December 2011 – OneMint

A new year special!

New year resolutions are fun to make and even if you carry them out for a month – I guess that’s a lot better than not doing anything at all.Â A few of us can actually make lasting changes and that of course is great and what we should aim for.

With that in mind, I contacted a few folks who OneMint readers should easily recognize, and asked them for their new year resolutions or what they thought other people could benefit from.

I got some varied and interesting responses, and I think they are very sound ideas and most of us have given them a thought at one point or the other – this might be just the chance to adopt some of these or come up with a money resolution of your own.

Furqan’s response was the most amazing, and you will see in a minute why that is but before that here is a summary of everyone’s thoughts.

I had to shorten a few things which people had to say because I wanted to fit it all in one image, so here is the whole version of what some of these people said.

Furqan’s note to me was actually quite inspiring because I had written to him sometime last month, and not only did he plan on something – he actually lost 5 kilos and executed on some of that plan as well!

Here is Furqan:

At the start of each year I take resolutions, many of same types as previous year and
wonder, with a sense of bewilderment, how I end up in the same situation once again.

This time your email made me ponder and thought of making this year different. I
decided to take time to think about what I can do differently in 2012, so that at this time
next year, I will look back with a sense of accomplishment and pride.

As a first step, instead of waiting for the new year I took the immediate personal
resolution to change to a healthy life-style. Met my family doctor who ran some tests
and based on the results embarked upon improving my health. Met this dietician, took
wife into confidence, started regular morning walk and meditation. You will be surprised
to know that I lost 5 Kgs in a month and half. I feel great, healthier and energetic.

On the professional level I chose my 3 loyal clients who were simply investing without
a Financial Plan and did their Financial Planning free of charge. This resulted in, one,
a better understanding of their financial health by the client and second, a sense of
accomplishment for me.

To go ahead in the same direction, Iâ€™ve made a list of 5 New Yearâ€™s Resolutions. Small
things that can help make better, smarter decisions, for me and my clients, for the
coming year and the years ahead.

My New Year Resolutions on professional front are:

1) Do an FP for atleast 1 client a week.
2) Help clients make more money that will help me progress.

3) Invest in myself (Education is Empowerment).
3) Learn one new thing about Investing/Finance every month.
4) Take action and apply what I learn.

My New Year Resolutions on personal front:
1) Continue Daily Walk/Exercise
2) Write a Gratitude Journal
3) Self Coaching Questions
4) Meditation

I was very impressed by what Furqan had to say and it inspires me to carry out my own resolution firmly and throughout the year.

Now, here is Hemant:

Budget is the “”numero uno”” step of financial planning & it is also the only panacea for good financial health. With technological enhancements, every day it we face new ways to spend our money without realizing its long term impact.

When you donâ€™t have budget everything looks important & necessary. Biggest problem of not having budget means you are likely suffering a financial disease called “”I NEED IT NOW””. It looks so good so… I NEED IT NOW, there is good discount so… I NEED IT NOW, my friend bought it & I am suffering without it so…. I NEED IT NOW & the story continues. Are you a kid?? Remember the most insane reasons we gave to our parents just to own a stupid looking toy. Donâ€™t feel guilty you still have time to improve it. Just do it!!”

The size of these responses vary because my request was a little vague, and thanks to Adi, Hemant, Furqan, Shiv, Bemoneyaware, ShabbirÂ and Manish for sparing their time, and sending these in.

Your turn now – what’s your new year resolution?

PFC Tax Free Bonds Review

PFC (Power Finance Corporation) is the latest company to come out with tax free bonds and the terms are exactly the same as the NHAI bond issue.The only two differences that I noticed was that the minimum subscription for the NHAI issue was Rs. 50,000 and for this issue is Rs. 10,000, and these bonds will list only on the BSE while the NHAI issue was going to list on both BSE and the NSE.

Other than that, everything appears to be the same to me.

The issue opens on Friday, December 30th 2011 and will close on January 16th 2011. It is likely that this issue gets over-subscribed quickly because the same thing happened with the NHAI issue that had similar characteristics.

If that happens then the PFC issue will close the issue before the January 16th 2011, so if you are interested in these bonds then subscribe as soon as you possibly can.

The total issue size is Rs. 4,033 crores and while that doesn’t make any difference to individual investors – I want to keep a track of the size of these issues to see how much money flows into them, so that’s the reason for mentioning it here.

Here are some of the other terms of this issue.

Options	Tranche 1 Series I	Tranche 1 Series II
Face Value	Rs. 1,000	Rs. 1,000
Term	10 years	15 years
Interest payment	Annual	Annual
Coupon Rate	8.20%	8.30%

Based on the questions I saw for the NHAI issue – I think a lot of people are confusing the 80CCF infrastructure bonds with these bonds.

So, I want to clarify that these are not infrastructure bonds and they do not come under the 80CCF limit – PFC had issued infrastructure bonds earlier, but they closed for subscription on November 4th 2011. If you came here looking for the Rs. 20,000 additional limit under 80CCF then this is not the instrument for you.

You need to choose one of the open infrastructure bonds from this list.

The next common question is about returns comparing tax free bonds with long term fixed deposits and you can find a very detailed post on that subject here.

I can’t think of anything else with respect to the PFC tax free bonds that I should mention here, so if you have any questions or observations – please leave a comment.

Comparing Tax Free Bonds and SBI Fixed Deposit Returns

There has been a lively debate about how to compare the yield between tax free bonds like NHAI and something like a ten year SBI fixed deposit in the comment section of the NHAI tax free bond. This debate was started by a calculation from Amlan Basak, and then others have weighed in on his calculations.

Savio had made a similar comment a few days ago, and basically what they are saying is that since bank fixed deposits are compounded 4 times a year, whereas the bond interest is compounded only once a year – the returns from a SBI bank fixed deposit is going to be higher than a PFC or NHAI bond issue in the long run.

Let me reproduce Amlan Basak’s comment here because he is the one that has done the calculation.

Currently SBI is giving 9.25% for 10 years FD.
letâ€™s assume you invest 1,00,000.
With quarterly compounding interest the maturity amount will be 2,49,544 (though it is surprising but it is the power of compounding).
Interest component = 1,49,544
Tax @30.9% = 46,209
So, effective maturity value = 1,00,000+1,49,544-46,209=2,03,335

for NHAI, simple interest of 8.2% will yield 82,000 in 10 years
So, final amount = 1,82,000
It is less by 21,335

Please let me know if I made any mistake in the calculation.

(Note: I am not considering how we are going to invest the 8200 per year that we will get as interest)

There are a few things that I want to highlight in this calculation.

First point and he has himself acknowledged that is the fact that he has not included the NHAI interest amount reinvestment in his calculation. So, on one hand you have the SBI money that is put to work by you at the high rate of interest but on the other hand you have the interest amount from NHAI or PFC that is not reinvested but is supposed to do nothing at all.

Scenario	NHAI	SBI Fixed Deposit
Money from NHAI is not reinvested & money from SBI is reinvested. Tax Rate is 30.9%	Rs. 1,82,000	Rs. 203,335

If you hadÂ assumed that the NHAI interest is also reinvested at the 8.2% that is the original bond’s coupon rate then you actually get Rs. 2,19,923 which is about Rs. 16,000 higher than the SBI fixed deposit amount. This is probably theoretically, a more correct way of comparing these two.

Scenario	NHAI	SBI Fixed Deposit
If NHAI interest is also reinvested along with SBI interest	Rs. 2,19,923	Rs. 2,03,335
If money from NHAI is not reinvested & money from SBI is reinvested. Tax Rate is 30.9%	Rs. 1,82,000	Rs. 203,335

Reinvestment makes a big difference and another way to highlight that is to look at what would happen if you reinvested NHAI interest but simply took the SBI FD interest home with you every year.

Scenario	NHAI	SBI Fixed Deposit
If NHAI interest is reinvested but SBI FD interest is not reinvested	Rs. 2,19,923	Rs. 1,66,170
If money in either is reinvested (Tax at 30.9%)	Rs, 2,19,923	Rs. 2,03,335
If money from NHAI is not reinvested & money from SBI is reinvested. Tax Rate is 30.9%	Rs. 1,82,000	Rs. 2,03,335

But coming back to the original calculation I can understand why Amlan Basak didn’t consider investing the Rs. 8,200 back from the bonds, and this is what Kiran tweeted out to me some time ago as well – that for most people they will not reinvest the money and it will just lie in their bank accounts. Hence for majority of investors the cumulative option on bonds is better than the annual interest one.

The thing to consider in this is that you don’t see anything from your SBI investment for 10 long years, but you are getting Rs. 8,200 paid out to you from NHAI every year. With the high inflation that we have today – you just can’t compare the absolute sums from the two investments. Rs. 2,03,335 is worth a lot less in ten years than it is today. So, to really evaluate these two cash streams you should see the present value of these two cash flows. That means you see what the maturity amount ten years from now is worth in today’s rupees and then compare that with the cash flows on the bond. In this case, the present value of cash flow from bonds is higher than the present value of the fixed deposit. I have assumed inflation to be at 7%.

Scenario	NHAI	SBI Fixed Deposit
Present value of money if money from NHAI is not reinvested and money from SBI is reinvested. Inflation is assumed 7% throughout	Rs. 1,19,924	Rs. 1,03,365
If NHAI interest is reinvested but SBI FD interest is not reinvested	Rs. 2,19,923	Rs. 1,66,170
If money in either is reinvested (Tax at 30.9%)	Rs, 2,19,923	Rs. 2,03,335
If money from PFC is not reinvested & money from SBI is reinvested. Tax Rate is 30.9%	Rs. 1,82,000	Rs. 2,03,335

I have done all these calculations on a Google Spreadsheet that you can access here. It is read only so you can copy it to your own spreadsheet and make changes.

Another aspect of these numbers is that you are supposed to pay tax on the interest income every year so that will reduce what you get at the end of year. This has been pointed out by Vaibhav.

The take away for me has been that these bonds don’t offer as sweet a deal as I earlier thought them to offer and thanks to Amlan Basak and Savio for that. However, if I had an option I would definitely opt for the bonds instead of the SBI fixed deposit.

Since this has been a complicated exercise I won’t be surprised if I made mistakes, so I’d request you to review the numbers and point out if I made any errors. And like always, comments are welcome!

SBI Tax Advantage Fund Series II: 10 Year Closed Ended ELSS Fund

SBI Mutual Fund has come up with a new fund offer for SBI Tax Advantage Fund Series II which is a 10 year closed ended ELSS (Equity Linked Savings Scheme) fund.

It’s an equity mutual fund which means that it will invest primarily in shares listed on the stock exchange. It’s an ELSS which means that it will give you tax benefits under section 80C. So, the money you invest in this fund will be reduced from your taxable income thereby reducing your tax liability.

The NFO has opened for subscription on December 22nd 2011, and will close on March 21st 2012. The minimum application is Rs. 500, and you can invest in multiples of Rs. 500 after that. Since this is a closed ended fund – you will be able to buy it only during the NFO period, and once the NFO closes units won’t be available for purchase.

The fund has a dividend and growth option, and since it is an ELSS fund – your fund will be locked in for 3 years in which period you won’t be able to redeem it.

The information document says that redemption or repurchase facility will be available after the 3 year lock in period. I have no experience buying into closed ended funds, so I don’t know how the redemption of these work – if anyone has any practical experience or insights on this then please do share that in comments.

This fund doesn’t offer any differentiation from the plenty of other ELSS funds that exist today, and I was hoping that they offer a lower expense ratio to lure in customers but that’s not the case.

The recurring expenses are going to be 2.50% for the first 100 crores of assets, 2.25% for the next 300 crores, 2.00% for the next 300 crores, and then 1.75% for the balance. I see that the series I of this fund has an asset under management of Rs. 550 crores so that could be a potential pointer on how much Series II could amass, and based on that it looks like the expenses will be relatively high. Expenses of the fund eat into the returns so you want them to be as little as possible.

I think ELSS funds are a great way to utilize the 80C limit because they are equity instruments and have the shortest lock in period among the 80C options, but for this particular fund – I don’t see any reason to invest in it at all.

There are plenty of other ELSS funds that have a fairly long track record, have lower expenses and buying one of those makes more sense to me than getting into this one.

This post is from the Suggest a Topic page.

NHAI Tax Free Bond Application Form Download Link

Shiv has just left a comment with a link to download the application form of the NHAI tax free bonds. He had created such a link to download the application form of IDFC and L&T infrastructure bonds as well, and we had to create new links because there were more than 500 downloads which was the limit set on the overall downloads!

I was a bit surprised by that because I didn’t realize that so many people are just looking for a place to download forms. I guess just a post to provide a download link serves as much (if not more) purpose than the original post reviewing the bond!

The application form is just over 1 MB, and here’s the link:

Application Form of NHAI Tax Free Bonds

Here is Shiv’s comment about the form:

Hi Manshu.. Like IDFC Infra Bond and L&T Infra Bond issues, please check another Web Link to download the NHAI Tax-Free Bond Application Forms online:

Application Form of NHAI Tax Free Bonds

Note: Just want to tell the investors that the photocopies of a form cannot be used to invest, as each form has a unique application no. To get multiple forms in order to invest in different names, just click multiple times.

In case any reader has any query regarding this link (E-Form), NHAI Tax-Free Bonds as such or wants to invest in NHAI Tax-Free Bonds, Call/SMS 9811797407 (Gurgaon, Delhi or Noida) or mail us at [email protected]

Hemant has written a post specifically focusing on the NRI aspects of the NHAI bonds, which will be a useful read for NRIs interested in either this issue, or generally in tax free bonds.

Book Review: Boomerang: Travels in the New Third World by Michael Lewis

Michael Lewis has got to be one of the best story tellers when it comes to the world of high finance and economic crises. I recently read Boomerang which is another one of his great books; it’s a fairly short book and you can breeze through it in an afternoon or so.

The book has only 5 chapters, and each chapter looks at a country which found itself in the center of financial turmoil, and the 5 countries are Iceland, Ireland, Greece, Germany and the US.

In typical Lewis style, the book is devoid of much financial jargon, is easy to read, consists of plenty of colorful characters, and is full of anecdotes that keep you hooked.

Lewis takes a look at every country, and writes how they dealt with the easy money that came to them during the boom years, where they invested, and then how they dealt with the situation after the crash.

In addition to that the stories that Lewis tells about these countries are really something else. Take this one for example:

What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called hidden peopleâ€”or, to put it more plainly, elvesâ€”in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free, but, as he put it, â€œwe couldnâ€™t as a company be in a position of acknowledging the existence of hidden people.â€ The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. â€œIn manufacturing,â€ says the Alcoa spokesman, â€œyou want people who follow the rules and fall in line. You donâ€™t want them to be heroes. You donâ€™t want them to try to fix something itâ€™s not their job to fix, because they might blow up the place.â€ The Icelandic male had a propensity to try to fix something it wasnâ€™t his job to fix

The stories about Greece will sound uncomfortably familiar to Indians as there are several similarities, though you get a feeling that the Greek went way overboard with their issues.

Though it’s not all similar – take this for excerpt for example. Nobody in India joins the government sector for money, but the schooling system sure sounds familiar.

The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greeceâ€™s rail passengers into taxicabs: itâ€™s still true. â€œWe have a railroad company which is bankrupt beyond comprehension,â€ Manos put it to me. â€œAnd yet there isnâ€™t a single private company in Greece with that kind of average pay.â€ The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finlandâ€™s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.

There are several such specific examples from other countries as well, and they are all a lot of fun to read, though you get the feeling that the situation has been over simplified to present a simple theme built on human vices and how those vices affected people in different countries.

Boomerang is fast paced and talks about the human side of the financial crisis – of people getting overpowered by their vices and spending money that they didn’t have and blaming others when things go wrong.

I doubt that this will offer you any new insight on the current economic crisis if you have already been following this story for the past 3 years or so, but it does an absolutely great job of stringing together a series of stories to come up with a book that gives you a quick primer on what happened in each of these countries and how differently they reacted to the situation due to differences in their national character.

Merry Christmas Everyone!

I’m extremely happy to be able to wish everyone a Merry Merry Christmas. I hope you’re having a great time with your friends and family, and I wish you joy, peace and prosperity for this coming year and the time ahead.

I want to share something that happened many many years ago while I was still in school, and I was reminded of that incident when I saw this tweet from Liz Danzico a few days ago.

Taxi driver on the holidays “I celebrate everything. I believe in everything and everyone.” Yes.

â€” Liz Danzico (@bobulate) December 18, 2011

What a wonderful message, and how timely it is.

I’ve heard a variation of this myself many many years ago when I think I must still be in primary school. A teacher asked me if my mom was a Christian from Kerala, and my dad a Hindu from Benaras, then what festivals did I celebrate?

And then without hesitating, she answered the question herself, “everything, you celebrate everything, of course.”

For all the things that we have got wrong, we have got many important things right, if there is a country more diverse in the world, I don’t know of it – and in this great diverse country where we speak more languages than the whole of Europe – we celebrate everything and we believe in everyone.

Merry Christmas and a Happy New Year!

NHAI Tax Free Bonds

National Highway Authority of India (NHAI) is usually known for issuing Section 54EC bonds, but for the first time they are issuing tax free bonds as well.

Now, a lot of people confuse tax savings or no TDS with tax free, but these are truly tax free bonds, which means that the interest from these bonds is tax exempt – you don’t have to pay any tax on the interest regardless of your income tax bracket.

The bonds will list on the BSE and NSE, and if you sell them on the exchange and make capital gains on them, then that will be taxable. Listing of the bonds doesn’t however mean that the bonds will be issued in dematerialized form only and you will compulsorily need a demat account.

NHAI bonds will be issued in both physical and demat form, so people who don’t have demat accounts can also buy these bonds. There are two series of bonds – one with a ten year maturity, and the other with a 15 year maturity. The first series has an interest rate of 8.20% and the second series has an interest rate of 8.30%, both the series will pay interest annually.

Since some of the best bank interest rates are at 10% right now – you can see that for people in the 30% or 20% tax bracket – this issue has got great yield.

NHAI tax free bonds have been rated CRISIL AAA/Stable, CARE AAA, and Fitch AAA by CRISIL, CARE and Fitch respectively. These are very high ratings, and although NHAI has made losses in the last three years – it’s easy to see how these credit agencies assigned these bonds the highest rating.

This is a secured issue from a company that comes under the Government of India, and as such it’s hard to see how NHAI could default on its debt obligation.

I think this is a good issue especially for people in the 30% tax bracket, and won’t be surprised if it gets over subscribed in the first few days itself. This is especially so because interest rates can’t remain this high forever and this issue allows you to lock on to these high rates for 10 or 15 years, which is quite a good return for a safe debt instrument. And even NRIs can invest in these bonds, so to the extent they can manage the application process, this will be an attractive offer for them as well.

SBI CapitalÂ Markets, AK Capital Services, MCS Limited, ICICI Securities and Kotak Mahindra Capital are the lead managers to the issue so you should find the application forms in their offices. Other investment firms like Karvy should also have the application forms, and I think some of these companies will also enable it so that you can apply for the NHAI tax free bonds online, but I don’t have a definite list yet.

I’m sure as more information comes in – you will leave comments and I’ll update the post with where exactly you can find the application forms etc. at the time.

Meanwhile, many thanks to Rakesh Jain who let me know about this issue much in advance, and let’s hear any other questions or observations you have about the NHAI issue in the comments.

Application Form of NHAI Tax Free Bonds

Update: Deleted the part about allotment being on a first come first serve basis per Shiv’s comment below.

Wisdom of crowds, Facebook’s IPO and Iceland’s Currency

The Economist has an interesting article on crowd wisdom which talks about how people decide which direction to move to when they see someone coming from the opposite direction, and they say that in France people step to the right to avoid a collision, while in most parts of Asia – people step to the left to avoid a collision. This has nothing to do with which side you drive because people drive on the left in London but step on the right to avoid a collision when walking.

The answer has to do with behavior which is also the topic of the second link in another interesting article on the behavioral economics of gift giving. It turns out that cash is the best gift, but you may not want to give such an impersonal gift – so try something expensive and useless if picking a gift for a girl and a gadget if looking for a gift for a guy!

Facebook is expected to come up with an IPO next year, and this WSJ story has some interesting details about how they are preparing for the IPO and things they want to watch out for like bowing to the short term expectations of shareholders.

I was surprised to read this article that said one political party in Iceland is suggesting that they adopt the Canadian dollar. It doesn’t look like this will happen and while it sounds very odd at first, when you think about it some more – if you are going to adopt something like the Euro why not adopt something more stable instead, right?

News of downgrades have become very common these days, so it was refreshing to see Moody’s praise Poland for managing inflation and maintaining a flexible exchange rate which combined with other things leads Moody’s to believe that Poland will grow rather than contract in 2012.

Something a bit less dramatic – Ranjan writes about Metlife’s Met Smart Child.

Finally, in a bit of relief India’s food inflation dips to 4 year lows.

Enjoy your Christmas weekend!

Update: Corrected the error pointed out by Ashok in his comment.

Of Volatile and Stable Markets

One of the themes that I’ve had trouble thinking through in the past is if a person living in India should invest in developed equity markets like the US, and if so then by what percentage?

For a long time, I used to think that investing in the NASDAQ or S&P 500 will not be meaningful for Indian investors because although these markets are a lot more stable – the returns over a long period just about match what you get in a fixed deposit in India. Combine the dismal performance that these markets had over the last decade with the great returns that emerging countries have had – and you don’t find many takers for investment in the Nasdaq or any of the German, Canadian, Australian or even South Korean indices.

In fact if you look at the list of the international mutual funds available to Indians – you will find that it is loaded with funds from other emerging countries and thematic investments, but only the MOST N100 – Motilal’s Nasdaq ETF is the one that gives you international exposure to a developed market’s index. I think this should also be one of the best performing funds this year returning 14% year to date.

If you look at the performance of the major global indices this year – you will find that the emerging countries have fallen a lot more than the developed ones, and I think you will find that true for most periods in history.

via chartsbin.com

The economic events that have unfolded this year have influenced my thinking from being in a position where I didn’t see any value in investing in US or Germany to being interested in such investments in a moderate manner if you can access a low cost fund. Unfortunately, most funds right now are fund of funds and that too with high fee and they will do no good for getting exposure to international markets.

But something like a Nasdaq ETF or another instrument that gives exposure to the Canadian or Australian market can be useful to protect from volatility and also participate in the upside when it occurs.