October 2010 – Page 2

The importance of asset allocation in developing a financial roadmap

Today I present a guest post from Manish Jain of MProfit, which is a desktop portfolio management software.

His message of thinking about asset allocation is a timely one as the market gets flooded with bond issues, and IPOs, and it gets easy to get immersed in yield calculations and forget about the big picture. So, without any more commentary from me, here are Manish’s thoughts.

When it comes to finances many people just don’t know where to begin. Â You watch CNBC-TV18 for stock tips, you listen to relatives for investment strategies or you read financial blogs for general advice. Â That is the equivalent of getting advice about how to fix your car without a mechanic inspecting your car.

I would suggest you stop everything and first take an inventory of all your financial related instruments – assets and liabilities. Find and categorize all your assets – Â property, equities, fixed deposits, LIC policies, etc.Then take a look at your liabilities.

Next, create an asset allocation table so you can understand where most of your assets are held. This will give you an idea if all your money is in a single asset class or evenly distributed. Asset allocation is a way to spread the risk, imagine you have all your money in a single company and it goes bankrupt or 80% of you money is in property and there is a dispute that may take many years to resolve.

Once you understand your asset allocation you can now decide how to increase your wealth by changing these percentages. Think of your asset allocation mix as a road-map. The first asset class people explore are equities, I always tell people there are 3 stages to equity investing and you have to be comfortable at each stage before going to the next. Â Stage 1 – purchase a Sensex/Nifty Index/ETF Fund that is tracking the whole market. Â Stage 2 – purchase specific mutual funds based on the research you have done. Â Now if you feel you can do better than an index fund or a fund manager then Stage 3 is to purchase direct equities in the companies you have researched.

Equities is one way to diversify and there are risks involved. The most important thing is to be comfortable with the ups and downs of those decisions.Â Now that you have a guide via your asset allocation table you can now go back to watching CNBC-TV18, listening to relatives and/or reading blogs and deciding whether thatÂ informationÂ is relevent to your financial situation.

Click here to read my earlier post on asset allocation

News you may have missed

I generally don’t do a links post till Saturday, but I came across several positive news items one after the other, and I thought I’d share them, and spread a bit of cheer among you.

Opto Circuits acquires Cardiac Science

Opto Circuits an Indian company in the business of healthcare equipment has acquired U.S. based Cardiac Science. The transaction has a relatively small price tag of $54.6 million, so probably the small amount combined with all the excitement around the Biocon story crowded this out, as I didn’t see this being reported very widely.

From beyondbrics

Opto is buying up all Cardiacâ€™s outstanding stock for $2.10 per share, a 9.5 per cent premium to Cardiacâ€™s Monday closing price on Nasdaq. But the stock has fallen 46 per cent in the past year, with the majority of the losses coming in late 2009, so, if the recent record is any guide, it doesnâ€™t look at expensive.

Guess what’s over-subscribed?

No, not that.

I wrote about India’s ambitious target of generating 20,000 MW of solar energy by 2022 some time ago, and Reuters report that the first phase of that plan is over-subscribed!

The first phase target was generating 1,300 MW of solar energy by 2013, and it seems that work will begin on half of that by December 2011, and the remaining can be done by December 2012.

From Reuters:

Debashish Majumdar, chairman and managing director of Indian Renewable Energy Development Agency, told the Reuters Global Climate and Alternative Energy Summit that a strong investor interest in India’s solar power indicated the goals could be met.

“We are over-subscribed for the first phase of 1,300 MW, and by December 2011 generation will have begun work for at least half of this target,” he said.

“The rest could be done by December 2012 which will be ahead of schedule. There is no dearth of investors.”

Let’s hope this stays on track, and doesn’t turn out to be like CWG.

India ranked highest among middle-income countries on government openness

According to the World Justice Projectâ€™s Rule of Law Index India has scored highest among middle income countries and 9th overall on Government openness.

I came across this via the WSJ blog, and like the author, was surprised at first. However, I browse through a lot of government websites, and there is in fact quite a lot of data available publicly, which is probably not so easily accessible in other countries. I have no experience with the Right to Information Act, but I have heard that it has made a difference in enabling access to information as well, so this is another piece of good news.

All is not rosy though as India ranks 27 out of 35 on the access to civil justice.

Bharat Diamond Bourse opens in Mumbai

This one is from the WSJ Blog again which reports that the new diamond exchange: Bharat Diamond Bourse – opened last Sunday. The new exchange will hopefully give a little boost to the diamond trade, and attract more traders from around the world.

From the WSJ:

The new exchange will shift the center of diamond trading from the old Opera House neighborhood of south Bombay to the booming suburb of Bandra.Â Mr. Mehta said the exchange â€“ which has 2,500 offices, four walk-in vaults, 24,500 safe deposit boxes and a 6,200 square foot trading floor set on a 20-acre plot – is the worldâ€™s largest.

He said close to $18 billion worth of diamonds were exported from India during the last fiscal year and he is hoping that the new trading hub will bring more international diamond traders to Indiaâ€™s financial capital.

Anything else that you found interesting but didn’t see widely reported? Let us know in comments.

L&T Finance Bond Yield Calculation

I got a comment about how the yield for the L&T Finance Bonds have been calculated and though I have a slightly longer post scheduled on the topic later; I thought Iâ€™d do a quick one for now.

There are 4 series of L&T Finance Bonds, and two of them offer cumulative returns while two others offer annual returns.

L&T Finance Bonds: Cumulative Option

Letâ€™s first look at the cumulative ones first, which is series 2 & 4. Cumulative series mean that you donâ€™t get a payment every year, but get a lump-sum at the end of the bond buyback period.

In L&T Finance Bondâ€™s case â€“ Series 2 is 7.75% for 7 years, and Series 4 is 7.50% for 5 years, so using compound interest â€“ you can calculate the amount after 5 and 7 years as follows:

	Cumulative Option
	Series 2	Series 4
Principal	1000	1000
Interest Rate	7.75%	7.50%
Time in years	7	5
Amount atÂ buyback period	1686.25	1435.63

From the above table you see the amount at the end of the buyback period in both the series. Now keep in mind that these are tax saving infrastructure bonds, so your effective purchase price is lesser than the face value of the bond. If you fall in the 30.6% tax bracket, then your taxable income reduces by the amount of L&T bonds you buy (up to a cap of 20,000).

So based on your tax rate, you need to calculate your effective price, and find out at what rate you need to invest that amount, and reinvest the interest earned on it to come at the final buyback amount (1,686.25 and 1435.63) calculated above. You can use the CAGR calculator on this site to help you arrive at the yield of these two series. That page has details on how this is calculated as well.

	Cumulative Option
	Series 2	Series 4
Principal	1000		1000
Tax Rate	30.90%		30.90%
Effective Purchase Price	691.00		691.00
Amount atÂ buyback period	1686.25		1435.63
CAGR	13.59%		15.75%

The last row in the table above contains the CAGR or yield on both these series, and what this shows you is that if you had invested Rs. 691 in Series 2 for 7 years at 13.59% compounded annually, you would’ve gotten 1,686.25 at the end of 7 years, which is what the yield of this series is.
L&T Finance Bonds: Annual Interest Option

In this case you get interest paid out to you every year, so you use a concept called Yield To Maturity (YTM). This formula takes into account the discounted cash flow, effectively seeing how much money you will get in total, and what itâ€™s worth today. It also assumes that whatever money you get will be reinvested with the coupon rate or 7.75% in Series 1 or 7.50% in Series 4.

You can calculate the YTM using an online calculator or Excel. Plug in the Face Value, Market Price, Coupon Rate and Time in the calculator, and it will show you the YTM.

Here is how that table will look like.

	Cumulative Option
	Series 1	Series 3
Principal	1000	1000
Tax Rate	30.90%	30.90%
Market Price / Effective Purchase Price	691.00	691.00
Coupon Rate	7.75%	7.50%
Time	7 years	5 years
Yield to Maturity	15.23%	17.20%

The 17.20% number that you see in Series 3 basically means that the cash flows from this bond discounted at 17.20% will equal the present value of future cash flows at the same rate.

To come up with the 17.20% number you need to use Excel or an online calculator or something, but then after that you can take the cash flows for each period, discount it with the 17.20% and see what the present value of each amount in each period is, and the sum of those cash flows at 17.20% should be 0. This is just for those of you interested in diving further into the calculation.

Here is how the Series 3 table of what I am talking about look like.

	Series 3 Cashflows	Yield	1 + Yield	Time	Multiplier (Yield ^ Time)	Present Value (Cashflows / Multiplier)
Time 0	-691	17.2	1.172	–	–	-691
Time 1	75	17.2	1.172	1	1.172	63.993174
Time 2	75	17.2	1.172	2	1.37358	54.601684
Time 3	75	17.2	1.172	3	1.60984	46.588468
Time 4	75	17.2	1.172	4	1.88673	39.751252
Time 5	1075	17.2	1.172	5	2.21125	486.15013
					Sum	0.08

If you look at the last column of the above table â€“ Present Value (Cashflows / Multiplier) thatâ€™s the column that shows you the present value of each of these payments at the discount rate.

So, 63.99 invested at 17.2% for 1 year becomes 75; 39.75 invested for 4 years at 17.20 will be 75 and so on.

So, this is basically how the yield for this L&T Finance bond is being calculated, and also the IDFC Infrastructure bond and you can read more about NPV, IRR and YTM at Wiki to get a better understanding of this calculation.

I hope this helped those of you who were trying to figure out the calculation, and if I’ve made any mistakes or if you have any other questions or comments please let me know.

And one last thing, these calculations don’t take into account taxes paid on interest payments; that’s just the way yields are calculated – pretax.

Click here to read the entire review of the L&T Finance Bonds.

Coal India IPO finds no takers

for the employee reservation part of its offer.

Forgive the mis-leading headline but the Coal India IPO opened today, and as expected, there was a lot of excitement in the media about its subscription numbers.

Reading through the headlines I felt the IPO must have done quite well on the first day itself, but on closer look, I found nothingÂ spectacular about these subscription numbers.

So, I thought I’d go the other extreme and with a little use of selective statistics create a headline which is eye catching, true to an extent but not really reflective of the underlying reality.

It’s true that most retail investors participate on the last day, and that as the momentum builds this issue may be over-subscribed by up to 10 times, but that hasn’t happened yet, so instead of speculating on what could happen, I thought I’d take a look at the current subscription numbers, and show you how they are mostly dull.

As long time readers know, a certain percentage of stock is reserved for different categories of investors, so I will show you the Coal India IPO subscription numbers as they stand at the end of day 1 broken out into the different categories.

All data from NSE.

As you can see the QIBs are the ones that have taken a good position on day 1, but the responses from other categories is just about what any other IPO would expect, so really there’s nothing much to see here.

If you are not familiar with the categories, and how the headline over-subscription number most often reported is the sum of all categories, and is not entirely relevant for retail investors read my earlier post on over-subscription numbers that I did during the NHPC IPO.

Oh, and I almost forgot, here is how the shares are reserved among different categories.

L&T Infrastructure Bonds Review

Close on the heels of the IDFC Infrastructure bonds – L&T is also issuing infrastructure bonds beginning October 15th 2010, and closing on November 2 2010.

L&T Bonds: Tax Saving Infrastructure Bonds

These are classified as infrastructure bonds under Section 80 CCF which means that investing in them will reduce your taxable income by Rs. 20,000.

This increases your effective yield because along with the interest you earn on these infrastructure bonds, you save on tax as well.

These bonds are good for a maximum of Rs. 20,000 as far as the tax saving aspect is concerned, so if you buy bonds worth Rs. 30,000 and nothing else, even then the maximum you can reduce from your taxable income is Rs. 20,000 because that is the cap on tax benefits on infrastructure bonds.

L&T Infrastructure Bonds Features

There are 4 series of L&T Bonds, and though these bonds have a term of 10 years, there is an option of a buyback after 5 years or 7 years.

The interest rates, and effective yields of different plans are shown below:

Series	Tax Bracket	1	2	3	4
Face Value	—-	Rs. 1,000	Rs. 1,000	Rs. 1,000	Rs. 1,000
Interest Payment	—-	Annual	Cumulative	Annual	Cumulative
Interest Rate	—-	7.75%	7.75%	7.50%	7.50%
Maturity	—-	10 years	10 years	10 years	10 years
Buyback in years	—-	7 years	7 years	5 years	5 years
Yield on Buyback	30.9%	15.23%	13.59%	17.20%	15.75%
	20.6%	12.31%	11.36%	13.42%	12.58%
	10.3%	9.86%	9.44%	10.23%	9.86%

L&T Bonds Minimum Investment

The minimum investment needed for you to invest in these bonds is Rs. 5,000 because you have to apply for a minimum of 5 bonds, and the face value of each bond is Rs. 1,000.

Open and Close Date

Subscription opened on October 15th, and will close on November 2nd 2010.

Credit Rating

The L&T bonds have been rated CARE AA+ by CARE and LAA+ by ICRA which indicate high credit quality and that the rated instruments carry low credit risk.

How can you invest in the L&T Infrastructure bonds?

You can invest in these bonds either in the physical form or electronically through brokers like ICICI Direct. You can buy a form through one of the several agents across the country and invest in it through them as well.

Here is a list of banks listed on their website that can give you more information as well:

Axis Bank
DBS Bank
HDFC Bank
HSBC Bank
ICICI Bank
IDBI Bank
ING Bank
SBI Bank

They also have this cool link on their special website for this bond where you can enter in your contact details and they will contact you and help you.

If any of you do decide to contact them then I am really interested to know your feedback because I tried to get in touch with the numbers given in the IDFC website, and tried at least 10 times to no avail. I’d like to know if this is any better.

Tax on interest earned from the L&T Infrastructure bond

The interest itself is not tax free. Itâ€™s only the Rs. 20,000 you get reduced from your taxable salary that helps save tax.

L&T Infrastructure bonds to list on NSE after 5 years

The Bonds are proposed to be listed on NSE, and can be traded after the initial 5 years lock-in period. After this lock-in period, the holders can also pledge the Bonds with banks for availing financial assistance.

You don’t need a demat account to invest in these bonds

L&T will offer you the option to hold the Bonds either in Dematerialized or Physical Certificate form.

NRIs can’t apply in the L&T Bonds

Non-resident investors including NRIs, FIIs and OCBs are not eligible to participate in the Issue.

Conclusion

These were some salient features of the L&T bond issue, and I hope you found this useful in order to make a decision on whether you want to opt for them or not. Keep in mind that IDFC has a similar issue running, and if you have already applied for that then you won’t get any additional tax benefit (over Rs. 20,000) by applying for this issue as well.

If you have any questions, leave a comment, and the community here will try to answer them for you.

Click here to read about the IDFC bond issue

Click here to read about the SBI bond issue

SBI Bonds FAQ

Like the IDFC bonds post, there have been several comments and a bit of a discussion going on in the comments section of the SBI Bonds post as well, so I thought I’d take some of those questions and make a SBI bonds FAQ post here.

Listing with a premium

There was this interesting discussion about the bond listing at a premium and I myself know absolutely nothing about this, so I will paste Monu’s original theory and question, and then Arun’s response to it verbatim. Thanks to both of you for bringing this out!

MonuÂ October 15, 2010 at 5:23 am

Whether the Bond will list at a premium because as per Bond Valuation theory Bond Value is a function of interest rate. So they are offering 9.5% which is 2% higher than the rate offered on FDs by Banks so we will get 2% higher for 10 years, which if we discount it @7.5% we will see its present value comes to around Rs 14 per 100. So I expect the bond to list @ 14% premium. So can anyone advise me whether I am write or wrong, because I have never invested in Nonds before.

REPLY

ArunÂ October 15, 2010 at 7:12 am

Hi Monu,

Your basic logic is correct. However FD are covered under deposit insurance while these bonds are not and this makes bonds more risky thus coupon rate has to be higher. In my opinion you will not get more than 2-3% listing gain on these bonds. Same happened with Sriram Transport NCDs (new ones) in May.

Arun

Maximum retail subscription and over – subscription

There is a lot of excitement around these bonds, so I won’t be surprised if they get over-subscribed on the first day itself. So, I thought Sameer asked a very good question about over-subscription. Here is that discussion.

SameerÂ October 16, 2010 at 3:57 am

I understand the retail category applicants can apply for max. Rs 5 lakh. Now if I apply for Rs 5 Lakh on the 1st day , will I qualify for the first come first serve rule to be followed for allotment.

REPLY

Manshu October 16, 2010 at 4:23 am

Thatâ€™s a good point. The bond is reserved 50% for retail, 25% for HNI and 25% for Corporates etc. If one category is left under-subscribed then their quota will be allocated to Retail, HNI and Corporate in that order.

If there is over-subscription â€“ then from the applications received on the day of over-subscription â€“ preference will be given to Series 2 Lower Tier II Bonds on a first come first serve basis, and balance will be allotted on pro-rata basis to Series 1 Lower Tier II bonds.

The relevant part is in page 160, 161 in the prospectus under Basis of Allotment, Issue structure for those of you interested in reading through it. And if anyone else has heard any different then letâ€™s hear it.

Here are some other questions that you may find useful.

Can I trade the SBI bonds on NSE after it lists?

Yes, these can be traded after listing.

Where can I get the application forms, and can I buy the bonds online?

You can get the application from notified branches, and then fill it up there and submit it. To the best of my knowledge, there is no way to invest in them online, but if anyone knows otherwise then please leave a message, and let us know.

Can NRIs apply for these bonds?

NRIs can’t apply for these bonds as they fall under one of the ineligible categories.

Can you take a loan by keeping the SBI bonds as security?

The terms of the issue in the prospectus state that the bank shall not grant any loans against these bonds. Here is what it says:

In accordance with the RBI guidelines applicable to the Bank, it shall not grant loans against the security of the Bonds.

Will the interest from these bonds be taxable?

Yes, the interest income will be taxable.

These were some good points that came out from the comments on the earlier SBI bonds post, and if you have any more questions, then let’s hear them and try to get answers for them.

Click here to read the earlier review of SBI bonds

Click here to read the review of the IDFC bonds

Happy Dussehra to everyone

Dussehra was one of my favorite festivals growing up, and I have many fond memories linked with it. In fact, I used to be part of a group of kids who used to organize burning of the Ravan in our apartment complex.

We were just a bunch of kids, and did the whole thing by ourselves without getting any help from any elders, and one year we really screwed things up. If I remember correctly, we didn’t have enough money to pay the folks who raise the Ravan, and tried to do it ourselves, but it was too big a task and we goofed up badly. In the end, we had to tie our Ravan to a tree and burn it. That was a bad year, and we almost didn’t make an attempt the next year, but my dad encouraged me a little, and all my other friends also decided to give it another shot, and that year we were really able to turn things around.

The key highlight of our celebration was when we rented light-bulbs, and were able to light up our whole park. That was awesome and made all the difference in the world. That day was a real high point for all of us, and to this day I can’t think of that day without a big smile plastered all over my face.

With this happy thought I wish all my dear readers a very happy Dussehra; have a great day, and if you are reading this in an email or through your Feed reader, do click through to see the new festive look that OneMint will sport till Diwali (you might have to refresh your browser).

Once again, happy Dussehra to you and your family; have a great time!

How to un-mute a conversation in Gmail?

A few days ago I wrote about a feature called Mute in Gmail which allows you to ignore conversation threads that you don’t want to see in your Inbox.

As a follow-up, there are three things about this feature that I’ll write here:

How to find conversations that are muted?
How can I turn the mute off?
Is my dog muting my conversations?

There are three things related to this feature that you should know lest it becomes a nuisance, and I address them here.

How to find Gmail conversations that are muted?

It’s fairly simple to find what you muted, and all you have to do is type “is:muted” in the search box.

is:muted

This will show you all the conversations that you muted, and then there is an option to turn mute off on any conversation as well.

How to turn the mute off on a conversation?

You can select a muted conversation, and move it back to Inbox. Once you move a conversation back to your inbox, you’ve un-muted the conversation or turned the mute off, and you’ll start seeing the future emails on that thread in your inbox.

Is my dog muting my conversations?

Most likely not. The shortcut key to mute a conversation is Shift-m, so there’s a chance that you hit that while a conversation is selected and it gets muted. So there is a possibility that you accidentally mute a conversation, and then scratch your head. The good thing though is that if you’re in the To or CC of a muted conversation, then the conversation will appear in your inbox so chances are that you won’t miss any important emails because of this feature.

Even if you haven’t muted anything, it might be a good idea to search for muted conversations anyway because some people have accidentally muted conversations, and found those months after, so just check out if you have any such conversations.

SBI Bonds Issue

Click here to read about the latest bond issue which will open on February 21st 2011.

SBI Retail Bonds are the latest offering from SBI which is coming up with a bond issue that opens on 18th October and closes on 25th October. This is the second big bond issue this month with the IDFC issue still running.

A lot of people will be comparing the SBI bond issue to the IDFC one, so let me say upfront that they’re quite different in one key aspect which is the tax savings. The IDFC bond issue was an infrastructure bond under Section 80CCF, and could get your taxable income reduced by up to Rs. 20,000.

The SBI retail bonds are not covered under this, so you won’t get any 80CCF benefits. Now let’s look at some of its main features.

Interest rate on SBI Bonds

There are two series of SBI Bonds – Series 1 Lower Tier II Bonds gets you an interest rate of 9.25%, and has a tenor of 10 years, and the Series 2 Lower Tier II Bond has an interest rate of 9.50%, and a tenor of 15 years.

This compares quite favorably to the fixed deposit rates SBI offers as the SBI fixed deposit interest rates for 5 – 8 years is 7.50%, and more than 8 years is 7.75%. These bonds are not covered under deposit insurance since they are not fixed deposits, and are not redeemable at the option of the bondholders.

There is a call option or redemption with SBI according to which they can redeem the series 1 bonds after 5 years, and series 2 bonds after 10 years. If they don’t do that then the interest rate will rise by 0.50%.

Demat account is compulsory for investing in SBI Bonds

You need a demat account to invest in these SBI bonds, and your bonds will be held in dematerialized form. If you don’t have a demat account and wish to invest in them then you will have to open a demat account fairly quickly.

Tax implications of the SBI Retail Bond

SBI Retail Bonds are different from the IDFC bonds in the sense that they are not covered under section 80 CCF, so there won’t be any reduction from your taxable income because of investment in this bond.

The interest from these bonds will be treated as income that gets added to your other income and you will pay tax on it accordingly.

SBI Bonds to be listed on NSE

These bonds will be listed on the NSE, and as far as I could understand you will be able to freely trade the bonds even within the 5 year period. So you could hold the bond till maturity or sell it on the exchange if a market develops for it. The prospectus states that all formalities to list the bond will be completed within 30 days of date of closure, so the bonds will be listed on the exchange to buy and sell fairly soon.

When will the interest be paid on the SBI bonds?

The interest on both the series of SBI bonds will be paid out on April 2 of every year.

What is the minimum application size on the SBI bond?

The minimum amount you need to invest in these bonds is Rs. 10,000, you can subscribe in multiples of Rs. 10,000 after that.

How do these SBI Retail Bonds compare with fixed deposits?

Quite favorably because of the higher interest rate and option of listing on NSE. People are expecting these retail bonds to over-subscribe, so let’s see how it goes.

These were some important points about the SBI retail bonds that’ll help you make a decision whether they are right for you or not. If you have any other questions, please leave a comment, and I’ll try to answer them.

Click here to read about the latest bond issue which will open on February 21st 2011.