Undervalued yuan, over-priced lattes and exaggerated ULIP claims

As I read a series of great posts this late Wednesday, I thought I’d do a quick middle of the week links post. Let me begin by highlighting this article by Paul Krugman who talks very strongly about taking on China for its manipulation to keep its currency low.

Next up is a post in the Harvard Business Review, where they talk about companies over-pricing their stuff in China. Great stuff; here is an excerpt:

2. Consumers, increasingly, buy products that are status symbols. Starbucks has done well in China partly because of its snob appeal. Its audience is concerned less with the fact that buying a Starbucks latte is, by local standards, a luxury than they are with the prestige they gain by tapping at a laptop in a Starbucks cafe. Similarly, Haagen Dazs has thrived by adding elaborate desserts to its menu and creating an upscale ambience in its stores. In cities like Shanghai, teenagers often take their first dates to a Haagen Dazs parlor and they are willing to pay for the privilege.

Two great posts about these new ULIPs that guarantee highest NAV returns. First at Value Research and then at Jago Investor.

Lastly, Barry Ritholtz on reviewers on Amazon who have the concept all wrong.

Enjoy.

How many levels away are you from your investments?

There is a lot of interest in gold ETFs and other such proxies of gold, and I think a large part of it is the convenience that comes along with buying assets electronically.

However, when you buy something which is a proxy of something else, you pay for transaction costs, and start losing control on how much you gain (or even lose) by the price movement of the underlying asset. This is something you should think about when planning to buy paper assets.

To me, if someone wants to go long gold – buying gold coins is the best option. Most of you will have bank lockers where you can keep gold coins secure, and they don’t cost a lot anyway. I checked the rate today and a 2 gram gold coin from SBI costs about Rs.3,760. When you buy gold coins – you cut all the middlemen and buy the asset that you really want.

As opposed to this, if you buy a gold ETF, then the following factors will affect you and eat into your returns:

  1. Brokerage commissions of your stock trader.
  2. Demat fees (you might be paying this already, so this might not be a big deal)
  3. Expenses charged by the ETF provider.
  4. Difference between the underlying value of the ETF and the price at which it is quoted at the stock exchange.

In addition to this the ETF may not have sufficient liquidity and give you headaches while trying to sell it.

If you buy a fund of funds that invests in a gold ETF, then you expose yourself to all the factors listed above, and in addition to that you may have to pay the expenses of the fund of funds. They may not hold 100% of the ETF, so the fund will not track the underlying ETF completely, and in turn track gold prices even less.

Try to go to the source, and cut the middlemen as frequently as possible.

How to track your SBI mutual fund NAV?

Continuing with a one day old tradition – I will talk about something I wrote in the past and leverage user comments to build on the concept.

Some time ago I wrote about using Moneycontrol to track your mutual funds NAV. This post was a response to a large number of comments I was getting from people who wanted to know the NAV of their mutual fund.

Abhishek responded with a comment telling me that Rediff has a portfolio, which is a lot better than Moneycontrol, and I ended up reviewing the Rediff portfolio tool.

Then another reader commented on that post telling me about the HDFC portfolio tracking tool, which is another good resource. Initially I thought that the tool was only available to people who held HDFC accounts, but that is not true.

This is a free tool, and anyone can register for it free. I registered with it yesterday and although I don’t understand why they need to know my complete details (even gender) to allow me to use their tool, I do think this is quite a handy tool as well.

I will not be moving to this because Moneycontrol and ICICI Direct are more than enough for me right now, but if you were planning on using a new portfolio tool – you have one more option to play with.

How to set up SIP in ETF

I wrote about the Quantum gold savings fund yesterday, which is a fund of funds, and said that I couldn’t think of a situation in which I would want to invest in this fund. That was because it is a fund of funds that simply invests in another ETF that I can directly buy myself.

In that post I asked if you could think of any reasons of getting into such a fund, and I got an interesting comment about investing in this fund as an indirect way to set up a Systematic Investment Plan (SIP)  on an ETF (clever thinking).

This is something that I think a lot of people will be interested in because I can see a lot of interest in setting up SIP on ETFs from Indian investors.

I have covered this topic earlier and I thought I will do a quick post on this again, because since the last post I have got two comments that explore new ways of doing this.

And also because I know that a lot of you are interested in setting up SIPs on ETFs, but there is no direct way of doing this. There are a few indirect ways (which were covered here earlier) though.

Here are five such indirect methods:

1. Kotak’s Auto Invest: Kotak has a plan called “AutoInvest” that in an online trading account based on systematic investment planning  in Gold ETFs, equities and mutual funds.

2. Set up reminders with your offline broker: If you trade using an offline broker – you can tell them to remind you by giving you a call at a certain day of the month, and remind you to place the trade.

3. Set up reminders in Outlook or Gmail: You can set up reminders using Outlook, Gmail or any other tool that reminds you to invest at a certain day of the month.

4. Buy a fund of funds that owns ETFs: As stated in the comment in yesterday’s post – you can set up an SIP for a fund of funds that invests in a particular ETF you are interested in – and that gives you an indirect way of getting into a SIP for an ETF.

5. Value Averaging Investment Plan (VIP) from Benchmark funds: This is an idea given by another commenter on the earlier post. This product from Benchmark is akin to set up an ETF – I am not sure how effective this is because I haven’t used it myself or done any great deal of research on it, but it does give another option to investors.

All these methods have pros and cons and you should evaluate them in earnest before getting into any of them. For example, if you are thinking of setting up a SIP for a fund of funds – you need to keep the following factors in mind.

1. Expenses of this fund of funds: Most fund of funds charge you dual fees because they charge you their own fee, and then you end up paying the fee of the funds they hold, so in effect you end up paying twice.

2. Transaction cost of the fund of funds: When you think about setting up a SIP through a fund of funds – what is apparent is that you won’t end up paying monthly commissions to buy the ETF yourself, and that is certainly a saving. However, beneath the surface – your fund of funds must also incur transaction costs while buying the underlying ETF. Think about this factor when comparing the cost between the two.

3. Allocation: If you buy ETFs worth Rs. 50,000 every month, then you know that your 50 grand has gone into the ETF. But fund of funds may not always invest 100% of the money in the underlying fund. They may keep a part of it as liquid holdings in order to cater to redemption and such.

These are some factors that you need to keep in mind while evaluating a fund of funds for setting up a SIP instead of just buying the ETFs directly. Figuring this out on your own will be overwhelming for most, so you can take a shortcut and compare the returns on the fund of funds and ETF after a period of say six months or a year, and see how well both correlate. If there is a lot of difference between the two returns then that means that this fund of funds is not as good a proxy as you initially thought it to be.

So, there you have it – some indirect ways of setting up a SIP for an ETF, and some things to think about before you do it. Let me know what you think about these and any other ideas you have.

Photo by Sergei Golyshev

Quantum gold savings fund – Fund of Funds

I recently wrote about a fund of funds scheme – HSBC Brazil Equity fund, and today I am going to cover the Quantum gold savings fund, which is another fund of funds scheme that will primarily be invested in the Quantum Gold Fund ETF.

As I have probably stated a gazillion times already – a fund of funds scheme incurs double expenses. Once – of the fund itself, and then of the underlying fund as well.

However, in the case of this fund – the expenses section of the prospectus states that the annual recurring expenses of the scheme will be borne by the AMC and there will be no investment management fee as well.

Here is what it states:

These are the fees and expenses for operating of the Scheme. The annual recurring expenses of the Scheme shall be borne by the AMC. The AMC shall not charge any investment management fees.

This is certainly interesting and a good thing too, however, this fund will primarily be invested in the Quantum gold fund ETF that you can invest in directly, so you need to have really good reasons on why you just don’t go ahead and buy that ETF itself.

I was thinking of a situation where I might want to buy this fund, but couldn’t think of any (especially because this fund will have a minimum of 90% of its assets invested in the Quantum gold fund.).

I’d be interested to hear if you have any reasons to think that investing in this fund of funds scheme instead of the Quantum gold ETF will benefit you.

The fund does have an exit load of 1.5%, if you exit before 1 year of the date of allotment and here is an interesting passage from the prospectus:

The investors of the scheme will bear dual loads i.e. those of the scheme and those of Quantum Gold Fund. Hence, the investor under the scheme may receive lower pre-tax returns than what they could have received if they had invested directly in underlying scheme in the same proportions.

Another thing that caught my eye was that every funds lists down its minimum target amount when it files its prospectus with SEBI. If they receive applications for a sum less than the target amount – they refund the application money to all investors. This fund has a target amount of Rs. 1 lakh, which is one of the lowest targets I have seen.

It would be interesting to see how well this fund is received by the investing public and what impact it has on the underlying fund. I wonder if the volumes will be meaningful enough to make any difference to the Quantum gold savings fund.

Do you love tension as much as I do?

Although it’s about a month since my vacation ended – I am still not completely in the groove, and wanted to do some light reading during the weekend.

For some reason, I picked up Wuthering Heights – which is an old novel, and finished it in about a couple of sittings. I loved it; enjoyed it immensely. The plot is a dark one, and there are tragedies abound in the novel. Bad things happen all the time, and this is usually not the kind of stuff that interests me.

I was wondering what was it about it that I liked, but didn’t get down to thinking too much about it. That was until today, when I chanced across this post about the secret millionaire on Bad Money Advice, – I read this story on the WSJ earlier, and like BMA concluded that this is going to be written about a lot.

This is a story about a 100 year old lady, who passed away recently and donated about 7 million dollars to her alma mater. The thing that makes this story interesting is that the lady was not rich at all. In fact, the source of her wealth were shares of Abbot Labs that she purchased in 1935 with $180, and left untouched. That amount compounded to 7 million dollars in these 75 years.

You can read the story on the WSJ link, and then the reasons you shouldn’t read any other post about it on the BMA link.

The funny part is that this rekindled my interest in finding out what makes a story interesting, and one of the first things I found, and agreed with, is that tension makes stories interesting.

It seems so obvious when you think about it. In almost every movie, there is a hero and a villain, and there is tension between them. Think of the TV shows you like – how many of them are based on some sort of underlying tension or conflict between the characters?

Think about the writers you like, and find interesting, even the funny ones (or especially the funny ones), and think of their stories and how they invariably start with someone falling in trouble and then explore their stories. Sir P.G. Wodehouse (of the Ask Jeeves fame) is one of my favorite writers, and even his harmless stories take you through some sort of trouble that the characters are going through. Tension makes stories interesting fast, and although we may hate tension in our real life, we love seeing others face it.

Which made me wonder how the story about the woman, which to me had no tension or conflict became so popular? Of course, I understand that not everything that is interesting has to have a conflict angle, but was there any underlying tension or conflict in this story that was playing my mind sub-consciously?

Probably not. And I think the most likely answer to why this story became popular with a certain segment of people is that on the face of it – the story shows the fruits of virtues like frugality, compounding, buy and hold investing, giving, and other such stuff that people hold dearly.

It is a good narrative that helps reinforce values they already hold, and showcase it to others as a proof of what they believe in is correct. I may be completely off the mark as far as this article goes, but I do think this is a dangerous tendency as it leads us to sometimes make a web around us and completely ignore the other side of the story.

I think it is important for us to be cognizant of this tendency and try and seek things that we disagree with as frequently as possible. Who knows what you might unravel, and it might even lead to a change in your position. It will not be as much fun, but may turn out to be much more rewarding.

NMDC FPO

I wrote about the NMDC FPO a few days ago, and I wanted to follow up on that with a post about the company, and hoped that the price band is set by the time I am ready to publish the next post, – and although the NSE website still states the price is to be determined, BS reports that the NMDC FPO price range has been set up between Rs. 300 – Rs. 350.

The stock closed at Rs. 398.50, and it will be interesting to see how soon it comes within the range of Rs. 300 – 350, if it does that at all. I have already written about the 5% discount retail investors will get, so will not go into that again.

Business of NMDC

NMDC stands for National Mineral Development Corporation and is the largest iron – ore producer in India. It produced 28.5 million tonnes of iron ore in fiscal 2009, and its main iron ore mines are located in the state of Chhattisgarh and Karnataka. Some parts of the company’s operation are exposed to rebel attacks due to their location, and here is something interesting I found in the red herring prospectus:

Certain of the Company’s mining operations are located in areas of India that are exposed to risk of attack by rebel groups. Such attacks have had and may continue to have a material adverse effect on our business, results of operations, and financial condition. For example, the slurry pipeline owned and operated by Essar Steel Limited at Chhattisgarh which carried the Company’s iron ore slurry production from the Kirandul Complex to Vizag was damaged by Naxalite rebels in May 2009. The slurry pipeline is currently not functioning and, as a result, instead of slurry, the Company is selling fines to the customer by rail from the Kirandul and Bacheli complexes, which has had a material adverse effect on the revenues and profitability that the Company derives from the supply to this customer

Let’s get to iron ore itself now – iron ore is primarily used in manufacturing steel, and steel’s demand is linked to the manufacturing, industrial and infrastructure growth.

NMDC primarily caters to the domestic market and sells most of its iron – ore to the Indian makers. Last year, exports constituted 15% of its revenues and were mainly to Korea and Japan.

Interestingly enough, NMDC also owns a diamond mine at Panna in Madhya Pradesh, which is the largest diamond mine in Asia.

NMDC also plans to develop an integrated steel plant in Chhattisgarh with a capacity of 3 million tonnes per annum, and the company has acquired land for this project.

NMDC also seems to have international ambitions with news stories surfacing about a possible bid for partial stake in an Australian mines. It has also got an estimated Rs. 12,000 crores of cash reserves and plans an expansion plan of Rs. 26,000 crores.

NMDC Financials

The company had total income of Rs. 85,754.6 million in fiscal 2009, and a profit after tax of Rs. 43,495.5 million. The nine months ended Dec 31st 2009, has seen it clock total income of Rs. 48,825.4 million and profit after tax of Rs. 23,897.3 million. The EPS for fiscal 2009 was Rs. 10.97, and at a price of Rs.350 for the FPO – the P/E comes out at about 32.

The red herring prospectus lists peer companies as GMDC and Sesa Goa and states that their P/E on Feb 1, 2010 was 18.3 and 18 respectively. The other interesting aspect about its financials are its zero debt status, and operating profit margins of 70 – 80%.

These were some things that I found most interesting about NMDC, and while I am going to stop here, if you are considering investing in this FPO – I highly recommend this great piece in Business Line about it, and this CNBC video featuring Udayan Mukherjee.

Disclaimer: This is not a buy or sell recommendation, but just a few observations about the company.

Buffet gains, Brazil overheating and unemployment

I start this week’s link edition by highlighting another links post by Bad Money Advice. This is not the first time I am doing this, and you only have to go through his post to understand why.

Among other interesting stuff – WSJ talks about how Buffet’s gains beat every mutual fund for the past 45 years. Out of the two closest mutual funds, one was run by Peter Lynch for a long period of time, and that was part of the reason why it did so well.

Business Week reports how Brazil is worried about over-heating. If you were thinking about investing in Brazil, then this article is definitely worth a read for you.

The Weakonomics writes about putting the unemployed to work.

The Digerati Life talks about filing a consumer complaint with the FTC.

Jago Investor has a primer on floating rate mutual funds.

Tip Blog has the sequel to his exchange about investments with an ex-colleague.

Happy reading and have a good weekend.

Can I interest you in a 5% discount?

Image by State Records NSW

The NMDC Follow-on Public Offer (FPO) is going to be the next big disinvestment by the Indian government. The low retail subscription to previous IPOs and FPOs coupled with the need to raise funds from disinvestment to plug the fiscal deficit is prompting the government to sweeten its deal for retail participants.

The red herring prospectus of the NMDC FPO states that retail participants will get a 5% discount on the price set during the book – building process, and even more interestingly – ET reports that the price band may be set at 30 – 35% lower than the current stock price of Rs. 435.

This is interesting because the government really needs some retail participation in these offers to raise sufficient amounts to meet the divestment target, and retail investors have not really been interested in these offers of late.

The sale will start on March 10 and end on March 12, and we will know the price band on March 8th. I plan to do an IPO post on NMDC before that, but I just wanted to do quick post about this discount, and at least one factor you should keep in mind while thinking about it.

I wanted to do it a little ahead of time because very shortly there will be a lot of news articles about the NMDC FPO, and this discount, and I expect little bit of frenzy as well.

I think retail investors should keep in mind that the discount given is on the current price, but not long ago the price of the stock was Rs.140 odd. This company is in the iron-ore business, which like any other commodity is cyclical in nature. Iron – ore prices have risen sharply in the last year or so, and so when you think about the 30% or 5% or whatever the final number turns out – you need to think about these other things too. This is not to say that the offer will be over-priced, and I might even invest in it myself though I am not decided about that yet. Just something for you to think about in case the frenzy becomes too much.

Can you buy a Target gift card with another gift card?

Image by Thai Jasmine

I wrote about how you can’t use an Amazon gift card to buy another gift card some time ago, and today there was a similar question on Target gift cards. I had a feeling they wouldn’t allow you to buy another gift card with one you already have, but didn’t know for sure.

I placed a call to Target’s customer care, and they told me that they too don’t allow customers to buy one gift card with another. It was not too surprising because it looks like almost everyone has this policy in place. I say almost because I assume someone allows this but I am not aware of it.

This situation made me wonder if it’s better to gift people cash instead of a gift card?

I thought of a recent example where a few friends got together and gifted me a Crate and Barrel gift card for the wedding.

One of them told me it is for my wife to buy what she likes for her house, which I thought was kind of cute, but was promptly reminded by people who have been married for longer than I am – that the statement has the added virtue of being true as well, and that is what I should focus on.

But I digress, what I really wanted to say was that I appreciated the fact that they put thought into it, and got me a gift card that we could use to set up our home. Cash worth the same amount would have had more utility (as used in Micro 101), but I prefer getting the gift card rather than the cash.

On another occasion – a few of us got together and got our friend a Macy’s gift card for his wedding anniversary. I am not sure how he felt about it,  though I must confess I have a feeling that he doesn’t feel the same way I did. To be honest, given another chance – I would go for the gift card again, because there is a chance that he might feel we put some thought in it; which will never happen with cash.

I am undecided about this, and have a feeling that I will gift someone cash very soon in the future just to see what kind of a reaction I get, but until then – I’d be interested to hear how you feel about this.