February 2011 – OneMint

Budget: Where does the government get its money from?

I didn’t plan to do a budget post originally because I didn’t feel anything of great interest has been announced, but then Amit left a comment on the Suggest a Topic page, so I thought I’d do one on it anyway.

Leading economist Bibek Debroy (@bibekdebroy on Twitter) tweeted the following earlier today:

Para 196 of budget speech sums up what entire budget is about.

The para says that as a result of the budget there will be a direct tax loss of Rs. 11,500 crores, and an indirect tax gain of Rs. 11,500 crores, so a net loss of Rs. 200 crores.

I don’t think anything really noteworthy took place, and whatever little did take place has already been reported upon quite extensively, so let me take a look at this budget at a higher level, and see how the numbers look like.

Specifically, for this post, I’ll take you through the revenue side of the budget. The Revenue of the government has three components:

Tax Revenue: This is the revenue raised from taxes like your income tax and corporate tax.
Non Tax Revenue: This is the revenue the government earns by things like dividends from PSUs, royalty from selling petroleum, spectrum fees etc.
Capital Receipts: Includes mostly borrowings

First off, let’s take a look at how the two revenue heads contribute to the government’s coffers.

As you can see the majority of the revenues are generated through taxes, and here is how they’d look like in absolute numbers.

Total Tax Revenues are expected to be Rs. 9,32,439.88 crores, while Total Non Tax Revenues are expected to be Rs. 1,25, 435.12 crores.

I say expected because that’s what the budget is really – it is an expectation of how much the government will earn and spend in the coming year.

I also use crores because that’s the number used in official documents and makes it slightly easier for me to prepare this post. For simplicity – 1 lakh crore is equal to a trillion rupees.

Now that you know how much taxes contribute to government’s coffers – can you guess how much income tax contributes to the total tax collected?

Here is a pie chart that shows the breakup of various tax heads.

As you can see companies pay the largest share of taxes at 39%, and income tax contributes 18% along with excise duties. The next highest is customs with 16%. What this shows is that income tax paid by individuals is actually quite small when you compare it to the other ways the government collects taxes.

This is probably because a very small percentage of the population pays income tax.

Here are the absolute numbers.

Heads	In Cr.
Corp Tax	359,990.00
Total Taxes on Income	172,026.00
Wealth Tax	635.00
Customs	151,700.00
Net Union Excise Duties	164,115.66
Total Service Tax	82,000.00
Total taxes on UT	1,973.22
Total Tax Revenue	932,439.88

Next up is a look at all the heads of the indirect revenues, and here is how that pie chart looks like.

So, the two biggest contributors are dividends and economic services. Dividends are of course dividends from PSUs like MOIL, and that number will go down in the years to come as disinvestment continues and government continues to reduce their holding in the PSUs. Of course it could happen that some of the loss making PSUs start earning a profit, or that the profit of the existing PSUs become much higher, but I wouldn’t count too much on that.

Economic Services are really dominated by two things – royalty on petroleum products, and spectrum fee that has been generated from the telecom auctions.

So, if you really see the 12% non tax revenue that the government gets is higher this year because of the spectrum auction.

Here are the absolute numbers.

Heads	In Cr.
Interest Receipt	19,577.78
Total Dividends and Profits	42,623.68
Total Fiscal Services	127.82
General Services	11,494.36
Total Social Services	2,353.90
Economic Services	45,915.27
Total Grants in Aid	2,172.96
Non Tax Revenue of UT	1,169.35
Total Non Tax Revenue	125,435.12

So, this is how the government “earned” money but like you and me our government has got a credit card as well – that too an international one because it gets money from abroad as well.

The government gets Capital Receipts and this is part of the revenue as well. These are things like short term borrowings, and external debt.

Most of the borrowing is short term in nature, and the external debt forms only 3% of our total capital receipts which is a good thing because we don’t want to borrow in another currency from foreigners.

Here are the absolute numbers for you.

Heads	In Crores
Net Recoveries of Loans and Advances	15,020.00
Misc. Capital Receipts	40,000.00
Net Short Term Borrowings	358,000.00
Securities against Small Savings	24,182.46
Net State Provident Funds	10,000.00
Net Other Receipts (Internal Debts)	(13,865.89)
Net External Debt	14,500.00
Draw Down of Cash Balance	20,000.00
Net Market Stabilization Scheme	20,000.00

Now, of course you want to see how the capital and revenue receipts are relative to each other.

So, here is that chart.

They project to earn a lot more in taxes and revenues than they project to do via borrowings.

A quick word about these capital receipts is that they include miscellaneous receipts of Rs. 40,000 crores which is really the disinvestment target for the coming year. So, expect to see more PSU IPOs in the coming year.

I have taken all these numbers from the Budget website, which is really fabulous. The website itself is easy to navigate, and the documents are very easy to read as well.

Let me make an honest admission and say that if I were to guess any of these numbers or percentages I would have never been able to guess them correctly. I had vague numbers in my heads, but they were not accurate at all. So, this has been a really good if a very time consuming exercise for me.

How about you? Which of these numbers surprised you the most? I think a lot of people are going to find this information useful, so I’ll request you to share this post on Facebook, Twitter and email, and of course I’m really looking forward to comments on this one, and if you have any specific budget related questions then those are welcome as well!

Sachin Tendulkar’s Centuries in ODIs against various countries

Click here to view a report on Sachin century vs India Win.

I hope you’re enjoying today’s game like me, and here’s some light Sunday fun for you.

When I heard that Sachin has just scored one century against England prior to this – it made me look for a break up of how he has fared against other countries.

He’s treated them all well, but Australia is clearly his favorite. Here’s a little pie chart of Sachin Tendulkar’s centuries against various countries.

47 in total with the list created on 27th Feb 2011; all numbers from Wiki.

The name that you can’t read is Namibia here – sorry for that!

PFC Infrastructure Bonds

I think PFC is going to be last issuer to issue infrastructure bonds, and here is a post about some details on this bond issue.

PFC infra bond issue opened on February 24th 2011, and will close on the March 22nd 2011. The issue has been rated AAA / Stable by CRISIL and LAAA with stable outlook by ICRA.

These PFC Bonds are only going to be issued in the Demat form, and are secured in nature. The face value of each bond is Rs. 5,000 and here is a table with interest rate and maturity information of these bonds.

I’m not covering this in a lot more detail because of the many posts about other infrastructure bonds here. If you have any questions then please check out my 80CCF Infrastructure bonds FAQ post, and of course you’re always to welcome to post any questions or other thoughts as a comment.

OneMint forum has more than 6 subscribers and links

When I started out on OneMint it had 6 subscribers for what seemed like a very long time.

I used to check my Feedburner account everyday, and there it was Â – a big 6 – I used to wonder what I need to do get the seventh subscriber.

Then I did a guest post at another website, and the number increased to 15, but I can never forget that 6.

That’s why when I launched the forum I was hoping that it doesn’t get stuck at six, but it quite easily passed that number, and as it stands today – there are 49 members right now, and it’s growing steadily.

Please join the forum, and ask any questions you may have. I say any questions because lately I’ve fielded quite a few questions about blogging itself, so I know some of you are interested in things outside finance, and you’re welcome to ask those questions too.

As long as the discussion is civil – all topics are welcome.

With that said, let’s move to some great links from this week.

First up is this great piece by Ajay Shah on how jittery regimes fix prices. A lot of you ask about which blogs to follow, and Ajay Shah who is a leading Indian economist has the best economics blog in an Indian context in my opinion, and you should definitely give him a try.

Libya has allowed India to land two AI flights there everyday for 10 days and assist in evacuation of the 18,000 Indians present there.

The budget is of course the big news these days, but somehow I’ve never been able to get that interested in it. Regardless, I’m really interested in seeing FDI open in Indian multi brand retail.

My hope is that it will bring in large investments in cold storage, food distribution, and in the long run bring down food prices as well, so I was quite happy to see that the WSJ blog has a piece that says the Indian budget could have some good news for the retail sector in this regard.

And finally an interesting post from TFL about 7 different types of investors. I think I fall under the regular category. Check it out for yourself to see where you fall or better still create a category yourself.

Enjoy your weekend!

Q. What returns can I expect from this investment?

Ans. Your investment will plummet in the next few years, and it will take about 25 to 30 years to recover it back.

That’s not the answer you wanted to hear, but that would’ve been the correct answer for anyone asking about gold investment in the late 1970s.

Here is a chart that shows how gold prices moved from the 70s till date.

I bring this up because there are a large number of comments that ask about the expected returns on gold, or some other commodity or mutual fund without inquiring about risk.

As I’ve said earlier, there is absolutely no point in talking about returns, if you’re not talking about risk. While it might be true that gold has historically returned more than inflation, or that it has done extremely well in the past decade – that doesn’t mean it will continue like that forever.

Let’s see if you can guess what I’m talking about here.

If you invested in me today you will lose 80% of your money in the next two decades. Don’t worry – it will be painful at first but then you will get used to it.

This is not a penny stock or some shady investment – I’m talking about Japan’s leading equity index the Nikkei 225 which reached its peak in 1989, and was at about 20% of its value two decades later.

I have a strange feeling that a lot of Japanese folks were talking about expected returns in the late 80s, but there weren’t many who were talking about risk.

There is risk in everything – inflation eats into cash, countries can go bust and default on their debt, and of course banks can go under as well. You can’t just go back to the barter system because of that; my point is that you should understand that there is this risk element present in these avenues, and try to understand that.

A lot of people do ask these type of questions, and that’s great, but for those of you looking for an expected return number only – you’re looking at just half the equation.

SBI Bond Gray Market Premium and Annualized Returns

Business Standard reports that the recent SBI bond issue is getting gray market premiums, which is a first for any bond issue!

Brokers are giving up to Rs. 320 to retail investors to apply for bonds on their behalf as the brokers expect good listing gains, and though popular for IPOs – this is the first time listing gains and gray market premiums are being seriously taken for a bond issue.

I feel that this is quite ridiculous, and will have the effect of crowding out real retail investors, and create a crazy short term mentality even for bond issues that is detrimental to long term wealth building for the small investor, but I’m sure this trend is going to catch up in the days to come.

It’s very hard to resist easy money and quick gains – no matter how small they are.

In this case you get to make Rs. 320 risk free on Rs. 10,000 which is fine if you are interested in that kind of a gain, but please don’t say that you get an annualized return of 76% because you really can’t annualize this return.

It makes sense to calculate annualized returns when you know that you can execute such risk free transactions throughout the year and get a return that is at least close to the 76% number, if not exactly that.

But in this case you just have this one transaction where you see you can make Rs. 320 on Rs. 10,000 so there’s not a lot of sense of calculating that return on an annualized basis except perhaps to boast to others.

This becomes even worse with IPO listing gains because you make 3% here 5% there, but then get stuck in that one issue that falls badly and wipes out all your previous gains. Just take a look at my earlier post on IPO performance in 2010 to see how many of them listed below their issue price or for just a tiny listing gain to get a sense of what I’m saying here.

Ultimately you have to be true to yourself and evaluate an investment based on what you are really getting out of it, or else it will cloud your judgment, and paint a rosy picture and make pennies look like gold dust.

HDFC Debt Fund for Cancer Cure NFO

This is a really unique mutual fund by HDFC precisely because of what the name suggests. The HDFC Debt Fund for Cancer Cure is a closed ended mutual fund that will have a term of 3 years, and it will donate 50% or 100% of the dividend income to the Indian Cancer Society.

At the time of subscription you will have the option to tell them whether you want to donate half of your dividend income or all of it, and HDFC mutual fund will donate your dividend according to your wish.

While I’m not entirely sure what to make of this philanthropic mutual fund offering – I applaud HDFC for coming up with this idea, and most of all for not charging any expenses on this fund.

It would have been really lame if they were to profit out of such an undertaking, but they are not charging any expenses to the investors, and that’s a great thing.

The mutual fund NFO will close on the 4th March 2011, and the mutual fund is only going to invest in highly rated debt instruments.

The dividend that is donated on your behalf enjoys tax benefit under section 80G, so you can use that money as a deduction from your taxable income.

The minimum investment needed in this fund is quite high at Rs. 1,00,000, and I’m not sure why they have kept the minimum limit so high, but that’s how much you need if you want to invest in this NFO.

Since this is a close ended fund you won’t get an opportunity to invest after the NFO closes, so the barrier to entry is aÂ bit high.

What do you make of this mutual fund? Would you like to invest in something like this if the minimum investment were less than a lakh rupees?

IDFC Infrastructure Mutual Fund NFO

I’ve seen at least one comment that confused the IDFC Infrastructure Mutual Fund to the IDFC Infrastructure bonds, so let me say it upfront that this is a equity mutual fund, and not a bond.

You will not get any tax benefits from investing in IDFC Infrastructure mutual fund, and when you invest in this infrastructure mutual fund your money is going to be invested in the shares of infrastructure companies in India.

This NFO (New Fund Offer) has started on February 14th, and will close on the 28th February.

This mutual fund will invest 80 – 100% of its assets in the shares of companies that are related to infrastructure related activities, and the remaining money will be invested in debt and money market instruments.

The scheme information document describes infrastructure companies as:

Power and Utilities â€“ generation, transmission, trading and distribution of power,

Oil and Gas â€“ (a) petroleum and natural gas, including exploration and production, import terminals, liquefaction, regasification, storage terminals, transmission networks and distribution networks and (b) development of technology and production of renewable energy of fuels,

Ferrous and non-ferrous metals, including mining, production and distribution,

Transportation â€“ (a) roads, including toll roads, rural roads, bridges, highways, road transport providers and other road-related services, (b) rail system, rail transport providers and other railway-related services, (c) ports, inland waterways, coastal shipping, including shipping lines, dredging and other port-related services, (d) aviation, including airports, airlines and other airport-related services and (e) distribution/logistics services,

Telecom – telecommunication services, including radio paging, domestic satellite service, network of trunking, cable TV services, broadband network and internet services,

Industrial and Commercial Infrastructure â€“ (a) urban development including industrial parks, special economic zones, real estate development, water supply, irrigation, water treatment systems, sanitation and sewerage systems and solid waste management systems and (b) tourism including hotels, convention centers and entertainment centers,

Rural Infrastructure â€“ infrastructure related to agriculture, food distribution, irrigation and rural development and

Others â€“ (a) development, operation and maintenance of educational institutions and healthcare facilities, (b) technology-related infrastructure, (c) manufacturing of equipments, components and materials or any other utilities or facilities required by the infrastructure sector like energy saving devices and metering devices, etc., (d) environment related infrastructure, (e) capital goods/engineering equipment, (f) financial institutions including banks and housing finance companies (g) building materials and (h) any other types of utilities or facilities or services as may be determined by the Board of the Fund from time to time.

The NFO has a minimum investment requirement of Rs. 5,000 and there is an exit load of 1% if you redeem before a year. There is a dividend and growth option, and you can select one of them.

I created a list of infrastructure mutual funds some time ago and there are about 13 such funds right now, so if you were planning to invest in the infrastructure sector you have plenty of options at present.

Personally, I don’t see any benefit in applying in NFOs when there are other alternatives in that segment because there is no past performance data available for the fund, and of course as you already know too well that a 10 rupee NAV is a meaningless thing.

IDBI MIP NFO

IDBI is going to come up with a new MIP (Monthly Income Plan), and the NFO is going to be open from February 14th to February 28th 2011. The scheme will then reopen on 14th March 2011.

As I’ve written earlier MIPs intend to provide you with a monthly income but there are no guarantees, and the IDBI MIP is no exception to that.

There is a growth and a dividend option available in this MIP, and within the dividend option you can choose to get paid the dividend monthly or quarterly.

IDBI MIP will invest 80% – 100% in debt instruments and the remainder in the shares of the Nifty and Nifty Junior Index. The minimum investment needed in IDBI MIP is Rs. 5,000 and then there is the option of SIP as well.

I don’t quite understand why people do a SIP on an instrument whose whole premise is paying out monthly incomes, but I got a few comments asking about this option in my last post, so I guess there are some people who see merit in it.

The expenses are estimated to be 2.25% of net assets, and there is an exit load of 1% if you redeem within a year.

A look at my earlier MIP in India post shows me that there are as many as 18 Monthly Income Plans in India right now, so this fund is being launched in a category where there are quite a few funds already.

The look at the returns show that they range from 5.85% to 13% annualized, which is quite a big range, but then this is for all MIP funds and how they did in the past.

As I said earlier – to me it makes sense to avoid NFOs if there are mutual funds already in that category, and invest in the fund only when it has shown a good performance record, and this fund falls under that category as well.

How does mutual fund NAV affect performance of a fund?

There were two recent comments that prompted me to write this post, and both had to do with mutual fund NAV (Net Asset Value), and how they impact the performance of a fund.

The truth is that mutual fund NAVs have no impact on the performance of a mutual fund, and you should ignore the NAV while making a decision to buy a mutual fund, and it shouldn’t figure in your decision process at all.

One reader asked me if the NAV and performance of a fund are inversely related, and I think that question has its roots in listening to people touting benefits of investing in a mutual fund NFO, and getting a mutual fund at a ten rupee NAV.

In reality, there is no relationship between the NAV and performance of a mutual fund. The fund’s NAV will have absolutely no bearing on how it’s going to perform in the future or how it has performed in the past.

The second comment was about the relationship between a dividend payout and the NAV of a mutual fund, and even that doesn’t have any effect on performance.

The NAV of a mutual fund will adjust according to the dividend payment, but that doesn’t mean you stand to gain or lose anything based on when you choose to buy the mutual fund.

Let’s take an example to understand this. Suppose you want to start up a mutual fund of your own, and give your family members a chance to invest with you.

You go ahead and shoot out an email to all family members who you think are interested in it, and ask them how much money they are going to invest with you.

Being as smart as you are – you get a lot of responses from your family members, and at the end of your subscription period you get the following sums:

Rs. 500,000
$10,000

At an exchange rate of 45 rupees to a dollar you convert your 10,000 USD and see that you have Rs. 450,000. So, now your total assets under management are Rs. 9,50,000.

You send out a letter to all your subscribers with the information that the fund has collected Rs. 950,000 and you will send them a quarterly report of your progress.

At the end of the 3 months, you see that your investments have grown smartly, and that you have grown the money to 10,45,000.

Most of your subscribers are happy, but the cousin in US who invested in your fund says that he can’t really understand if you did good or bad, and needs a simple way to compare your performance with the Dow.

You tell him that the fund made 10% in that quarter, and the Dow gained by 3%, and add that from the next statement onwards you are going to send a percentage gain along with the funds under management as well.

Time goes by, and you forget to wish your uncle on his 50th birthday. He does what any loving uncle would do – withdraw his Rs. 50,000 investment from your fund to teach you a lesson. Ouch.

You are the honest nephew, so you tell your uncle that his original investment grew by 10% in the 3 months you handled it so you hand him over a check of Rs. 55,000.

The market remains stagnant in the next quarter, and the fund doesn’t move at all. You shoot an email to your readers telling them that the fund value is now at 9,90,000 and this quarter has been no profit no loss for it.

You get a barrage of emails the next morning from your subscribers who ask you what kind of a scammy outfit you’re running since the value came down from 10,45,000 last quarter to 9,90,000 this quarter, and you saw no loss at all?

You are at a loss on what to do, and decide to call up your good friend Loney who tells you that you need to split up the fund into units, and assign a NAV to the fund. Then tell each of your subscribers how many units they own based on their initial investment, and declare the NAV every quarter instead of declaring the total assets under management. The NAV is not impacted by redemption or new investment, and your current subscribers will better understand your fund performance.

Aha – so now you know why you need that blasted NAV in the first place.

Now, the next question is what to base it on.

You decide that you are going to go the extra mile and make it really easy for your US subscribers to compare your fund’s performance with the DOW and make one unit of your fund equivalent to one unit of the DOW!

You see that the Dow closed at 12,391.25 on February 18th, and decide that one unit of your fund will also represent that sum.

So you divide the initial investment of Rs. 950,000 with 12,391.25 and arrive at 76.67 units. In this case the NAV of 1 unit of your fund is equal to 12,391.25 at the start, and you have 76.67 units in your fund.

You then tell each of your subscribers how many units they own based on how much money they invested with you. When your aunt sees your email about one unit having a NAV of Rs. 12,391.25 she flips out and calls you asking what’s this DOW, and why should she care about it.

After listening to your explanation she understands what you’re doing but wants you to compare your performance to gold instead of DOW because everyone “knows” gold is the next big thing, and you should at least better that.

You try to reason with her, but when she threatens to complain to your mom you go back home, and see that one gram of gold is about Rs. 2,000, so based on that you say that one unit of your mutual fund will be Rs. 2,000 as well, and the total units will now be 450 instead of the earlier 76.67 based on the initial corpus with you.

You draft the email informing subscribers of this change, but before hitting the send button decide to take a second opinion from your brother in Delhi.

When you call him up and tell him about the Rs. 2,000 NAV – he is livid. He hadn’t read your earlier email, and it’s good that he hadn’t because the only reason he invested in your mutual fund was to get a 10 rupee NAV!

What’s the point of investing with you if you give him such an expensive NAV? He demands you to give him a 10 rupee NAV immediately.

You are at the verge of going insane now, and call me up to ask me what you should do. Unfortunately I’m too busy sending people their infrastructure bond statements and doing the needful so I ask you to call up my buddy Shiv who is an adviser.

Shiv tells you to take it easy and keep the NAV at Rs. 10 and placate everyone. It doesn’t matter what the NAV is anyway, it’s just a number you pull out from a hat. This way at least everyone will be happy.

You take this sound advice, and shoot out an email the next day saying that the initial NAV was Rs. 10, and that the fund had 95,000 units, and tell everyone their units individually as well.

You wait for angry emails, but no one replies – no news is good news you decide, and smile for the first time wondering how easy it is to pull out any NAV from your hat, and get everyone all riled up for nothing.

You can make up any NAV you want at the start of the fund, it doesn’t matter if it’s 10 or 10,000, so ignore NAVs while making your investing decision.