Tuesday, May 29, 2012

Rupee Fall will hit You and me

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


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!

Tuesday, May 22, 2012

It's not Greek, Mr. Mukherjee

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


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!

Life Insurance Simplified

This article was originally published in Postnoon on May 18th, 2012


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!

Friday, May 11, 2012

SME Exchanges: New Kid on the Block

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


“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.

Saturday, May 5, 2012

Manage Mutual Funds Wisely

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

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.