India’s big population, huge inflation and large insurance market

My links post is normally an aggregate of unrelated topics because I save good articles throughout the week, and then write this post sometime late Friday.

This week however I find that most links have the central theme of something big that pertains to India.

To start with I was going through the Census Website, and saw that India’s population was 238 million in 1900, and in the next 110 years it grew at 1.49% CAGR to 1.2 billion people.

The US had a population of 76 million in 1900 and it currently has a  population of 307 million, which shows that in the same period their population grew at ~1.28%.

If they had grown at 1.49% then their population would be about 386 million.

I was thinking about why India has such a large population a few months ago, and I don’t think I’ve seen this question addressed comprehensively anywhere. From this data I infer that there’s nothing extra-ordinary that happened in the last 100 years or after Independence, and we had quite a large base to begin with.

There are some other interesting nuggets of information on the census website, and the current report (pdf) itself is just 2 pages and very well laid out.

Next up is this speech by Dr. Subir Gokarn, Deputy Governor RBI on Sustainability of Economic Growth and Controlling Inflation.

The speech is quite brilliant: short, easy to read, with charts that offer explanation and is one of the best pieces I’ve read about the balance between growth and inflation in the country. The bottom line is that inflation must be controlled for higher economic growth, and high inflation does in fact pose a risk to high economic growth.

Beyond BRICS on a BCG report about how Indian insurance market is set to become the largest after America and China.

Some other links now:

Great post explaining the concept of Margins by Fred Wilson.

Kid Dynamite on how the NASDAQ 100 Index is going to change shortly, and how it evolved.  This is an important post for people who recently invested or are looking to invest in the MOST Shares NASDAQ 100 Index.

Finally, Hemant on 10 best ways of managing personal finance.

Enjoy your weekend!

India’s External Debt: Detailed look at the numbers

I was looking at India’s External Debt for December 2010 (pdf), and came across several things that I didn’t know about earlier.

So, I thought I’d write about them and here is a post with some interesting aspects about India’s external debt.

Government versus Non- Government Debt

When we talk about India’s external debt – the fact that only a part of this debt is owed by the government is not very apparent. Even though you regularly read that private companies are raising foreign currency debt – when you read news reports about India’s external debt rising – the fact that this could be because of the private sector doesn’t come to mind so quickly.

India’s foreign external debt for Dec 2010 stood at $297.51 billion, and the share of government debt in it is 25%, and non – government debt is 75%.  So, government debt is significantly lesser than private debt.

Different Categories of Debt

Different countries categorize their debt in different ways and India has seven heads under which it classifies its long-term external debt, and then it has one head for the short-term debt.

Here are the heads as well as numbers for the Dec 2010 quarter:

S.No. Head Amount as on Dec 2010

In Millions USD

1 Multilateral 47,608
2 Bilateral 25,207
3 IMF 6,127
4 Export Credit 18,955
5 Commercial Borrowings 84,676
6 NRI Deposits 50,672
7 Rupee Debt 1,646
Total Long Term Debt 234,891
8 Short Term Debt 62,620
Grand Total 297,511

 

As you can see a large part of the external debt is long term in nature, and within that commercial borrowings form the majority followed by NRI Deposits and Multilateral debt.

I didn’t realize that some part of India’s external debt  is denominated in INR, and the explanation I got from the document is that the Rupee denominated debt showed in this table is owed to Russia and is payable through  exports.

However, what you see in this table is a very small percentage of the total Rupee denominated debt, and after the USD – Rupee is the currency in which India owes most of its external debt!

Currency Composition of External Debt

Not surprisingly, USD makes up 53.3% of the external debt, but I was really quite surprised to see that the next currency was the Indian Rupee itself!

I certainly didn’t realize that India has borrowed so much from foreigners in its own currency, as about 19% of our external debt is denominated in INR.

Here is pie chart that shows the break – up on external borrowing.

External Debt Currency Composition
External Debt Currency Composition

The fact that INR made so much of our debt amazed me and I dug a little more to see why that is the case.

I found an explanation of this in a report named India’s External Debt: A Status Report 2009 – 10 (pdf) and here’s what I found.

The Rupee denominated debt has four components:

  1. Rupee debt: This is something we owe to Russia from the times of the old USSR and is not a whole lot in value.
  2. Rupee Denominated NRI Deposits: The money NRIs keep in NRO and NRE account.
  3. FII Investments in Government Treasury Bills
  4. FII Investments in corporate debt securities

For the period ending March 2010 – the relative percentages for these were as follows:

Rupee Denominated Debt Composition
Rupee Denominated Debt Composition

What’s really interesting about this debt is that although it’s owed in a foreign currency – the effect of exchange rate movement is the opposite on this type of debt when compared with other external debt.

Normally, if you borrow in a foreign currency, and your currency depreciates that’s bad for you. For example: if you borrow $100 from your cousin in the US at an exchange rate of 1 USD to Rs. 50, you will get Rs. 5,000.

But, if at the time of repayment 1 USD = Rs. 100 then you will have to spend Rs. 10,000 to buy $100 and you’re at a loss because your currency depreciated.

However, if your cousin opened a NRO account with $100 – he gets Rs. 5,000 in his account. If after a year he wants to repatriate his INR into USD he will get an exchange rate of 100 rupees to a Dollar, and his Rs. 5,000 will only fetch him $50!

Conclusion

Looking at this foreign debt data was quite a useful exercise for me because I had never looked at the numbers in detail, and this reading will certainly change the way I look at the debt numbers whenever they are reported the next time!

 

Capital Gains and Dividend Taxes on Shares and Mutual Funds

This is another post from the Suggest a Topic page, and this time we’re going to take a look at how capital gains – short term and long term as well as dividend distribution taxes are charged on shares, equity mutual funds, debt mutual funds, and Gold ETFs.

The way I have gone about creating this list is to look at the tax section of various mutual funds, and then refer back to the relevant act.

In a few cases I’ve been unable to make heads or tails of the act so I have not linked back to the act in those cases.

The most helpful page to get started was the UTI Tax page which has laid out the mutual fund taxation in very good detail. You can find similar pages on all mutual fund websites, but I’m linking to them because I found them quite useful.

Before you go on to read the table I should remind you that I’m not a tax expert and while this table can serve as a good starting point you shouldn’t file taxes just based on this!

Asset Class Classification as Short term or Long term Long Term Capital Gains Short Term Capital Gains Dividend Distribution Tax
Shares Less than a year is short term and more than a year is long term Exempt under section 10 (38) 15% under section 111A 15% Under Section 115 – O
Equity Mutual Fund Less than a year is short term and more than a year is long term Exempt under section 10 (38) 15% under section 111A Exempt under section 115 R
Debt Mutual Fund Less than a year is short term and more than a year is long term 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess Gains taxed on investor’s slab. 12.5% under section 115 R
Money Market Funds & Liquid Funds Less than a year is short term and more than a year is long term 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess Gains taxed on investor’s slab. 25% under section 115 R
Gold ETFs They are treated exactly like Debt Mutual funds.

 

You don’t pay the dividend distribution tax – the company or the mutual fund pays that, but it still reduces the amount of income you will get so I have included it here. Dividends are not taxable in your hand since such tax has already been paid by either the company or the mutual fund.

The original question also touched upon how someone with multiple transactions could keep track of the taxes, and calculation, but I’m afraid I don’t have any input on that.

Please do let me know if you see any errors or have any other comments!

Towards more effective email

I’ve gone through several hundred emails in the course of managing OneMint, and I thought I’d do a small post with some ideas on writing better emails, as writing emails has become an important part of most people’s jobs, but there’s hardly any help on how you can do it effectively.

Here are a few things that I’ve seen work well, and I hope you can benefit from these ideas too.

1. Context: I receive several emails which have a question, but no background information, or context on what the person is trying to do.

A couple of months ago I received an email from someone saying I send out more than 500 emails every day, but he isn’t able to do that, and was wondering how I did it.

My first thoughts on reading that email was: I don’t send 500 emails, who are you and why do you want to send so many emails? Do I know you? Why should I answer this question?

Of course, I didn’t say any of these things but responded with a question on what the person was trying to do, and turns out he needed to set up a Feedburner like thing which is a fairly straightforward thing to do.

If you give a one or two line context and then proceed to explain what you are trying to achieve then that makes it a lot easier for the person who is reading your question to understand what you’re really trying to do, and you should always make a point of doing that when starting a new email thread.

2. Don’t start with a negative: Don’t start with a negative if you’re trying to get an answer. If you start your email with “you are wrong because….” you are likely to annoy the person reading the email and the chances of co-operation diminish significantly.

Start with stating the fact, and then your position on why that is wrong. This gives a sort of a mental cushion and also helps your thought process. I’ve seen several instances of where someone wrote someone else was wrong, but when you read closely the person just didn’t understand what the first commenter said.

3. Give a reason: If you give people a reason on why you’re asking them to do something then they are much more likely to respond to you. A lot of times we think that we can just ask someone something or that somebody really doesn’t need to know why we are asking them, but you’re just making it harder on yourself.

Giving a reason is a more polite and effective way of asking things and brings the recipient of the request on board with what you’re trying to achieve. You may think that you can just tell your subordinates what to do but if you tell them why you’re asking that your request is likely to get carried out more sincerely.

4. Close the loop: If you make it a habit of writing a short thank you or acknowledgment note at the end of a conversation then that will help you stand out from the majority that doesn’t do this.

Someone sends me an email with a question, I take the time to respond to that and then silence. If I look at it later I wonder if the response really did help the person, was he or she convinced, did the response go to the spam folder or what happened?

And if it repeatedly happens then you just get the feeling that this guy is only interested till he gets an answer and you reduce your chances of co-operation in the future.

Close the loop with a small note – it’s only good manners, and helps your cause in the long run.

5. Don’t worry about over-communicating: A friend once told me that no one likes surprises but some people don’t even like good surprises.

When someone emailed him he used to send an acknowledgment immediately saying he had received the message, and the expected time on when he will respond with an answer. Then at that time he would either respond, or give another time, and follow it up with another email until he closed the loop completely.

While I’m not that good with everyone, I try to at least keep those people informed who I want to develop a long term relationship with.

You don’t want to keep people guessing when you can get them at ease in 30 seconds.

These are few things that come to my mind as I think about making email communication more effective. There are several readers here who interact with me through email or in comments and are great examples of doing the right thing, and immediately make a positive impression. I’ve learned a lot from them and have imbibed some of these good habits only after seeing them in others. I’d recommend you to try out these ideas and see if it helps your communication or not.

Weekend Links: April 8 2011

Here are some good links I found this week. Before I get to the posts let me share a new site I discovered a couple of weeks ago.

The site is called MoneySights, and it’s a pretty good resource for doing stock and mutual fund research.

The look and feel is brilliant, and there is good data there as well. Play with it and let me know what you think.

This week’s links:

Franklin Templeton Family Solutions review by Hemant.

How can an investor get a common account statement at Value Research.

Cheaters causing crashes at Fundoo Professor

Of Mice and Templeton Moments at Psy – Fi Blog.

Enjoy your weekend!

Crores to Millions Calculator

I have often felt the need to calculate numbers from Crores to Millions because I feel its easier to make sense of larger numbers in millions and billions. Isn’t Rs. 1 trillion much better than 1 lakh crore?

If you think in terms of Millions of Dollars then it also simplifies comparison across geographies. With that in mind I made this simple calculator that will take your input in Rs. Crores and then convert the number into millions and billions of INR and USD.

I’ve started with an exchange rate of 1 USD to 54 Rupees but you have the ability to change that.

Enter Crores
Exchange Rate

In Millions of INR
In Billions of INR
In Millions of USD
In Billions of USD

Auditor’s Reports, Promoter’s Shares Pledged and Management Discussion

There are a lot of people who are interested in picking stocks for their portfolio, and while I’ll not recommend this to people who are not willing to do a lot of research on their own; if you are interested in analyzing companies then there are three things that you must read.

Auditor’s Report: Every annual report has got a section called Auditor’s Report which is usually 2 or 3 pages long. In this section the auditors comment on the company’s financial statements and state any irregularities that they see.

Usually, you won’t find anything here, but every once in a while you will come across some comments from the Auditors about how something should have been done differently.

For example – they may say that the foreign currency loans have not been revalued, and had they been revalued the profits of the company would be lower by $10 million. This is a red flag and should make warning bells go in your head. I’m not saying this should be the basis to reject a company, but if you’re going to own a stock you should know about these kind of things.

Promoter’s Shares that have been pledged: In the financial statements you will find disclosure on whether the promoter of a company have pledged their shares.

Pledging shares by the promoters is mortgaging stake in the company to raise money, and if the promoters have to do that then that’s usually not a good sign. Again, this is not something to reject the company on its own, but something that you should be aware of.

Management Discussion and Analysis: This is another section of the annual report in which the company discusses its current situation and discusses its future prospects. Since the management writes this you can expect them to be on the optimistic side, but as a small time investor this is a good way to understand what strategy the company employs and whether you agree with that or not.

You should view the positive tone of the Management Discussion with a little bit of skepticism since it’s only natural that they are gung-ho about their business, but other than that – this will give you a good flavor of how the management is thinking.

Sometimes, this section also has some interesting observation about the industry as a whole with good numbers, and that can be useful if you’re trying to understand an industry or a sector.

Reading these three sections won’t take more than 30 minutes of your time, and if you’re going to buy stocks then you owe it to yourself  to spend these 30 minutes.

Let me reiterate what I said at the beginning now – picking stocks is not for everyone, and you should have good reasons to think that you can beat the market or the good mutual funds that have been around for years. Most people won’t be able to do that and are well advised to stick to mutual funds. This post is only for the few who have the time and interest to do their own research and are interested in stock picking for their portfolio.

ELSS Mutual Funds: Effect of DTC and Current Status

There is still a year to go before DTC (Direct Tax Code) kicks in, and there seems to be some amount of confusion in people’s minds on how DTC will affect the tax saving ELSS mutual funds.

To understand the effect of DTC you need to first know how ELSS mutual funds give you tax benefit. These mutual funds are covered by Section 80C, which mean that the money you invest in these funds is reduced from your taxable income (up to a limit of Rs. 1 lac) and hence you pay less taxes. With that said – let’s take a look at how DTC impact on your existing as well as new ELSS purchases.

Effect of DTC on your existing ELSS MFs

The funds that you’ve already bought have given you the tax benefit in the year you bought them, and after the year of purchase there is no tax benefit from them.

Given that, you shouldn’t be worried about the ELSS funds you have already bought.

The only thing I’ll add to that is some people choose for the dividend re-investment option, and the re-investment is treated as a fresh investment. This is important because ELSS funds have a lock in period of 3 years, and your new units are locked for a further 3 years. With that in mind, change your dividend reinvestment option to a simple dividend or growth option.

ELSS Purchases from now till April 2012

Since DTC will kick in from the next financial year, you can still buy them this year and get tax benefit under 80C this year.

ELSS Purchases After DTC Kicks In

Under DTC – ELSS mutual funds will no longer enjoy the tax benefits that they currently do. I don’t know whether they will still have the 3 year lock in period, but it doesn’t make any sense to have the lock in period if they’re not going to have any tax benefit.

Will DTC affect the performance of the existing funds?

There was an interesting comment where a reader asked that since the popularity of ELSS funds is bound to go down, the assets under management are likely to come down, and will that have any effect on the performance of these funds?

I can’t think of any reason why it will play out like that. If anything, it should be easier for a fund manager to produce better returns because the base is lower.

These were some thoughts that came to my mind while answering ELSS related questions here, please feel free to leave a comment if you have any questions or observations on these.

How much pension will I get from the NPS?

A question that pops up quite frequently in comments is how much pension will I get from NPS, and I think it’s not clear to a lot of people that the NPS itself won’t give them a pension.

There are two things that you need to keep in mind:

  • NPS doesn’t pay a pension directly.
  • There is no fixed rate at which your money will grow.

NPS doesn’t pay a pension directly

The way NPS works is that you invest regularly in the scheme and the scheme invests that money on your behalf.

At the age of 60 you will get the money and it will be up to you to invest it and generate an income for yourself. In this regard you can think of it more like a provident fund than a pension.

Under NPS there is no fixed rate at which your money will grow

When you open the NPS account – you will be asked to select a fund manager and your money will be invested by this fund manager. You will also be asked whether you want to choose an Ultra Safe, Safe or Medium approach, and based on your selection the fund managers will spread your money between debt and equity instruments. The rate of growth will depend on the performance of the fund managers and the choices you make, so to that extent it’s not like a bank fixed deposit where they tell you that you will get 8 or 9% interest regardless of anything else.

How to calculate pension amount from NPS?

Keeping these things in mind it should become clear that you can only get an idea of how much pension you can generate and not an accurate answer.

So, how do you get that idea?

Suppose you have the following question:

I am 28 years old – how much pension will I get if I invest Rs. 2,000 every month?

CAMS has got this great corpus calculator which allows you to input the parameters and tells you how much your final corpus will be.

In this case I’ll put in the following numbers:

  • Contribution Amount: 2000
  • Periodicity: Monthly
  • Rate of Interest: 9.5% (Assumed)
  • Number of Years: 32 (60 – 28)

The calculator shows me a value of Rs. 50,05,164.

Now, this is the amount that you will get at the end of 60 years, and you will have to invest it in order to get a pension. You could create a bank fixed deposit with it or buy an annuity. NPS requires  you to buy an annuity from 40% of your money in the Tier 1 account compulsorily, but there is no such restriction on the Tier 2 account, so you can keep that in mind while opening the NPS account.

Conclusion

The first thing you should keep in mind is that NPS won’t pay you a pension directly, the second point is that the rate of return is not fixed either, and the third thing is when you get the NPS money you will be free (to an extent) to invest it, and generate an income for you as you see fit.

 

International Mutual Funds in India

This is another post from the Suggest a Topic page, and in this post we take a look at all the international mutual funds that are currently available to Indians.

These funds are sorted according to their category, and I’ve written a small description for them. In three or four cases I’ve just taken the description from the fund website itself, and if you want more information about them I’ve included the source at the end as well.

Do let me know if I’ve missed out any International mutual funds in India, and the starting point for this list was from Value Research.

Fund Category Description Link
Franklin Asian Equity Asia It’s an equity fund with the MSCI Asia (Ex Japan)  as its benchmark. http://bit.ly/fxdnfa
Hang Seng BeES China Passive ETF that seeks to replicate the returns of the Hang Seng Index http://bit.ly/dREMIT
JP Morgan JF Greater China Equity Off-shore China Fund of fund that invests primarily in a diversified portfolio of companies that are either incorporated in China, have their registered offices there or make most of their money from China. http://bit.ly/gkV52A
Mirae Asset China Advantage China Fund of fund that will invest in companies domiciled in China or whose primary operations are in China. http://bit.ly/funFPm
DSPBR World Mining Fund Commodities Fund of fund that invests primarily in BGF – World Mining Fund. http://bit.ly/gMsu9S
ING OptiMix Global Commodities Commodities It is a fund of fund and invests in various 3rd party global funds that provide access to commodity producers around the world. http://bit.ly/ijprtl
Mirae Asset Global Commodity Stocks Commodities An open ended equity fund, investing in equity and equity related securities of companies in Asia Pacific and Emerging markets that are engaged in commodity and commodities related sectors / sub sectors / industries, While the fund invests predominantly in commodity sectors like Agriculture, Metals & Materials, Energy etc, it would also target stocks of commodity related industries which provide support / services to companies engaged in commodity businesses. http://bit.ly/eiogvn
JP Morgan Emerging Eu, Mid East & Afr Eqt Off-Shore EMEA Fund of fund that invests in companies from an emerging market in Central, Eastern and Souther Europe, Middle East or Africa. http://bit.ly/gkV52A
HSBC Emerging Markets Emerging Market Invests in equity of India and other emerging markets. http://bit.ly/fxsDpI
Kotak Global Emerging Market Emerging Market Fund of fund that invest in mutual funds whose primary goal is to invest in emerging markets. http://bit.ly/f62C89
Principal Global Opportunities Emerging Market Fund of fund currently invested in Principal Global Investors Funds – Emerging Market Equity Fund http://bit.ly/hKZFxV
Tata Growing Economies Infrastructure Plan A Emerging Market Fund that has two plans and invests in overseas infrastructure securities. The percentage depends on which plan you choose. http://bit.ly/i2jmXr
Birla Sun Life International Equity Plan A Global Picks stocks from across the globe. Has partnered with S&P to recommend International stocks. http://bit.ly/gXRJfJ
DWS Global Thematic Offshore Fund Global Fund of funds that looks has the MSCI World Index as its benchmark. http://bit.ly/hlsklT
Sundaram Global Advantage Global Fund with allocation across global emerging equities,
commodities & real estate.
http://bit.ly/dI0IYJ
DWS Global Agribusiness Offshore Fund Global Agriculture Fund of funds whose underlying seeks to invest in companies that are linked to agriculture or allied industries. http://bit.ly/fJklDy
DSPBR World Energy Fund Global Energy Fund of funds that invests primarily in BGF – World Energy Fund and BGF – New Energy Fund http://bit.ly/eL6g8H
Fidelity Global Real Assets Global Tangible Assets Fund of funds that invests in stocks that have tangible assets like energy, materials, industrial, real estate and utilities companies. http://bit.ly/e2uvfi
AIG World Gold Gold The AIG World Gold Fund is an open-ended Fund of Funds scheme that invests in the equity of gold mining companies through Falcon Gold Equity Fund based in Zurich. http://bit.ly/i6gIwF
DSPBR World Gold Fund Gold Fund of funds whose underlying fund invests in global gold mining companies like Newcrest Mining Ltd. http://bit.ly/ecHftN
ING Latin America Equity Latin America Fund of fund that invests in Latin American stocks. http://bit.ly/ijprtl
ING Global Real Estate Retail Real Estate This is a fund of fund that invests primarily in small, mid and large-cap stocks in a number of different countries, including the U.S., that own, operate, develop or manage real estate http://bit.ly/ijprtl
Motilal Oswal MOSt Shares NASDAQ-100 ETF USA An ETF that will directly invest in NASDAQ 100 stocks. http://bit.ly/hj31f4