This article was originally published in Postnoon on May 25th, 2012

http://postnoon.com/2012/05/25/rupee-fall-will-hit-you-and-me/50330

I ran into my recently married cousin and his wife at a family function yesterday. I asked him, “Abhi, you were supposed to be on a honeymoon in California at this time! What are you doing here?”

Abhi: I had booked my trip with a travel agent six months back, as soon as Priya and I got engaged. The travel agent had told me that the trip would cost me a total of around Rs2,00,000/- Now he is asking me to pay him Rs2,30,000/- So I fought with him and cancelled the trip.

Nicky: Oh oh! The exchange rate has spoiled your honeymoon!

Abhi: No, it’s the travel agent. He is a cheat.

Nicky: No Abhi. It’s not his fault. His costs have gone up by more than 20% in the last one year. For the same facilities, same hotel, same cab, same restaurant, same entry tickets, his cost in Indian Rupees is much higher now due to the falling Rupee.

Abhi: What do you mean?

Nicky: See when you booked your trip, exchange rate was around Rs 51 per dollar. It means that for every $100, the travel agent had to shell out Rs5,100/- Now, the exchange rate is Rs56.3 per dollar. So for the same payment of $100, the travel agent needs Rs5,630/- .

Abhi: I blasted the poor agent for no fault of his. I must go back and apologize. But why is this happening? Why is the value of Rupee falling?

Nicky: There are multiple reasons. Our Government attributes it to the crisis in the Euro zone. Greece, Spain, Portugal, are all in bad shape. This is causing uncertainty in the Euro zone and hence the Euro. Investors and traders are selling the Euro and buying dollar. Increased demand for dollar is making it more valuable. So it is appreciating against most other currencies in the world.

However, Indian Rupee has been most badly affected when compared to other currencies like the Indonesian Rupiah or the Ringgit or Won. This is due to the weakening fundamentals of our own economy. Our GDP growth rate has slowed down, inflation is high and fiscal deficit is enormous. On top of that, the political will to take corrective measures is lacking. The allies need to be placated at every step, preventing any meaningful action.

Abhi: But why doesn’t the RBI do something about the exchange rate? If they supply dollars in the market, the rupee should stop depreciating right? And I have heard that the Indian government has huge reserves of foreign currency.

Nicky: You are right. If dollars are supplied to the market, the rupee slide should stop. But how much can the RBI supply that is the question. We have a reasonable reserve right now. But we should not forget that our oil and gold imports are also very high, which are both paid in dollars. Also, till the confidence in the economy is not restored, foreign institutional investors will keep fleeing the country with their money. New investors will not come into the country to invest.

Abhi: The country is going through all this, and I was upset about my honeymoon!

Published in the business section of www.rediff.com on 22nd May, 2012

http://www.rediff.com/business/slide-show/slide-show-1-column-its-not-greek-mr-mukherjee/20120522.htm

 The crisis in our economy is growing. Are we heading towards 1991?”, asks Mr. Murali Manohar Joshi (BJP) to Mr. Pranab Mukherjee in the Parliament on Wednesday, 16th May. The reply consisted of statements like “Indian growth story is intact“, “The rupee fall arising out of the weakness in Euro“, “India’s growth story has not come to an end. I have confidence in people and political system of this country“.

The problem is, apart from Mr. Mukherjee himself, and a few other Congressmen, nobody else believes in his words any more. Not denying the role of Euro zone crises in the fall of the rupee, one still needs to look inwards and ask the question, “where is the government machinery?”

Seems like they are just biding time for the innings to get over, without getting all out before the time is up. There hasn’t been a single confidence boosting measure by the government in the recent years.

Reforms are announced, Mamata squirms, reforms are rolled back, back to status quo. She is the villain, government is bechaara (poor thing) and lachaar (helpless).

Impact on Importers and Overseas Investments

The rupee has fallen to an all time low of Rs55/$ (on May 21). The CEO of a company, which is looking to invest close to $20 million in land and equipment abroad in the coming year, was clearly a worried man when he said, “Desh ki to batti lagne waali hai (the country is going to get ruined). The government does not have the balls to protect the economy. They should stop the flight of dollars. Take tough stands. My cost of capital has just gone up by 20% in a year! How do I compete with the Chinese, the Koreans, the Malays and the Indonesians? I am going to withdraw from the project if this continues.”

Similarly, the importers are concerned about the increase in their cost of buying goods and services.

Till Friday (May 18), the dollar has appreciated by 18.8% against the rupee. In the same period, the dollar has appreciated 0.82% against Malaysian ringgit, 7.67% against the Indonesian rupiah, 4.76% against the South Korean won and has depreciated by 2.84% against the Chinese yuan.

Except China, all the other currencies have suffered due to the flight to dollar. But they are still faring much better.

Impact on Exporters

The IT companies would have benefitted from the slide in rupee if they had not hedged their positions. Those who did not hedge, are sure to benefit. But, only as long as their customers do not start demanding for discounts, which they already have.

The micro, small and medium enterprises, which contribute to exports in a big way in sectors like gems and jewellery, textiles, handicrafts, etc are already badly hit due to the global economic crisis. Their concern is that the falling rupee might further accentuate their financing constraints, due to rise in borrowing costs.

The Reasons

Euro zone tried to save a country which was living beyond its means as a result of which euro is all over the place. This has resulted in the flight towards dollar, which itself is a fundamentally weak currency. But what is the alternative? Gold?

An already gold obsessed nation has more reasons to buy gold now. The money spent on importing gold does not have any multiplier effect as it just gets hoarded. For the year 2011-12, the import bill of gold accounted for about 25% of India’s trade deficit.

Oil is another commodity which forms a large percent of the import bills. Subsidising it is not helping matters. Not for the oil marketing companies, not for the economy. Removing the subsidies might upset didi, but it will reduce the fiscal deficit and lower consumption will result in lower imports, hence lower trade deficits.

Inflation (consumer price index) has once again gone up in April to 10.36% on an year-on-year basis, versus the 9.47% in March. GDP growth rate has come down, Index of industrial production is down, food bill and subsidies are the highest ever, and Mr. Mukherjee says, “I have confidence in the …political system of this country”.

The Culprit

The slide of the rupee is the consequence of a spineless government, not Greece. No steps by the RBI can stop the fall in the rupee, if the investor confidence is not restored in the economy. If the current team at the centre, the team which is credited with putting India on the growth trajectory, cannot do it, it would be a shame. Because then this very team would be blamed for the slowdown or rather the downward slide!

This article was originally published in Postnoon on May 18th, 2012 http://postnoon.com/2012/05/18/life-insurance-simplified/49106

As I walked into the lobby of my apartment block, Mukherjee was waiting for me, sitting on a sofa, with a piece of paper in his hand. The moment he saw me, he jumped up and extended his hand to greet me.

Me: How are you Mr. Mukherjee?

Mukherjee: I am fine, except that I don’t understand your world.

Me: My world?

Mukherjee: Yes, your world of investments, financial jargons, markets, assets.

Me: Ah! That? What’s troubling you?

Mukherjee: See I want to buy a life insurance. So I contacted an agent. After meeting him, I am totally confused. There are so many different types of policies. Now which policy should I buy?

Me: That’s it? Let me explain a few basic things about insurance to you. Hopefully, then you will be able to decide about which policy is suitable for you.

Since you have already made up your mind to buy a Life Insurance policy, you probably already know that such an insurance provides the beneficiaries, that is, your family, the financial protection in case of the death of the insured or in the case of terminal/critical illness of the insured. Most of the policies have exclusion which will not cover you in the event of suicide, war, natural disaster, fraudulent claims etc. The sum that will be paid to the beneficiaries depends on the sum assured at the time of buying the insurance. The premium that you will pay, will depend on a number of factors, like age, sum assured and the type of policy.

There are basically two types of Life Insurance policies. They can be for a specific number of years; term policies. Or for the entire life of a person; whole life policies.

Term Policies: As the name suggests, term policies are for a specified period, say 5, 10, 15 years up to a maximum of 35 years. The beneficiaries are paid the assured sum in the event of the death of the insured during this period. However, no money is paid to either the beneficiaries or the insured, if he or she survives the term of the insurance. These policies are known to have the least premium amongst all types of life insurance policies.

Whole Life Policies: Whole life policies assures the payment of the assured sum to the beneficiaries, irrespective of when the insured passes away. Similarly, the insured needs to pay the premiums throughout his life time. There can be variants of these policies as well. For example, you can buy a cash back policy where a certain amount of cash is returned to you after a few years, and the balance is paid to the beneficiaries after the death of the insured.

Mukherjee: But have a look at this sheet. It says that there are other policies too like the endowment plan and ULIPs.

Me: The other types of policies are nothing but additional features added to these two. For example, Endowment plans are term policies with elements of savings attached to them. So you buy a policy which ensures a certain sum to your family in case of your death, during the term of the policy, and in case of survival, you get the sum assured along with a bonus or return. You might even opt for an annuity plan. Which basically returns you the money in the form of an annuity (divided into equal annual payments over certain number of years), instead of a lump sum, upon survival. Unit Linked Insurance Policies, popularly known as ULIPs are again like term plans, where a part of the premium that you pay, gets invested in the stock markets.

Mukherjee: So it is not as complicated as it looks in this sheet?

Me: Not at all. Go home, discuss with your wife, and then decide on the policy you want to buy!

This article was originally published in Postnoon on May 11th, 2012

http://postnoon.com/2012/05/11/sme-exchanges-new-kid-on-the-block/48033

“The students of B-Schools now a days are so much more up to date with the latest news that we have to be on our toes. It is so different from the days when there was no Internet and majority of the students were content with what the professors and the books taught”, thought Prof. Nicky while walking to her class on Investments.

Dheeraj was the first to raise his hand, as usual.“Go ahead Dheeraj. Ask your question”, she said.

Dheeraj: Prof. Nicky, I recently read that the BSE and the NSE have launched new platforms for the Small and Medium Enterprises (SMEs) to raise equity through IPOs. Why do they need a separate exchange? Why can’t they get listed on the main exchange?

Prof. Nicky: Because you must compare artists with artists and geeks with geeks. What I mean to say is that the SMEs have different characteristics in terms of growth, number of employees, size, and risks. They tend to get lost in the pool of large, multi billion organisations on the main exchange. The larger companies get all the visibility, pushing the smaller ones to the periphery, making them illiquid.

Dheeraj: But if the companies are good, won’t they anyways get noticed?

Prof. Nicky: Ideally yes! There are many companies which are good and have the growth potential, but they are perceived as having very high risk due to their size. This keeps the investors away.

Also, being listed on the main exchange is an expensive affair. There are many costs like the fees of the merchant banker and marketing costs pre IPO. Followed by expenses to meet the regulatory and legal requirements of disclosures, reporting etc.

Rajat intervened to ask, “So aren’t these expenses going to be there even in the case of SME exchanges?”

Prof. Nicky: The SEBI has tried to minimise these expenses as much as possible. Instead of Quarterly reports, the SMEs need to publish only half-yearly reports. That too only on their website. They can send an abridged version of the report to the shareholders instead of the full version. SEBI has also tried to keep the marketing and stationery costs of IPOs minimum.

Abhijeet: Professor, what is the benefit to the investors like you and me? Why should we bother about the SME exchanges?

Prof. Nicky: When a SME gets listed on an SME exchange, it adds credibility to the company and its business. There is a compulsory credit rating requirement before getting listed. SEBI has mandated appointment of market makers for these companies who would provide liquidity to the market. So as investors, we can now invest in these companies, which by nature are riskier, but have a higher growth potential and hence have the potential to provide higher returns.

Though the ticket size for investing in these companies is fairly large, a minimum of Rs1 lakh. The idea is to shield the retail, smaller investors from any kind of risk. But high net worth individuals and financial institutions like banks, mutual funds, venture capital and private equity funds etc. can invest in them.

This article was originally published in Postnoon on May 4th, 2012

http://postnoon.com/2012/05/04/manage-mutual-funds-wisely/46815

I was waiting for Srikanth to come back to me. I knew that he was convinced about investing in stocks. He had the risk appetite and the ability to take the risk of investing in stocks. But, he did not know how to pick or select stocks. And that is what brings him to my room today.

Srikanth: Prof. Nicky, I have been reading the financial newspapers, listening to experts on TV, talking to my friends and family and going through stock price charts. I am not able to understand which stock I should put my money in. Moreover, you had once told me about not putting all my money in one basket. How do I select which sectors and which stocks to put my money in? Can’t you do it for me?

Prof. Nicky: No. I will not do it for you. I am an academician. Not a financial advisor. But there are people who can do it for you.

Srikanth: Really? Who? Are they expensive?

Prof. Nicky: Yes, I am not joking. You can invest your money in a Mutual Fund. Mutual Funds are managed by fund managers who have expertise in stock picking and analysing the companies based on their performance. In fact, in India, close to Rs6,00,000 crores is being managed by the mutual fund industry.

Srikanth: That is a mind boggling figure! How do they function? Are they expensive?

Prof. Nicky: The Mutual Funds take money from many investors and the fund manager invests the pooled amount in the stock markets (or the other markets like debt, money market, commodities). The cumulative returns from these investment, are passed on to the investors, after deducting the expenses of running the fund. Hence the expenses of running the fund and the salary of the fund manager is shared by many investors.

Source: www.amfiindia.com

Srikanth: Seems like a lot of power is given to the fund manager. What if he is not good at his job?

Prof. Nicky: Hmmm…the fund managers are governed by strict guidelines on fund objectives, sector weights, risk and other stock selection criteria like liquidity, size and so on. Also, most of the funds hire qualified, experienced professionals as their portfolio managers. A little bit of personal bias is bound to be there and you should be prepared to take that risk. The information about the performance of a fund is easily available. There are fund managers who are more consistent in giving better returns. You can chose the fund on the basis of who manages it, apart from looking at the risks and returns.

Srikanth: How is the return on a Mutual Fund calculated? Since the fund invests in many stocks, how do we know the return on the fund?

Prof. Nicky: Good Question. I am glad you are thinking. In the case of mutual funds, instead of Prices, we have the Net Asset Values (NAVs). The NAV is the net asset of the fund (total assets minus liabilities) divided by the total number of outstanding units. Just like shares of a company, you have units of a mutual fund. The value of a unit is referred to as the NAV. You can calculate the return by taking the difference in NAVs on the date of investment and the date of selling the units divided by the NAV on the date of investment.

Srikanth: So it works just like shares?

Prof. Nicky: Exactly like it. And you get the benefits of an expert investing your money for you, you save time, you have a better diversified portfolio, and you may even invest in a tax saving scheme if you want.

This article was originally published in Postnoon on April 27th, 2012

http://postnoon.com/2012/04/27/the-business-of-deposits/45733

I, Prof. Nicky, had a tet-e-tet with Laxmiamma three weeks back. I was curious to know if she had taken heed of my advice and started investing. So I strolled out of our lush campus and walked into the nearby GPRS quarters. It is in one of these quarters that Laxmiamma had been hoarding her cash every month since the past 10 years in the hope of collecting enough money to release her pawned jewellery.

Laxmiamma was genuinely happy to see me and did not waste any time before showing me the account opening kit which she had got from her bank. She was the proud owner of a bank account now, which came with an ATM card and a cheque book.

She did not waste any time in offering her famous Irani chai and shooting her questions to me. So while enjoying the chai, I answered her primary question related to the difference between a savings account, a Fixed Deposit and a Recurring Deposit.

A Savings Account is meant for saving money, as the name suggests, from your income. The money deposited can be withdrawn any time and you can deposit money into the account as many times as you want. It is generally like a temporary parking place for the surplus funds that you have. Earlier, the banks used to pay a very small interest on the amount in this account. However, the recent deregulation of savings account interest rates by RBI has resulted in the bank giving as much as 6-7% interest.

Laxmiamma: I have opened my account by putting an initial deposit of `5,000/- Should I put my entire savings in the past 10 years into this account then Prof. Nicky?

Prof. Nicky: You could do that. But, you will earn more if you deposit your savings into a Fixed Deposit. The interest that the Banks offer on this account are usually much higher. Though the catch is that, you are expected to keep your money with the bank for a fixed tenure. The interest rates vary according to the tenure and, currently, may range from 7% to 10%.

Laxmiamma: But what if I have a medical emergency and need the money urgently?

Prof. Nicky: Hmmm… you can withdraw the deposit if you wish to. However, the bank will usually impose a penalty of 0.5% to 1% for doing so. Different banks have different rules regarding it.

Laxmiamma: So I will keep my past savings as a Fixed Deposit with the bank. But can I do a fixed deposit of my monthly future savings too?

Prof. Nicky: Once again, you could do that. But it will be a hassle for you to do it every month. If you have an online banking facility, then it is easy. But since you do not have that facility, you will need to fill up the fixed deposit form every month. Instead, you can do a Recurring Deposit of your monthly savings.

Laxmiamma was awed at all the facilities that the banking system offers. She asked, “How do I do that?”

Prof. Nicky: You can fill up a form similar to the Fixed Deposit form and instruct the bank to take out a fixed amount of money every month from your savings account, and put it into a Recurring Deposit. The bank will do it every month, for as many months as you instruct them to do it in the form. You will not need to remind the bank. You only have to ensure that you have that money in your savings account. For a Recurring Deposit, you need to be reasonably certain about the amount of money that you can save every month. The interest rates are similar to those in the Fixed Deposit.

Laxmiamma: So what you are telling me is that all three, Savings Account, Fixed Deposit and Recurring Deposit are going to be useful to me!

Prof. Nicky: Exactly! Can you please get me another cup of the chai?

This article was originally published in Postnoon on April 20^th, 2012

http://postnoon.com/2012/04/20/take-stock-of-risks/44467

Srikanth kept mulling over his conversation with Prof. Nicky the entire week. He reached the conclusion that he falls in the category of people who not only have the appetite to take risk, but also have the ability to do so. Equipped with this self realisation, he walked over to Prof. Nicky, who was looking at a piece of paper very carefully.As Srikanth got closer, Prof. Nicky looked up from the piece of paper and gestured to him to look at the graph on the paper.

Prof. Nicky: Hey come on Srikanth. Look at this!

Srikanth: What is this Professor?

Prof. Nicky: Remember that I was telling you that every asset class has its own risk profile?

Srikanth: Yes I remember!

Prof. Nicky: Ah good! So if somebody has the appetite and the ability to take risks, where does he invest his money?

Srikanth: That’s what I came to ask you. I have realised that I fall in that category.

Prof. Nicky: There are various asset classes like real estate, commodities etc. in which such people can invest. However, one of the most popular classes of risky assets is equities. Equities imply owning a share in the assets, liabilities and profits of a company. When a company grows, more money is required for it to expand. The original promoters may not have that money. Hence they approach the public to buy the shares of the company. That’s where the term “investing in shares” comes from!

Thus equities have the benefit of being very liquid, that is, they can be bought and sold easily on the exchanges like the NSE and the BSE. The other aspect of equities which attracts investors to them is the potential to make huge returns. If you look at the graph, you can see that the benchmark NIFTY index has given close to 13.8% returns on an annual, compounded basis over the last ten years. In other words, if you had invested `1000 in the stocks of Nifty in April 2002, you would have `4,645 now. This is a return of 365% over a 10-year period. This is more than what you would earn if you had invested in fixed deposits or other savings schemes like Kisan Vikas Patra or Post Office Saving schemes!

Srikanth: Really? So why do the equities give a higher return?

Prof. Nicky: They give a higher return because they need to compensate the investors for the higher risks associated with equities. It is like demanding a higher salary if your job is more stressful.

Srikanth: Where is the risk? You just now said that an investor can earn as much as 365% over a 10 year period!

Prof. Nicky: Now that is how a lot of people tend to think and that is why they end up losing money. You would make so much money if you invested in April 2002, and if you remained invested till April 2012. But what if you invested in September 2007 and then had to sell around September 2008?

Srikanth: looking more closely at the graph now, gave a gasp, “Oh My God! I would have lost more than 50% of my money in that case”!

Prof. Nicky: Exactly. And that is the risk. You do not know where the market is going to go tomorrow. The share prices depend upon the performance of the company, the economic, political and technological factors, the future prospects of the company and many more! When there are so many uncertain elements in running the company, it is very difficult to know exactly how much return you will get after a given period.

Historically, the equities have performed better than the other risk free investment tools like Government Bonds or saving schemes and Deposits. For those who can take this risk, it might be worth it! So go ahead boy, invest in equities, choose the companies wisely, and keep your fingers crossed!

This article was originally published in Postnoon on April 13^th, 2012

http://postnoon.com/2012/04/13/know-risks-before-the-plunge/43256

On my way to ISB on Monday, I saw a motorcyclist speeding on the Gachibowli road hit a car taking a u-turn. The car was damaged and the motorcyclist suffered good deal of injuries. On enquiry, the rider said that he was in a hurry to meet his sister who was not well.

This got me thinking about the risks people take in their lives. Even though we read about accidents due to speeding very frequently, we still drive fast to save a few minutes. A cricketer tries to hit a six with every ball, taking the risk of getting caught on or near the boundary.

An investor faces similar risks. In order to earn higher returns, investors often take risks which may not be compatible with either their risk appetite or risk taking ability.

Taking a sip of the coffee, Prof. Nicky asks Srikanth, “Have you watched the movie 3 Idiots?”

Srikanth: Of course. Who hasn’t?

Prof. Nicky: Do you remember the scene where ‘Virus’, summoned Raju and Farhan to his office and told them to leave the company of Rancho?

Srikanth, proudly: I remember the entire movie, dialogue by dialogue. I’ve watched it 23 times.

Prof. Nicky: And how many times have you read Yasaswy’s book on investments?

Srikanth, descending down to the earth: Uhhh… Prof. I was about to start reading it the coming weekend… I Uhhh… thought… uhhhh…

Prof. Nicky: Ok. Coming back to 3 Idiots. So what was ‘Virus’ trying to explain to Raju and Farhan by comparing the income of their families with that of Rancho’s?

Srikanth: Ummm… I guess he was trying to tell them that they cannot afford to be thrown out of the course as passing and getting a good job was very important for them. Their families were not as well to do as Rancho’s.

Prof. Nicky: Exactly. This means that they do not have the risk taking ability, even though they have the appetite. Generally youngsters, with lesser responsibilities, single status, have more appetite to take risk.

Srikanth: But an investor wants returns. How are all this connected to returns?

Prof. Nicky: Alas, that what the investors don’t understand and that’s what I am trying to explain to you. There are different asset classes like Bonds, Equities, Commodities, Gold, Derivatives, Art and Artifacts, Real-Estate, etc, available for an investor to invest in. Each one of them has a risk profile of their own.

I can see that I am losing you. Let me explain.

Risk has a negative connotation in our day to day life, but not entirely so in the case of Investments. The uncertainty or deviation from expected returns is known as risk in the case of investments. For example, if you invest in the shares of Reliance Industries Limited, with an expectation to earn 20 per cent return in one year, an actual return of — 30 per cent is a deviation from the expectation, just as a return of 30 per cent.

If you take the case of fixed deposit in a bank, you get as much as you expect. So it is riskless, unless the bank goes bankrupt. But in the case of Reliance, your returns would depend on the performance of the company, the dividends, the future projects etc. So the uncertainty is much more.

Srikanth: I get it. So if I do not have the risk taking ability, I should not put my money in risky assets. But if I do have the risk taking ability as well as the appetite for it, I can invest in risky assets, though I should be aware of the risks that I am taking.

Prof. Nicky: Ah… there you go… Perfect… I couldn’t have put it better!