19	527.37	60.69%
EBIDT	69.82	126.57	81.28%
NP	46.06	80.86	75.55%
EPS	12.49	21.98

Its good to see a consistent increase in the gross block of the company. Recently the company has raised 75 Cr by way of preferential allotment to an FII. The company has been developing a product pipeline over the last 3-4 years; we expect the new facilities and products to give a revenue growth of 25-30%+ CAGR over the coming years.

Avanti Feeds – The company continues to maintain high growth rates with a revenue growth of 75% in 2014. Its amazing to see that the company has grown from just 72 Cr turnover in 2009 to 1135 Cr in 2014. The balance sheet is quite healthy with a debt of just 50 Crores.

Particulars	2009	2010	2011	2012	2013	2014	% CAGR
Turnover	72.51	96.16	199.62	393.41	648.04	1131.61	98.76%
NP	-8.59	-1.20	3.42	28.06	30.20	69.75
EPS	-10.74	-1.50	4.28	30.90	33.26	76.82

As per a recent article on the company, the company has recently set up a 85,000 tonne plant in addition to its capacity of 1,40,000 tonnes. With the industry continuing to do very well, it is expected that Avanti may again deliver high growth of 30-50% for the coming year FY15.

Its also good to see promoters buying over 1.7 lac shares since 1st April, 2014.

*Caution: Shrimp industry is a high risk industry, often affected by shrimp diseases and natural calamities.

Kitex Garments – We visited the AGM of the company and it was a superb experience. Its one of the those extra-ordinary entrepreneurship stories where a person has created a great company from scratch, all in 15-20 years.

Today, KGL is the third largest infant garments manufacturer in the world and supplying to some of the best names in the world including Gerber, ToysRus and Carter. They are known for manufacturing the best quality garments. Compared to a normal textile industry, the infant’s garment industry does not have a high competition. Infants can be allergic to dyes and chemicals, or chew the buttons – thus Kitex uses the best of the dyes and yarns. They also invest heavily into social compliances and provide an air-conditioned factory, free food and free stay to almost 9000 workers, of which 90% are females. The company had done a recent capex – it aims to be the biggest in the world in this year and eventually double the current size in 3-4 years.

Though the stock has had a sharp run up in recent times, we feel that it is one high quality business and should do well over a long term.

GRP – The company continues to face tough times. We were expecting the things to get better with the improving turnover, but this quarter has been a disappointment. Till the previous quarter, the issue was underutilization of capacity and problems at the new plant set up; hence we had a hope of better times as and when the economy improves. During the last quarter, however, the raw material cost as a percentage of total cost has increased substantially and is now a new cause of worry. We have reduced some exposure (by about 15-20%) and look forward for an update at the company’s upcoming AGM.

Oriental Carbon – After a long wait, the company has posted a good set of numbers. One of the big positives is the increase in dividend from Rs 5 last year to Rs 7 this year. The stock is trading at 5 times earnings with a price to book value of 1.

Amongst the new ideas, we are working on Anuh Pharma these days. The latest quarterly numbers hint an improvement in the company’s operations. From being a general bulk drug company, the company seems to be making efforts on R&D and entering regulated markets. The negatives are – 1. the group has several other unlisted companies which are also into pharmaceutical business and 2. the listed company has had a dull past.

We look forward to a strong budget over the next month. Happy investing!

The post Updates on the Quarterly Results – Q4FY14 appeared first on Dalal-Street.

As you get on in years it is not easy to look after your assets. Let me give you some examples:

A childless couple in a posh locality (stand alone Bungalows in the capital of the country) got a new ‘nephew’ to stay with them. No clue what happened, man found dead. Police arrested the nephew. Yes he killed the GOLDEN GOOSE. Anyway the old man was to give that house to that ‘nephew’. Property worth about Rs. 80 crores.

A cook and house maid took away all the silver ware from a senior citizen’s house. They found out, did not know whom to ask. They were too scared to ask. Sacked her. Loss? well about Rs. 80,000 AT LEAST.

Maids, drivers, etc – police keeps saying do a police verification, but we know it all, right?

What about your OWN children eyeing your property? Your son and daughter in law wanting your house NOW (you are 72, and with a chance of living up to age 100).

What about your tenant who does not pay the rent on time – knowing that a 73 year old cannot make too many trips to collect the rent?

Or your longish equity portfolio – and you are incapable of tracking all the dividends?

As you get on in age SAFEGUARDING your own assets is more and more difficult, and is becoming more challenging.

So once you reach a particular age (your call, not mine, but say 73) you need to much simpler assets. I am assuming that you and your spouse are the same age, you are childless, and thus, theoretically no interest in what happens to your assets AFTER you are gone.

What should those assets be?

Income funds, liquid fund, index funds, bank fd and savings bank account.

However once you hit say 80 years of age, you are better off if you can shift to just bank accounts. FD, and SB accounts. HOWEVER do remember if this amount is big, you will attract unnecessary attention of the bank. You are better off if you split the amount of money to 3-4 banks so that people do not know you as a HNI.

Tough, is it not?

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Between the World Cup in Brazil, and the Iraq crisis, it isn’t surprising that most people would ignore a speech by B ank of England governor Mark Carney last week. Mr Carney said he’s expecting interest rates to rise sooner than everyone expected, which was sometime next year. For those of us who follow these kinds of things however, any such move by the central bank has one obvious impact – on UK’s property prices, especially in London.

The jury is still out on whether there’s a bubble or not. Some believe that property market will continue to rise, albeit more slowly than before. Others believe that this is a bubble, one that’s just waiting to meet a pin. And that pin could well be even a small rise in interest rates, coupled with a series of measures that the UK government is bringing in to dampen fears of a property bubble.

To take it from the top, in the past couple of years, in order to pump up the economy, the government introduced a help to buy scheme, giving potential buyers help to get on to what they call the property ladder. Aided by rock-bottom interest rates, and banks quite happy to dole out generous mortgages, not to mention international buyers, London’s house prices have gone through the roof. It’s not so high in the rest of the country, but as in all these things, prices have been steadily rising, to a level where even the International Monetary Fund was been warning that a bubble could blow a huge hole through UK’s economic recovery.

Now, they’re all trying to ensure that pin doesn’t meet that bubble, because the consequences will be somewhat similar to what happened in 2008. For anyone eyeing the boom in housing prices as an irresistible investment opportunity, it would be well to take a cautionary stand – nobody will actually come out and admit, but banks have been up to their old tricks, lending far more than they should.

The Bank of England has been given the authority to curb mortgage lending, because the fear is that when interest rates rise, homeowners will be left with huge debts, unable to offload their property to meet those debts. What has already started happening, thanks to all the warning noises from Mr Carney and Mr Osborne – who’s also worried about runaway house prices – is that banks are now raising the rates of the fixed interest mortgages, as they assume buyers will want to lock in at current rates for a longer period. In addition, estate agents say they’re seeing more “sell” orders, as investors want to cash out at the peak of the boom. That will automatically put price rises on lower gear. And while there’s a severe housing shortage in the low and medium ranges, an avalanche of luxury developments are waiting to hit the London market; a skew at the top end will inevitably have a trickle-down effect. On the other hand, if the crisis in the middle-east continues, I expect another huge dollop of overseas money heating up the market again.

It’s impossible to predict how these things will go, but like the authorities, my alarm system is on red – there is a clear and present danger of a possible crash. From the international perspective, there could both be good news and bad news – a bust would make it ideal to invest in property, but given the importance of housing in the overall economy, bad news for businesses in this market. A slowdown, however, will make investing a far more realistic proposition, especially for those who are looking to buy houses to live in, and not just as a bluechip investment.

Prime Minister Narendra Modi’s visit to Japan in the first week of July followed by the India-US strategic dialogue in August, a summit meeting with US President Barack Obama in September and a visit towards the end of the year by Chinese President Xi Jinping spells out the new government’s foreign policy agenda: look East, but engage the West as well.

The world’s four largest economies by purchasing power parity (PPP) are the US, China, India and Japan. It is no coincidence therefore that the leaders of all four will be involved in summit-level talks within months of Modi taking office.

India is well placed in this quadrilateral of global power.

The US wants to contain China’s rise. India is a natural counterweight.

China has littoral and land disputes across Southeast Asia. It would like a peaceful, trade-led relationship with India.

Japan, embroiled in its own dispute over the Senkaku islands with China, sees India as an investment partner for its high-technology companies and a stable democracy in a region where – as Thailand has recently shown – stable democracies are at a premium.

The Modi government’s challenge is to leverage its strengths with all three countries.

With the US, Prime Minister Modi will seek collaborations in advanced defence equipment projects, closer ties with US universities and joint intelligence sharing on terrorism.

Technology, knowledge and intelligence are what the US can offer. India can offer a great deal in return: a growing consumer market, opportunities for US firms in infrastructure, and joint ventures in manufacturing.

President Obama knows he’ll be dealing with a very different kind of Indian prime minister – direct, self-assured, well-briefed.

Their meeting in September will be short on ceremony, long on calibrated outcomes.

Modi’s meeting with Japanese Prime Minister Shinzo Abe will have a different timbre. The two have met twice in Japan – once when Abe was PM, the other when he was out of office.

They share a liberal market  economy philosophy. Japan’s low-interest loans could be a gamechanger for India’s infrastructure projects: high-speed trains, the Delhi-Mumbai industrial corridor, roads, ports and manufacturing. All of these will create productive assets and jobs.

The Chinese relationship is the hardest to nuance. Fortunately, Modi as Gujarat CM established important political and business linkages during his visit to China.

The border disputes in both Arunachal Pradesh and Ladakh will need to be set aside for the moment. Trade must grow. The strategic intent is to reduce China’s overt and covert assistance to Pakistan.

Chinese leaders constantly stress that their country’s manufacturing strength dovetails with India’s capabilities in services. Chinese investment in specific manufacturing projects must be encouraged even as Indian IT service companies gain traction in China (TCS has 3,300 employees in China and others should follow suit).

China needs India to contain the US as much as the US needs India to contain China. The Manmohan Singh-Sonia Gandhi government failed abysmally to leverage this rare geopolitical advantage. Modi will not. 

India’s per capita income at current exchange rates is $1,600 (around $4,000 by purchasing power parity). To “eliminate” rather than merely alleviate poverty, as Modi has pledged, we need to raise India’s per capita income above $5,000.

This means tripling GDP, factoring in a rise in population. How quickly can this be achieved?

At an annual GDP growth of 9%, it would take 12 years. At 10%, it would take 10.50 years.

Around 21% of Indians – over 250 million – live below the poverty line. By focusing on growth through strategic diplomatic engagement with the US, China and Japan, a majority of these can be lifted out of the crushing poverty they today endure.

Good economics is good politics. Good foreign policy is good economics.

Prime Minister Modi knows this. And he is not a man to waste time.

Follow @minhazmerchant on twitter 

Sounds very funny does it not? Why would anybody choose to be poor? Or unhappy? Or fail? Well if you read Hindu philosophy in detail you realise the following lessons are taught to you through stories:

You are a function of what you chose to be.

If you are happy you make the choices to be happy and successful – so success follows happiness and not necessarily the other way around!

Happiness is a state of mind – money is important but the importance we give to money is just too much. It is not so important as we make it out to be. It is just like health – you need to have it, but those who have health do not jump up and down saying they are healthy. Those who do not have it know how much it means. Remember the song from the film ‘Khatta Meetha’? ‘Thoda hai thode ki zaroorat hain’.

Our requirements are a few, so we need less

I met a taxi driver (If Meru had a frequent user, I could benefit)…and got talking. He said he went to a barber’s shop and paid Rs. 20 for a shave. On probing I found that he normally spent Rs. 10 for a shave and that meant Rs. 100 a month – Rs. 1200 a year. Then I asked him about his food – he said he eats out every day – that meant about Rs. 100 a day ATLEAST – Rs. 36000 a year.

If he choses to buy a Gillette shaving blade (Rs. 20?) and it lasts him 15 days – he would end up spending Rs. 40 a month or Rs. 480 a year. He could of course choose some unknown brand and save still more! If he ate food from a ‘dabba’ packed by his family he could clearly save Rs. 25000 a year and save some stomach aches too! Do people not KNOW these basics? Actually NO. They cannot see the impact of small amounts on their total expenses. When I explained it to the taxi driver, he was stunned. I said ‘Rs. 40 a day can give u Rs. 3 crore by the time u retire….hmmm good habit

If you are in HR do you think it is your responsibility to tell people such basic things? No. Because HR (like most other professionals) do not ever get rewarded for avoiding trouble. If there is trouble and you sort it out you get rewarded!

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This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Edelweiss Financial Services’ subsidiary, ECL Finance Limited, came out with its first NCD issue in January this year and the issue got oversubscribed on the 2nd day itself. The company then decided to close the issue on the 3rd day due to such oversubscription. Boosted by such a good response, the company is all set to launch its second public issue of unsecured, redeemable, non-convertible debentures (NCDs) from June 17th i.e. the coming Tuesday.

Size & Objective of the Issue - The company plans to raise Rs. 400 crore from this issue, including the green shoe option of Rs. 200 crore. The company plans to use the proceeds for various financing activities, including lending and investments, to repay its existing loans, for capital expenditures and other working capital requirements.

Credit Rating of the Issue - Two rating agencies, CARE and Brickwork Ratings, have rated this issue as ‘AA’ with a ‘Stable’ outlook. As mentioned above, these NCDs will be unsecured, unlike those offered during the first issue.

Coupon Rate & Tenor of the Issue - Last time, there were two tenor options – 36 months and 60 months. This time the company has decided to issue its NCDs for a duration of 70 months and that is the only tenor option. The company has decided to offer 12% per annum rate of interest, payable monthly, annually or on a cumulative basis at the end of 70 months.

ECL Finance vs. Muthoot NCDs -Muthoot NCDs issue is also open for subscription right now and it is scheduled to close on June 26. As you can check from the table above, Muthoot is offering relatively lower rate of interest. For a period of 60 months, Muthoot is offering 11% p.a. payable monthly, whereas ECL is going to pay 12% p.a. for 70 months payable monthly or annually. Muthoot is offering 0.50% extra if you opt for its annual interest payment option.

Also, ECL is offering to more than double your money in 70 months’ time, whereas Muthoot will return exactly the double of your investment in 75 months’ time.

Apart from being the issues of two different companies with different business models, ECL Finance NCDs are unsecured, whereas Muthoot Finance NCDs are secured, except the last option of 75 months.

Minimum Investment - If you want to apply for these NCDs, you need to invest a minimum of Rs. 10,000 i.e. at least 10 NCDs worth Rs. 1,000 each and in multiples of 1 NCD thereafter.

No Additional Benefit to Edelweiss Shareholders - In the last issue, Edelweiss shareholders were entitled to an additional coupon of 0.25% p.a. over and above the base coupon rates. No such special benefit has been granted to the shareholders this time around.

Categories of Investors & Allocation Ratio - The investors have been classified in the following three categories and each category will have the below mentioned percentage fixed in the allotment:

Category I – Institutional Investors – 30% of the issue is reserved

Category II – Non-Institutional Investors – 20% of the issue is reserved

Category III – Individual & HUF Investors – 50% of the issue is reserved

NCDs will be allotted on a first come first served basis.

NRIs Not Allowed - Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.

Demat & TDS - Demat account is not mandatory to invest in these bonds as the investors have the option to apply these NCDs in physical form as well. Also, though the interest income would be taxable with these bonds, NCDs taken in demat form will not attract any TDS.

Listing, Premature Withdrawal & Put/Call Option - These NCDs will get listed on both the national exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The investors can always sell these bonds on the exchanges anytime they want, but there is no put option with the investors to redeem these bonds before the maturity period gets over. The listing will take place within 12 working days after the issue gets closed.

Financials of ECL Finance

I covered the profile of ECL Finance while posting its first issue in January, so I don’t think there is a need to do it again. Rather I would like to cover its updated share of financials and product line here.

(Note: Figures are in Rs. Crore)

As you can check from the table above, the revenues of the company grew by 25% last year from Rs. 650.64 crore to Rs. 812.28 crore. Profit after tax (PAT) also rose 32% from Rs. 121.17 crore to Rs. 160.04 crore. This clearly shows that the company is on a growth path despite challenges in the economic environment.

As the loan book witnessed a satisfactory growth of 27%, gross and net NPAs of the company also jumped to 1.24% (0.52% earlier) and 0.35% (0.16% earlier) respectively. Capital Adequacy Ratio (CAR) also declined to 16.06% from 18.40% in the previous financial year, but it is still above the RBI’s stipulated minimum requirement of 15%.

Performance of its Listed NCDs of Last Issue

With a falling interest rate scenario and analysing the price performance of its NCDs of last issue, it seems to me that this issue also is fairly valued at 12% p.a. rate of interest. The only issue I have is that these NCDs are unsecured in nature. But, again I think the risk is fairly compensated with 12% p.a. rate of interest.

Application Form of ECL Finance NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in ECL Finance NCDs, an investor can reach us at +919811797407

pricing

Andrew Odlyzko has an interesting paper entitled “Economically irrational pricing of 19th century British government bonds ” (available on SSRN) which demonstrates that more liquid perpetual bonds (consols) issued by the UK government often traded at prices about 1% higher than less liquid bonds with almost identical cash flows. Given that interest rates in that era were around 3%, these perpetual bonds would have a duration of well over 30 years. So the 1% pricing disparity would correspond to a yield differential of about 3 basis points. That is much less than the yield differential between long maturity on-the-run and off-the-run treasuries in the US in recent decades, let alone the differentials in the Indian gilt market.

In other words, contrary to what Odlyzko seems to imply, the 19th century UK gilt market would appear to have been more efficient than modern government bond markets! Odlyzko provides a solution to this puzzle. Most of UK consols in the 19th century were held by retail investors and very little was held by financial institutions. As Odlyzko rightly points out, this would substantially depress the premium for liquidity. Odlyzko argues that the liquidity premium should be zero because the stock of the liquid consols was more than adequate to meet any reasonable liquidity demands. I do not agree with this claim. The experience with quantitative easing since the global financial crisis tells us that the demand for safe and liquid assets can be almost insatiable. That might well have been true two centuries ago.

I am sure the title has confused you. Totally, I hope.

Recently a friend posted on FB his achievement of running 30km on a hot and humid day without drinking any water.

I just did not understand what he was trying to prove, and to whom! When you take a risk you need to get a reward, right? For many people it does not seem to be necessary. To me that is stupid. If you are hanging out of a running train the chances are you are getting a nice breeze and you are sweating less than the guy who is standing inside the train.

HOWEVER THE QUESTION TO ASK IS: “IS IT WORTH RISKING YOUR LIFE?”.

When a neighbor locked herself outside her house, I asked her ‘where are the spare keys’. Was shocked when she said ‘Inside the house’. WHAT IS A SPARE KEY DOING INSIDE the house, dammit?

Know the case of a guy who was in Paris when somebody flicked his pouch. What did he have in the pouch? His passport AND all his credit cards, money, etc. When his colleague asked him ‘Do you have a photocopy of the passport’ – he said ‘Yes, in that pouch’. And he was just out for a walk. Why not leave the passport in the hotel, the credit cards in the pant pocket /purse? why not keep the cash partly in the pouch and partly with the other baggage?

When you ask people ‘Why do you not invest in equity mutual fund?’ – one girl says ‘because mutual fund investments are subject to market risks’ – I KNOW that she has not understood the words mutual fund, investments, market risks. So for her to understand this statement is IMPOSSIBLE.

Risk comes in various forms – neglecting to take care of health is the easiest to spot. Kids drink coffee, colas, eat pizzas and other unhealthy stuff, smoke, do not exercise and work on a computer for 12 hour days. Then suddenly when one of them has a heart attack or is asked to test for diabetes, blood pressure, etc. suddenly there is a sense of disbelief – and keep saying ‘he was so young’.

Come on the road to a heart attack is littered with tons of tempting items. You need to make a healthy choice dammit. Almost all risks are hidden by our inability to see it.

How many of you have tweeted from the driver’s seat? How many of you speak on the phone while driving a car or worse riding a bike? Did you know that ‘operating the cell phone’ is the BIGGEST KILLER – and the biggest cause of car accidents?

Remember the train accident in Germany where the driver was supposed to be tweeting?

Remember Risk is always lurking around. When you have to meet with disaster God puts a blinder on your eye. Be careful.

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Yesterday, Elon Musk, CEO of Tesla, the electric car company, announced that Tesla would make its patents freely available to competitors. To many people this announcement seemed surprising if not shocking. After all, the conventional wisdom holds that patents are essential to keep competitors from imitating innovations, especially for small startup companies. If rivals imitate, they will drive down prices, wiping out the potential profits on innovation, thus making it difficult or impossible to earn a return on R&D investments.

But while this conventional wisdom applies to mature technologies, it is often wrong during the early stages of major new technologies. Indeed, since the Industrial Revolution, innovators have made their inventions and knowledge freely available to rivals during the early stages of critical new technologies including textile technology, Bessemer steel production, the personal computer, wireless communications, and the Open Source software that powers the Internet. Often innovators did not patent their inventions or when they did, they allowed other innovators to use them freely. Nearly two hundred years ago, the Boston Manufacturing Company, the leading producer of cotton cloth using the most important technologies of the Industrial Revolution, stopped enforcing its patents, allowing competitors to use its innovations, much like Tesla.

Moreover, these innovators shared knowledge for sound economic reasons. Some commentators have noted that Tesla’s move will help it hire talented engineers. Others see it as a brilliant PR move. They are right, but Tesla’s action is also central to their business strategy. There are real benefits to sharing knowledge that substantially outweigh the costs and this economic logic is very similar to the economics that motivated past innovators to share.

Consider first the benefits. Musk tells us “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.” In order for Tesla to succeed, a lot of complementary knowledge and infrastructure needs to be developed. Auto mechanics need to learn how to repair electric vehicles; drivers need to learn to drive and to maintain them; new marketing and distribution channels need to emerge; and the roads need to be populated with charging stations for long distance travelers. All of these developments will happen faster if multiple electric vehicle makers coordinate around common, open standards, each contributing knowledge as new techniques are tried. The success of electric vehicles will benefit most from powerful “network effects” when they share enough knowledge to create a “common, rapidly-evolving technology platform.”

These benefits were much the same for early stage technologies in the past. A large body of complementary knowledge was needed to implement these technologies. The engineers of the early US Bessemer steel mills met regularly with their rivals as a self-described “band of loving brothers” until they had developed common standards for producing steel, slashing production costs by 78% in the process.

But what about the argument that competition will destroy profits? The critical thing about many major new technologies begin as a competition between two groups: those using the old, dominant technology and the other startups using the new technology. Musk realizes that, “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.” This is likely to remain true for a decade or two. And as long as it remains true, the prices and profits of Tesla will be determined by the market share of gasoline cars, not by the trickle of rivals with whom Tesla is sharing its inventions. Sharing knowledge with them will not undercut profits in the near term.

This pattern, too, is seen in past examples of knowledge sharing. The early Bessemer steel mills competed mainly against makers of iron rails for the railroads, not against the trickle of other Bessemer mills. The early textile makers competed against home weavers and British imports.

This history explains why the conventional wisdom is sometimes wrong, but it also contains a warning for the future: the conditions that make knowledge sharing advantageous today won’t last forever. Eventually electric vehicles will replace much of the market for gasoline-powered cars. Then competition from other electric vehicle makers will affect Tesla’s profits and such extensive sharing might no longer be beneficial. But that is tomorrow’s problem. Elon Musk is shrewd to grasp today’s opportunity firmly, despite the conventional wisdom.

Democracy is about numbers. India has spoken and given a clear mandate to Mr. Modi to reform and extricate India from the quagmire of corruption, paralysis and inefficiencies of polity and bureaucracy. Mandate means the populace has given the authority to Mr. Modi to carry out his policies. His 31% vote share comes nowhere close to Mrs Indira Gandhi's or Rajiv Gandhis much bigger sweep. In both those cases, however, it was more affirmation of faith and sympathy - this time round despite a smaller share, it is akin to deposing a ruler and empowering another to take the lead.

Mr Modi has played out the electorates expectations thus far. His instincts on foreign relations, business alliances, his loyal supporters finding a place in the Cabinet - have all definitely turned erstwhile rants to chants everywhere. The tribe of journalists who like to be seen as liberals in charge of the conscience and the voice of the nation are quick to redress their past grievances and diatribes against Mr Modi by bromides and by admitting their poor judgement regarding the pulse of the nation. Well the politicians and the media blinked. Talk about Marie Antoinette, French aristocracy and Nicholas II, czar of Russia being alienated from their people resulting in their being overthrown in bloody coups. Our polity saw Anna Hazare's movement as a middle class uprising which was not worth the newsprint and sound bites it was enjoying. Media's dismissive stance and second guessing on the Modi wave kept us all on the horns of a voter's dilemma.

At least, AAP should have understood the people - a Party born out of the ire and resentment of the masses. But it did not go down very well with the electorate when Arvind Kejriwal, true to his own dispensation, wanted people to ratify his every move.

No sir, 'we the people' want a decisive leader - Mr. Modi understands his mandate and acts decisively. We feel safe with such a leader at the helm, the stock market is going northwards, national pride, I am told, is at an all time high and the country now awakens to its tryst with destiny.

Mr Modi does not believe in asking the people how he should rule - he has chosen his Cabinet and played his cards pretty close to his chest as long as was necessary. Speculation was rife about who would not make it to the Cabinet - Arun Jaitley losing legitimacy on account of his losing his Amristar seat, or Sushma Swaraj- she and Modi have not seen eye to eye for some time. But he has proved his critics wrong. Some others who were beginning to hope their past tirades and public denouncements are erased, were politely but firmly rid of their disillusionments.

Mr Modi puts a premium on loyalty as is clear from his close rank and file and his team of ministers. Smriti Irani's announcement as HRD Minister did create a storm - but Mr Modi ignored it like one in a teacup. At first I took umbrage because I saw it as a sexist remark - what does Piyush Goyal know about energy for that matter? Nobody made any comments about that, eh. An enlightened writer wrote that competence and performance is to do with common sense not degrees. I thought of my mother then - how she toiled to send me to college and fought family seniors to send me to IIMA. I have been informed that those degrees are meaningless. In a country where the erstwhile ineffective PM had a degree from Cambridge, common sense definitely is probably what you need more than anything else. I am beginning to see the light. In a country where there are more people who are excluded from primary, secondary and higher education - it would be best that the representative is one of them. Let us remind ourselves that democracy is of the people, by the people, for the people and most importantly must be 'from the people'. Well to be fair to Mr Modi, I had always known that Jobs, Zuckerberg and Gates were all college dropouts. I was tempted - weren't you? I could see the children egging me on!

I suppose, soon there will be common sense tests on the Internet and you will be able to score yourself. Jokes aside, I was upset at the trivialisation of my post graduate degree, but I have complete faith that in is first 100 days, Mr. Modi will restore our confidence and pride in a once great nation.

With a clear majority, Mr Modi need not fear the bogey of a strong opposition or vagaries of a coalition. It is 'we the people' that he must keep his eye on. He must not blink, his ear must be to the ground - hearing the gentle murmurs of 'we the people' - does not take long for those to turn into angry roars of a tsunami.

In May 2014, India’s trade balance widened marginally from April, with a $11bn deficit. This is the highest monthly deficit number since July 2013.

Export growth was strong at 12%,… (Read On...)

This is a slightly catchy headline. I have no clue whether the following traits will make you successful. However, these are the qualities / characteristics that I have seen in successful people:

1. To earn the basic money to invest, you need to work real hard, AND real smart: There is no escape from this. You also need to be a little lucky in the breaks that you get. You just got a nice degree and got a good break – you got a job paying you Rs. 2 million. Your classmate got a job paying Rs. 1.2 million. Your parents paid for your studies, but your friends are paying an EMI of Rs. 34,000 per month for 7 years. Yes a little bit of luck is needed, you have it, and you are up and running.

2. Knowing your priorities: Earning Rs. 2 million, having a nice life, and putting money away as saving for future investments is a MUST.

Having said this, let me now look at the traits:

1. Being Goal Oriented in what you do: When you are young and you do not see any great need to save or invest, you need to WRITE down your goals and save/ invest towards that. Later on it becomes a habit.

2. Learning and Risk taking: What looks like Risk taking is not so risky for the person who knows what he is doing. Imagine a tribal seeing you walk on the road with traffic! He must be thinking of you as a very brave man, would he not? It is just that YOU know that the cars will not come on to the footpath. Similarly when you see a person living within the forest – you will be amazed at the knowledge they have of which water to drink, which fruit to eat, and which animal to be scared of. Most of the risk can be well conquered by LEARNING.

3. Keep learning about new things: a fantastic characteristic that I have seen in many successful people. Equities, mutual funds, etf, FnO, the list goes on.

4. Be willing to experiment in a small way: A small experiment in investing, business, etc. can sometimes lead to a big windfall. So if you can invest, say Rs. 20L in a new business (assuming net worth Rs. 5 crores), it is surely worth the effort. Learning would be useful.

5. Save and Invest like a religion.

6. Satisfaction: I do lectures saying ‘Santhushthi hi Sampathi hai’ – satisfaction is the ONLY wealth.

7. Gratitude towards the world in general, and God in particular. Count your blessings.

8. Remember we get what we deserve, only problem is we think we deserve more.

9. Patience: remember ‘n’ is in the NUMERATOR in the compounding formula, ‘r’ is only in the body. Great wealth like Buffets have been built over 75 years. True for most wealth in the world. Overnight you can get RICH, but wealth creation is far, far more difficult.

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Newspaper front pages today informed Dilliwallas that this is the hottest summer in 62 years. To make the situation worse, many of us read the newspaper without the comfort of a cooler or A.C. thanks to the power cuts across town.

The plight of Delhi is indeed very infuriating. Unlike other states, the problem is not that of inadequate power – Delhi has enough supply to keep up with the demands of the summer. The problem is that of inadequate distribution infrastructure. Just having adequate infrastructure will also not solve our power woes. The importance of adequate as well as immaculately maintained infrastructure cannot be emphasized enough.

The hapless victims – the citizens – are well within their rights when they complain about the situation. I am very impressed by the understanding shown by them towards the new government, which is not even a month old. It is heartening to see the Power Minister Shri Piyush Goel taking the issue personally even though it is the Delhi government (for the time being run by the Lt. Governor) that is responsible. Such center-state dynamic is what the honorable Prime Minister spoke about.

To solve the problem, first we need to understand it.

Role of Delhi Government: Power distribution in Delhi has seen 15 years of neglect in the Congress era. The same is true for almost all type of infrastructure nationwide as a result of the policy paralysis that had gripped the UPA government. The present power infrastructure of Delhi Transco Ltd. (DTL is the State Transmission Utility of the National Capital of Delhi) is inadequate for the job it’s expected to do. DTL is wholly owned and controlled by the Delhi government, and provides electricity to the DISCOMS. An example of the situation here is the Bawana substation. It is presently operating at 100% capacity. Across the world, the standard load on substations is upto 60%. This is done to ensure longevity, and avoid catastrophic equipment failure due to overuse and overheating. So if this substation fails, the situation can get worse.

Worth mentioning here is that the bill subsidy given by the 49 day AAP government has robbed the Delhi Government of precious money it needed to potentially install new infrastructure. So this policy has effectively contributed to the Delhi power woes.

Role of the DISCOMS:Even though the DISCOMS have been privatized, it is the duty of the government to ensure that they are doing their job and maintaining and upgrading their infrastructure as and when needed. This is done via DERC (Delhi Electricity Regulatory Commission). The infrastructure of the DISCOMS is in poor state of maintenance, and also needs up-gradation.

Also, the DISCOMS also got their estimation of power demand wrong, which led to many unpleasant surprise situations.

I’m confident that we will turn the present crisis can into an opportunity to showcase how Centre-State dynamic will lead to improved delivery of public utilities. We are committed to providing 24X7 electricity to our citizens.

Yesterday I got a call from my close friend; he is a banker - heading loan department. Before even saying Hi-hello, he said “I have 2-3 lakhs to invest for 6 months, please tell me few good stocks.” I was NOT surprised/shocked & told him, you called the wrong guy. I know he was frustrated at the end of the call but I can’t help. (before election results he told me that he is planning to sell ESOPs)

This conversation reminded me of this awesome article “It’s a bull run when…” by Mudar Patherya that was published in Business Standard. I have just picked few points & created this infographics… Here you go….

Please share, if you come across something similar happening around you in last few weeks or if you remember something from last bull run 2004-2008.  

Caveat: Personally I do not like PSU shares at all. However I do have some in my portfolio – simply because I cannot get companies in certain businesses, and of a certain size in the private sector. So the shares that I have / had in my portfolio are Ntpc, Hpcl, Bpcl, Sbi, Nhpc, Bhel – mostly trading positions. However those that are there in my portfolio give me a fantastic yield – thanks to the low price (thanks to time), and high dividend payouts (bankrupt government forcing high payout). So take this article with that knowledge base.

Most PSU shares have galloped in the past few weeks, and some have done very well in the past 1 year.

Does this mean that the run up is over and you should stay away? OR

Is this the beginning of a bull run and it can go up many times more from here?

Well both these are very difficult to answer!

Let us look at Hpcl, Bpcl, Ntpc, Bhel, and Coal India.

If you take a 20 year view on all these shares, your answer will be very different from a guy who has been a trader and has been watching only in the past 6 months.

20 years ago the price of Hpcl was Rs. 294, in August 2013 it was Rs. 163, now it is Rs. 403.

Figures for Bpcl was 113, in Sep 2013 it was 278 and now it is Rs. 650. Sure for now it looks high, but if you take a 20 year view, the growth is not necessarily great is it?

If you take BHEL the story is not very different. In Nov 2007 it was Rs. 538, six months ago it was 161 (you have been ripped apart if you bought it at the peak of the boom), and is now at 257.

Coal India – terrible under performance over 5 years, but suddenly it has spurted. Ditto story for almost all energy and bank PSUs.

What has suddenly happened? well hope that Narendra Modi will kick ass and make these sleepy Kumbhakarnas perform. I am completely in agreement with the thought.

I have seen the amount of interference from the Ministry in various PSUs, the amount of idle Real Estate that they have, the luxurious offices, guest houses, the amount of corruption, the over staffing – very low hanging fruits for sure.

So I do expect Na Mo to crack whip and DRAMATICALLY improve performance. I do not expect the changes to be small time, but real kick ass performance is possible. The Tata Power share (Re. 1) is at Rs. 105, there is no reason that NTPC should not be at Rs. 1000 (sure we need many changes) (Caveat I have both TP and Ntpc in my portfolio).

What can happen? Take a simple example. Na Mo could get SUTI to sell L&T, Axis bank, ITC and raise say Rs. 50,000 crores. Use that cash to create a PSU Company’s REIT. Hpcl, Bpcl, Sbi, Ongc could sell their RE worth about Rs. 50k crore to this Reit. They could use the cash to pay off the more expensive loans.

The Reit could sell off some RE and use that cash to repeat that process with another set of PSUs. Then the Reit could raise money from the public…

Frankly I do not think there is any shortage of ideas. This article is to just say that 1. DO NOT GET CARRIED AWAY BY THE RECENT spurt in Psu share prices.
2. PSU shares could outperform many other shares, but one has to be selective for sure.
3. With a little honesty, and a driven market oriented top management, the PE ratios could change, and the change will be dramatic.
4. A dramatic change in the EPS, selling off of the non core unproductive assets, and a change in PE could be a dramatic and virtuous cycle of goodness.
5. I have met some very honest, brilliant managers in the PSUs. If they are empowered, hey it could be great.

HOWEVER:

1. All these PSUs require cash, so they could dilute their capital base.
2. GoI could create more ETFs (Goldman has a small PSU ETF) and dilute its holding.
3. GoI could place equity directly with FIIs or come out with many FPOs.
4. The whole process could take time.

So read the whole article, go to many free websites (or paid ones like Bloomberg or Reuters or CMIE) and do your own analysis. Then decide on what to buy.

Do not go by what I have said is there in my portfolio. My positions could change on an hourly basis. The companies that I chose are / were there in my portfolio.

Do remember this is an unedited site, I may/may not have vested interest in the shares mentioned. By the time you read this article I may have IOC, Bank of Baroda, Union Bank and puts in Bank of Baroda.

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One of the more amusing postswearing-in stories emanating from the Saarc region was the one in a website about Sri Lankan President Mahinda Rajapaksa gripe about the new Indian Prime Minister’s preferred language of communication. "I will now have to learn Hindi, as he does not speak English!" he reportedly raged.

The website (and Rajapaksa, if indeed he was correctly quoted) can be forgiven for mixing up religion and language but you get the drift. But the fact is, Yes He Can, to misquote Narendra Modi’s campaign mantra slightly. Speak English, that is. He understands it perfectly too but chooses to respond in Hindi.

The Hindi hegemony implicit in Rajapaksa’s alleged rant is of course overstated, though the increasing soft power of Bollywood films cannot be dismissed. However, Modi’s decision makes sense as Singh-like silence is not one of his virtues and communication is sure to be a hallmark of his term.

Language, therefore, is important. Arguably, if Vladimir Putin, Angela Merkel and Li Keqiang can get by just fine speaking in the languages they are most comfortable in, there is no reason for Modi to switch to Barack Obama’s or David Cameron’s mother tongue while communicating with his international counterparts.

What are interpreters there for, anyway? More revealing, though, is the medium of his exchanges with India’s chief ministers, to whose ranks he too belonged till recently. Language is such a prickly issue in India – more than most places in the world – he knows CMs can easily take umbrage at the slightest hint of condescension or bullying when communicating.

By all accounts, part of Modi’s charm offensive on the CMs was his willingness to talk in whatever language it took to get the message across. And those who may have harboured doubts about his proficiency in English were pleasantly surprised. His choice of Hindi is apparently just that – a choice, not a compulsion. It is a testament to the big-heartedness and tolerance of us Indians that CMs of all backgrounds and linguistic proficiencies enjoy popular support.

There are English speaking sophisticates and vernacular icons, inspiring speakers and taciturn but indefatigable doers... We love (and vote for) them all! Tamil Nadu CM J Jayalalithaa’s elegant Tamil and English connects her to snobs and plebs alike.

Her bete noir K Karunanidhi speaks only in Tamil but is a force to reckon with too. And then there is four-time Odisha CM Naveen Patnaik, whose lack of ease in Odia hasn’t come in the way of huge, successive electoral victories. That there are so many bilingual, trilingual and multilingual CMs and ordinary Indians doesn’t merely reiterate that we desis love to talk, it also underlines that language is basically just a medium to communicate. And the message is definitely more important, at least when it comes to politics and governance.

Old habits die hard, though. So the apprehension in upscale drawing rooms about the shift from India to Bharat is couched in concern about the PM’s preference for Hindi over English. Even a cursory look at the youngest generation of Indians would show that they share the PM’s practical attitude towards language.

Indeed, if anything, his decision reflects India’s increasing ease with itself. Like paneer pizza, we are like this only. Even West Bengal CM Mamata Banerjee’s unabashed mash-up of three languages echoes that newfound insouciance where once there was an undue deference towards the polished English of the Jawaharlal Nehru kind.

That said, Hindi – speaking not understanding – is anathema to Bengalis like me, primarily because of its disconcerting and illogical propensity to ascribe genders to all inanimate objects. So gender-neutral English is often a better bet.

Perhaps those conversant with other Indian languages also turn to it over Hindi for the same reason. When Modi attends the UN General Assembly in September, he may use English as speeches there are most often just read out. But I may not be the only Indian who would secretly rejoice if he switches to Hindi when he heads to Washington DC. Because then an eager-to-make-amends Obama will need an interpreter but Modi won’t!

I don’t know how many readers will recognize this headline, but it is just one word changed from a recent headline in an ET article. The article in question talks about six changes they’d like to see and going through that article reminded of the very first draft of the Direct Tax Code which came out in 2009.

That draft was the best draft of DTC that came out, and it was great for its simplicity and potential effectiveness. It proposed the following tax slabs which I thought was one of the best things about it.

• Up to Rs. 1,60,000 – Nil
• Rs. 1,60,000 – Rs. 10,00,000 – 10%
• Rs. 10,00,000 – Rs. 25,00,000 – 20%
• Above Rs. 25,00,000 - 30%

If there is just one change I’d like the government to make, it will be this change. Raise the tax slabs for almost everyone, and let people benefit from the lower taxes.

However, this is a simplistic view because it doesn’t tell you where the shortfall is going to be met from and that is a problem because the Indian government isn’t exactly loaded with money.

What I would do is get rid of all tax exemptions under Section 80C and save the government some money there. I think this will be very good for most people whether they know it or not, and in most cases they wouldn’t actually know it.

In looking through portfolios of several people along the years, I’ve realized that the number one cause for problems is buying tax saving products towards the end of February and March. When the taxman comes knocking, they reach out to their relatives and friends in a bid to buy something that will save tax.

Usually, that something is sold to them, and that something has got high commissions, opaque returns, and long lock-ins. The beauty of this combination is that it allows you sell the same crap year after year without the customer understanding what’s going on.

This is a really big problem, and people are losing a lot of money because of it without realizing it, and in a lot of instances the entire category of financial products is getting a bad rep because of this, and then people are just turned away from everything altogether which makes the situation even worse for them.

I changed the one word from that headline because I felt the solutions that were being proposed there and elsewhere don’t attack the root of the problem and maybe to some extent even extend it because they don’t offer simplification and removal of the poor incentives that exist in the financial industry today.

Update: Corrected tax rate for the above Rs. 25,00,000 slab. 

Our real friend in the Government is the RBI Governor. He is the ONLY man who is concerned about Inflation. It is inflation that hurts YOUR capital, savings and investments. This is the figure that makes it necessary to build a huge corpus for our retirement. Use any calculator and see the amount of money that you need to save/ invest for your old age. Even a 1% change in assumption has a huge impact on your Retirement fund requirement.

What is Inflation risk?

I have referred to investment risk very many times in the past. This is a really scary risk in the Indian context NOW, as the inflation rates are sky rocketing.

What exactly is Inflation risk?

Inflation risk is the danger that an increase in price levels (normally for a sustained period of time) will undermine the purchasing power of a bond’s fixed interest payments. In case of a portfolio we normally try to earn more than the inflation rate.

The Real Return of a portfolio = Nominal return MINUS inflation.

Investors often are attracted to bond (this includes income funds, income opportunity funds, floating rate funds, gilt funds, etc. – normally talking of debt funds with maturity exceeding ONE year) mutual funds because of their regular payouts from interest earnings. These payouts, ARE, subject to inflation risk. Inflation erodes the purchasing power of any investment. It is particularly scary for investments that pay out a fixed stream of interest over a period of time, such as bonds, national savings certificates, post office schemes, and of course the Indian favorite, BANK deposits. As inflation increases the prices of goods and services, investors find that their interest earnings are not keeping pace.

For example, suppose Rs. 10,000 in a bond (remember we are talking of a single bond like State Bank of India bond) earns 9% interest, but inflation is 8 percent per year. Although this bond will earn Rs. 900 in interest every year, inflation will make goods and services more expensive. Initially, the Rs.500 in interest will buy a certain amount of goods and services (a basket). After a year, that same basket will cost Rs. 972 because of inflation, but the investor will still only receive Rs. 900 in interest income. Year after year as prices rise, the same Rs. 900 in interest earnings will buy lesser and lesser goods and services in the market. This is what is meant by inflation eroding the purchasing power of an investment. The longer a bond’s maturity, the greater its inflation risk. Bond yields often incorporate expectations of inflation so that investors are compensated for expected inflation risk. If inflation rises by more than was expected when the bond was issued, investors will find that the interest and principal returned to them will be worth less than they had anticipated.

So when the market expects higher inflation in the future, the market expects the bond issuer to pay a high rate of interest, for longer duration bonds. So if SBI were to come out with an issue today people WILL EXPECT SBI to pay about 9.3 % interest – simply because the CPI figures are pretty close to this number.

CPI: Consumer Price Index.

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Huge Bull Era dawning…actually has dawned on us ~Vision 2018 ~  Strategy to Beat the Sensex The next few years ought to be game changers…make that life changers….for all those who are invested in Indian Equity…Huge Wealth Creation is on the cards Time to move heavily into Equities from Physical Assets…Sensex from 25000 to 50000 [...]