Saturday, August 31, 2013

Allocate Assets wisely to meet your financial goals

This article was first published in iNM, Volume 5, August 2013, pg. 6; Co-author: Saumya Rastogi, NMIMS

We all have different roles and responsibilities, depending upon the stage of life we are at. Due to this, the requirements of one individual differs from that of the other. A bachelor’s needs and responsibilities would be very different from that of a person with a family. Thus the assets in which a bachelor should invest his funds should be very different from the assets in which a person with family invests. Investing funds in different assets according to the needs and risk taking abilities of individuals, in appropriate proportions, and managing this concoction over time, is known as Asset Allocation.
Different assets in which investors invest their money include bonds, stocks, shares, bank deposits, mutual funds, real estate, gold etc. A good asset allocation is one in which the wealth of an individual is properly distributed across different financial instruments in a way that helps the individual achieve his objectives. In the event of negative performance by one of the assets, others cover up for the loss. Asset allocation diversifies the risk in an organized and planned manner.

Assets are selected based on the goals of the individual. The goals could be short term or long term, lump sum requirement of money or equal amounts spread over many year. The time available to achieve the financial goals is also important in determining the asset class mix. And of course the risk appetite and ability.
The risk appetite of investors are grouped under three categories; aggressive, moderate and conservative. Aggressive investors look for investing in asset classes which are very risky, like equities, hedge funds and certain commodities. Conservative investors prefer to stick to asset classes like debt mutual funds, fixed deposits, small saving schemes, public provident fund etc. which have very low or no risk attached to them. People with moderate risk appetites like to take measured risks. Mutual Funds may be a suitable asset class for them.

Risk taking abilities differ from risk appetites and is not generally understood by investors. A person may have the appetite to take very high risk but may not have the ability to do so. For example, a person may be a risk lover, but may have many mouths to feed and less money to spare. Hence his ability to take risk is very low, which must be accounted for when allocating assets.
It is commonly seen that investors make investments without analyzing their needs and requirements and end up with wrong choices. They either follow the trends in the market, or suggestions given by friends and family or simply imitate someone else. Young investors mostly buy assets on equated monthly installments and equate it to forced saving. They do not realize that buying assets which depreciate is not saving or investing. Retired investors prefer to invest money in mostly safe and riskless assets.

According to Hemant Rustagi, CEO, Wiseinvest, a wealth management firm, the mistake committed by investors is that they identify the instruments even before they decide on asset allocation. Investors do not choose instruments as per their needs but according to their awareness or suggestions which are given to them. This leads to misallocation of assets as the objective of asset allocation is not considered. Thus, the most important thing to begin with is to understand the requirement and the objective of asset allocation for an individual.
Over the years it has been seen that Indians prefer to invest in Fixed Deposits and Gold irrespective of their investment objectives. The investment in risky assets like shares and mutual funds are less than three-four percent of household savings. Even a necessary asset class like Insurance receives less allocation than fixed deposits.

On the other hand, investment in gold is highly preferred by individuals in India. This is because Indians have sentiments attached to gold, it is liquid and it is considered to be a hedge again inflation. The ever increasing demand for gold is another reason for minimal interest in other asset classes.
It is time to start investing for achieving specific financial goals. Be it education, marriage or a house. Plan, allocate, manage, be disciplined and achieve.

Friday, August 30, 2013

The NRI's Market

This article was first published in India Abroad, August 30, 2013, pg. 21

Rupee depreciates to Rs65.56 per dollar before recovering for the day. An average Indian would ask, "Why should I worry about the exchange rate? I am neither going on a World tour, nor am I sending my kids to study in America!".

Well, as the currency depreciates, the price rises ensure that you need more and more of it to buy the same quantity of goods. The purchasing power comes down due to inflation and pressure on the interest rates. As in the case of India, due to the depreciating Rupee, the Reserve Bank of India may not be able to decrease the interest rates, in spite of demand from the industry to do so.

So a mango Indian says, "Okay. I got it. I feel the pinch of the rising prices. I feel my car is a white elephant. Petrol prices go up every month. I wish my company paid me salary in US Dollars".

Now that is the best scenario. Earn in US Dollars and spend in Indian Rupees. The exporters and the manufacturers who have their facilities in India, that is their expenses are in Rupees, but export their goods and services, that is earnings are in Dollars, fall in this category. As do the Non-Resident Indians (NRIs).

According to the World Bank, the Indians form one of the largest immigrant population in the world (next only to China), around 1 percent of the total population of India. The estimated total remittance of money by NRIs, from more than 190 countries, in the year 2012 is a daunting figure of $69billion, higher than that of China, as per data from the world bank. It is approximately 3 percent of our GDP and 75 percent of our Current Account Deficit (CAD).

It does not come as a surprise then that the government is trying to woo the NRIs to repatriate more funds into the country to support the burgeoning CAD and the falling Rupee. The government has deregulated the interest rate on non-residence external (NRE) and Foreign Currency Non Residential (FCNR) Account deposits to incentivize the NRIs to park their funds in India.

Taking cue from this, many banks have increased the interest rates that they offer on these accounts. For example, IDBI bank increased the interest rates to 9.5 percent (by up to 50 basis points) for long term deposits in NRE accounts.  It also increased the interest rates by 100 basis points for the FCNR accounts.

As a result, the repatriation of funds from NRIs based in US, UK, Singapore, Dubai have increased in the last month. It clearly makes good investment sense for the NRIs as the interest rates offered by banks in countries like US, UK, Singapore and Dubai can range from a meager 0.5 percent to 2 percent at the most.

The falling rupee has also rekindled hopes of owning a property in India for many NRIs who want to maintain a home in India and would eventually like to come back to their own country. A survey conducted by the Associated Chamber of Commerce and Industry of India (Assocham), revealed an increase in the interest of the NRI community in real estate. The real estate has become more affordable to them in Rupees terms. The property prices as such are depressed in India due to high interest rates on home loan and lack of demand internally due to the state of the economy.

It may also be a good time to invest in the equity markets for those who can take the risk and tide over the uncertain times with nerves of steel. Many stocks are at their 52 weeks low. Many others are selling at very low P/Es and discounts to their book values.

Overall, as Simon Newcomb, a Canadian-American astronomer and mathematician writes in his book, "The A B C of Finance", published in 1877, "...a depreciating currency is the greatest source of injury to the business of a nation, being nothing less than a national calamity".

But, it is good news for those earning in currencies against which Rupee is depreciating.

Why is Gold so dear to everyone?

This article was first published in the business section of on August 28, 2013; Co-author: Puran Singh

'Dear' to people, but not so ‘dear’ to Indian Government at the moment. Or rather, too ‘dear’ for Indian government. The gold has kept the finance minister on his toes since the beginning of this year as continuous measures to curb gold imports have failed to reduce the ‘dearness’ of gold to people.

It is worthwhile to muse why the shiny metal has had an inherent appeal and emotional connect with people since ages.

How much gold is there?

Ever wonder how much gold is there? Let us see. Imagine you have a living room that measures 65 feet in length, breadth and height. Now imagine that it is full of gold. That is it. That is all the gold above ground in the world.

However, if you were to convert this block of gold into a wire of five micron thickness (thickness of human hair is - 75 microns), you would be able to wrap planet earth 11.2 million times. Now it seems a lot, doesn’t it? In other words, you can’t judge a book by its cover. Besides its metallic properties, there is much more to gold that makes it an obsession to mankind.

Who is after gold?

Kingdoms: Gold has been a reason for wars between kingdoms throughout human history. In 1500s, King Ferdinand of Spain destroyed Inca and Aztec civilisations while looking for gold. While some civilisations were lost due to gold’s pursuit, America owes its discovery to it for Christopher Columbus was in search of route to India and China to find the source of China’s gold when he accidentaly found America in 1492.

Individuals: In 1848, people from across the world rushed to California in hope of securing gold flakes for themselves. Later in 1888, discovery of a gold mine near Johannesburg in South Africa triggered another gold rush.

Economies: Gold became vital part of international financial system in 1870s when, to assert the importance of Gold, all major countries linked their currencies to gold and adopted gold standards.

Central banks: Central banks in the world turned net buyers of gold starting 2010. It serves as a guarantee that governments will redeem their promises and secures the value of local currencies.

Investors: Negative correlation of gold with stock market movements is its most appealing attribute for investors helping them safeguard the investments from market movements. In addition, investors use it as a store of value and inflation free investment.

Who else finds value in gold?

Sportspersons: Gold became a prized possession of sportspersons since 1904 Olympic Games in Missouri, US, that started the tradition of gold medals for winners of games.

Astrophysicists: Scientific value of gold was discovered in 1961 when it was used in a spaceship as a protecting device against radiation.

Pharmacists: In 1985, medical significance of gold was discovered when SmithKline & French, a pharmaceutical company in US, developed a gold-based drug for the treatment of rheumatoid arthritis.

Physicists: In 2001, Boston Scientific, a leading medical innovation firm, invented a gold-plated stent used in heart surgery to allow adequate flow of blood to heart.

Is gold the most valuable?

Platinum ($1,521 per troy ounce) is a more precious metals than Gold ($1,417 per troy ounce)!

Yet, Peter Jackson chose to use gold ring as ‘The Precious’ in Fiction Film Trilogy ‘Lord of the Rings’ grossing $2.92 billion which is roughly one third of India’s gold import in a year. There is certainly more to gold than its monetary value.

The religious connect

Gold has a huge religious significance, especially in India, a country with diverse religion and cultures.

Hindus: In Puranas, ancient Hindu texts, Hindu God Brahma is referred to as Hiranyagarbha which means born of golden egg. In Hindu mythology, many goddesses have been described as golden-hued that symbolizes purity and ultimate beauty. Manu, the ancient law-giver to Hindu rishis recommended wearing golden ornaments on specific occasions. Also, Indian mythological scripts describe how god and goddesses rode golden chariots.

Sikhs: Maharaja Ranjit Singh in 1830 gold plated the Harmandir Sahib in Amritsar that symbolized wealth and prosperity.

Christians: According to the Bible, on the birth of Jesus, gold was one of the three items gifted by three wise men on behalf of human kind to symbolise sacrifice and love for God.

Is more gold good?

Depends on whose shoes you are in. If you are an investor who can afford to buy gold at peak prices, Good! But ask Finance Minister and he will advise against it.

RBI does not have enough dollars at the moment to pay for gold imports.

Wednesday, August 21, 2013

All you wanted to know about CAD, but were afraid to ask

This article was first published in the business section of on August 21st, 2013
High current account deficit means that a country is buying more from outside than it can afford to.

CAD, CAD, CAD … the most repeated ‘word’ in the financial world, today. India’s economy is in a mess – blame CAD; inflation is spiraling out of control – blame CAD; rupee is sinking – again blame CAD (recently a pink paper while discussing rupee woes, wrote, ‘the undercurrent of an unsustainable and rigid CAD on rupee is a common knowledge’).
So what is CAD, and why is it so dangerous? Can the government control CAD? Read on to know all about current account deficit.

What is Current Account Deficit
A current account simply is an account of all money that comes into the country [as receipts for exports of goods and services, investment income or as capital] and all money that goes out of the country [as payments made for importing goods and services, paying out income for investments made by foreign entities in the form of interest or dividend, or outflow of capital from the country]. When the outflows are more than the inflows, a deficit occurs in the current account of the nation, which is widely known as the Current Account Deficit (CAD).

The CAD of India  was US$ 87.8 billion during Financial Year 2012-13. How was this figure arrived at?
The composition of CAD
India exported goods worth $306.6 billion during the financial year. The exported goods included textiles, gems and jewellery, mineral fuels, etc. On the other hand, it imported goods worth $502.2 billion, half of it on account of gold and fuel. This is the reason there is so much stress on reducing the oil and gold import bills by the Reserve Bank of India and the Ministry of Finance.
The falling rupee is not helping matters as it makes the import of fuel and gold more expensive in Rupee terms.
India also exported services worth $145.7 billion and imported services to the tune of $80.8 billion during the financial year. There was a net surplus. The surplus can be increased by increasing exports further or by decreasing the import of services further.
The falling exchange rates might help the exporters increase their market share by offering discounts. When the rupee falls, the exporters get more Rupees for every dollar. Hence their revenues in Rupees goes up. Similarly, import of services become more expensive.

Inflows due to other forms of income like transfer of money by Non-Resident Indians and investment income received, amounted to $78 billion while the outflows amounted to $35 billion.
Total inflows minus the total outflows amounted to a CAD of $87.8 billion (Table 1), forming 4.8 percent on our Gross Domestic Product (GDP).

Composition of the Current Account Deficit (in US$ Billions)
FY 2012-2013
Credit (Inflows)
Debit (Outflows)
Primary and Secondary Income
Current Account Deficit
Source: RBI

Why should we worry about a high CAD?
High CAD means that a country is buying more from outside than it can afford to. The consequence of this may not be felt too much in the short term. But in the long term, the domestic currency can start to lose value as payments in dollars far exceed the amount of dollars that the country receives. The demand for dollar goes up, making its value appreciate, which in other words means that the domestic currency loses value. This is what we are experiencing in India right now.

If the domestic currency loses value, the foreign investors lose interest in the economy of the country as the returns may not be adequate to them when they convert back the Rupees to Dollars. For example, if an investor invests $100 in India when the exchange rate is Rs50 per dollar, he buys assets worth Rs5,000 in India. After one year, the value of the asset is Rs6,000. The appreciation in value is 20 percent.
The investor wants to sell off the asset and take back his money to the US. So he sells his assets and gets Rs6,000. When he goes to convert the Rupees back to US dollars, the exchange rate being quoted by the bank is Rs62 per dollar. So the investor get $96.8 in exchange for Rs6,000. The investor has actually lost money. He has lost 3.2 percent on his initial investment of $100.

This explains why, in the long term, investors would shy away from a country with depreciating currency, which is one of the consequences of a high CAD.
Measures to control CAD

In order to control the CAD, the government would put in place various restrictions on the import of non-essential goods to start with. As in the case of India, the finance minister Mr. P. Chidambaram recently announced a curb on the import of Gold coins and medallions. Other measures like making it easier for foreigners to invest in India, making it easier for companies to raise money outside India (this brings in foreign exchange, though interest needs to be paid on it) were also announced by the finance minister.
If these steps do not reduce the CAD, further measures could be more restricting or severe in nature.