Don’t confuse yields with interest rates

Last week, a reader pointed me to fixed deposits from Avon Corporation, and my eyes naturally gravitated towards the highest number in the table viz. 14.19% yield  p.a. for a 3 year fixed deposit.

On the face of it this looks quite high, but that’s because your reference is usually a fixed deposit interest rate, which is different from this yield.

It is important to understand this difference because there are a lot of private companies that offer fixed deposits, and they usually do advertise the effective yield. I don’t write about company fixed deposits a lot, but when I checked a 2009 article about Tata Motors fixed deposit – I saw that they used the same annual yield as well.

Usually companies give you two options:

  • Periodic interest payment
  • Cumulative option

The periodic interest option is usually straightforward, as they advertise the rate of interest you will get for your deposit.

However, the cumulative plan becomes confusing because they advertise an interest rate and an annual effective yield.

Let’s use the numbers given in the Avon example. They say that the minimum investment is Rs. 5,000, tenure is 3 years, interest is compounded quarterly, and the yield per annum is 14.19%.

So, what does that mean – are you getting 14.19% interest per year which is then re-invested for you?

No, absolutely not.

Their brochure tells you that  you’re getting 12.00% interest rate for the 3 year maturity period, so where does the 14.19% number come from?

Since, this is a cumulative option you won’t get any interest payments, and get a lump – sum payment at the end of three years. Use the Compound Interest calculator to calculate how much you will get at the end of 3 years.

This gives us Rs. 7,128.80 at the end of 3 years.

So, for Rs. 5,000, you get interest of Rs. 2128.80 for 3 years. Divide that by 3 to get the annual interest – Rs. 709.43.

And (709.43 /5000) x 100 = 14.19%.

This is your annual effective yield.

Conclusion

You can’t compare this 14.19% with the interest rate that banks normally show because that’s like comparing apples and oranges.

This number is high only because it has been compounded for 3 years, then divided equally by three years, and you use the initial principal of Rs. 5,000 as base.

If you were to get a fixed deposit with a bank at 12% for a year, and re-invest that money again for two more years you will get the same effect.

I think this post is important for people who are interested in depositing money with companies, so please keep the distinction between yields and interest rates always in your mind, and don’t confuse one with the other.

Book Review: Confessions of an advertising man

I read Ogilvy on Advertising last month, and absolutely loved it. I picked up David Ogilvy’s first book Confessions of an Advertising Man soon after, and have just finished reading it.

This one is great too, and I really like Ogilvy’s writing style. It is direct, powerful, authoritative, and he doesn’t waste any words.

You couldn’t shorten any sentence he wrote, and the authority with which he speaks on the subject leaves a very strong impression on you.

The book is filled with advice on advertising, and 10 out of 11 chapters start with “How”. Like “How to Get Clients” or “How to Keep Clients”.

Review Confessions of an Advertising Man
Review Confessions of an Advertising Man

The only chapter that doesn’t start with “How” is the last chapter which is titled “Should Advertising be Abolished?”

I’m really glad I read this book and was a little surprised that it isn’t more popular among bloggers. There are a lot of lessons here that can be used by bloggers or even writers in general.

For example – Ogilvy says that twice as many people read the title of an illustration than the copy of the ad, and I’m sure that a lot more people read image titles than full blog posts too. So, while a blogger may not be selling anything – the image title is an excellent place to deliver the message of your post, and hook readers on to it.

Then there is advice on bite sized paragraphs, and keeping the first paragraph of an ad really short, and inviting. I think this is applicable to blogging or other forms of writing too. There are several other tips about writing an ad that can be used by bloggers.

So, is the book for advertisers and bloggers alone?

I really don’t think so because there is advice that’s applicable to a wide range of professionals. Especially, these chapters:

  • How to Manage an Advertising Agency
  • How to Get Clients
  • How to Keep Clients
  • How to Be a Good Client
  • How to Rise to the Top of the Tree – Advice to the Young

I really enjoyed reading through these chapters, and felt that everything was relevant to what I do, which has nothing to do with advertising at all. That shouldn’t be a surprise because these are words coming from an extremely successful person, and the principles that help you grow in one career should also work in another career.

I’d recommend Confessions of an Advertising Man without qualification. I enjoyed reading it, found it useful, and I think others will too.

7 Layered Tea, 3-D Printing and Understanding Risk

After last week, I feel we’ve had a good week in terms of covering a wide range of topics that included fixed income, personal technology, and economy.

I think I have some pretty good links to end the week too.

Let’s start with 3-D Printing is not exogenous from the Psy – Fi Blog. I’ve linked to a post about 3-D printing before, and if you don’t know what 3-D printing is, then read this Economist article first – it will blow your mind!

Every time I think about 3-D printing – it seems like magic to me, and when I tried to picture what a 7 layered tea would look like – that seemed like magic to me too. Check out this WSJ article about 7 Layered Tea from Dhaka.

Next up, this article from Roger Nusbaum about understanding risk. I particularly liked the following snippet:

Invariably, while things are going well, like now (on a price basis, things have been going well), no one says “oh yeah, the next time the market goes down a lot I am going to get caught with too much exposure to the wrong thing and I am going to panic sell big time.” No, when things are going well people say “of course markets correct, everyone knows that, I won’t panic.”

Ajay Shah on the Freedom of Speech in Pakistan and India.

Ajay Shah has also written about Rupee trade taking place outside India extensively, and this week I read an interesting article in BeyondBrics about Rupee / Dollar Futures trading growing in Dubai.

Great post from Barry Ritholtz – How to spot a bubble in real time?

Hemant has this section where you can ask questions and I see that he addresses taxation related questions as well. I’ve been getting a lot of those lately, and I simply don’t know the answer to any of them. You can try your luck there, and check out his latest financial planning post to get a feel of answers to past questions.

That’s it for this week – enjoy your weekend!

A few thoughts on the GDP Numbers

Last week, the revised estimates for 2010 – 11 GDP were declared, and I was going through the numbers to see if I could find something interesting. The numbers themselves didn’t hold much surprise, and the slowdown in the latest quarter has been well documented by newspapers already, so I won’t dwell on that.

Instead, let’s take a look at the breakup of GDP by economic activity.

GDP By Economic Activity at Current Prices 2010 - 11
GDP By Economic Activity at Current Prices 2010 - 11

Looking at this, a few things come to mind.

Where did the Industrial phase go?

People who study Economics in school are told how an economy grows from depending primarily on Agriculture to depending on Industries, and then moving on to Services. That’s true for most countries, and has certainly been a big factor in the growth of our big neighbor.

However, India went from being primarily an Agriculture economy to a Services economy, and missed the Industrial phase in between. This is amply clear from the break – up of various activities in the above chart and the low percentage of Manufacturing in it.

I think this is one reason for the kind of divide we see between the rural and urban areas today. You had a situation where most of the jobs created after liberalization were in the so called new economy that was more easily accessible to urban folks than it was to rural folks, and with no corresponding increase in agriculture incomes – the divide grew from there on.

Don’t we have about 74% of our people in rural areas?

When we looked at India’s unemployment numbers, we saw that about 74% of the population is estimated to be in rural areas.

Agriculture is one of the mainstays of the rural areas, and while we’re seeing people in rural regions moving from agriculture to other sectors – a 19% agricultural share when close to three quarter of Indians live on agriculture is totally off balance.

As India grows, the share of agriculture will give way to other sectors, and that’s good as long as people in the entire country can get a piece of that action. I feel that a strong manufacturing sector can create a lot of jobs in a much more broad based manner than services sector alone can, and there has to be a focus in that direction.

8% Construction and 1% Electricity, Gas & Water – Really?

It’s estimated that some 400 million Indians don’t have access to electricity and there are over 1,00,000 un-electrified villages. These are staggering numbers, and when you read that the total share of Electricity, Gas & Water Supply is 1% and Construction alone is 8% – you know that the people building houses are not the same people who are lighting lamps.

To me, this data point alone speaks volume on the disparity that exists between Indians today.

The Big Divide

To me, all these numbers point to the huge disparity in living conditions that Indians share, and also how much needs to be done for more inclusive growth. We have one of the fastest growing economies, but we also have an unbelievably high number of people below the poverty line.

I think developing a manufacturing sector is a must to bring millions of people out of poverty, and bridge this huge gap.

I can’t see how services alone can absorb so many people, and the best way to deal with this situation seems to be an effort to build a strong manufacturing sector.

Muthoot Fincorp 11.75% Secured Bonds

Recently I wrote about the IFCI Tier II Bonds, and Shiv and Value Investor commented on that post letting me know that Muthoot Fincorp has also come up with a debt offering.

They come with an interest rate of 11.75% per year, and have a tenure of 2 years.

Krish and Mithlesh left a comment on the IFCI post about Lakshmi Vilas Bank offering an interest rate of 10.50% for 1 year – 2 year deposit, and as far as I know this is the highest any bank is offering right now. So, investing in Muthoot’s debenture gives you that much extra yield (for the extra risk of course).

The debentures are secured debentures, and the issue opened on 30th May 2011, and will close on 29th June 2011.

Muthoot Fincorp 11.75% Bonds
Muthoot Fincorp 11.75% Bonds

The minimum investment required in the Muthoot Fincorp Debentures is Rs. 1,00,000 and unlike the IFCI bonds they’re not going to list on a stock exchange, so you must shell out at least Rs. 1 lac if you want to get in on these bonds.

They don’t have any tax benefits, and will only be issued in Dematerialized form, so you need a Demat account to invest in these.

How does it compare to the IFCI issue?

Since the IFCI issue is also open now, the natural question is how the Muthoot bond issue compares with the IFCI one.

To me, the benefit of the IFCI issue is that you get to lock down to a high interest rate for a reasonably high duration. This is unique to the issue, as banks these days allow you to get a good interest rate for a year or two, but as the duration increases the rate of interest decreases. This probably indicates that banks think that rates will be lower in the years to come, and in such an environment bond issues like SBI and IFCI allow you to lock on to a high interest rate for longer durations. The fact that they’re listed mean that you can sell them off if you need money before the maturity.

The Muthoot bond has a maturity of only two years, so it doesn’t have these benefits. It won’t list either, so someone who wants to buy the bond should primarily be convinced that the additional 1.25% or so is worth the additional risk.

These are secured bonds which means that the loan is backed by real assets, but I don’t know of the details about what assets are used to back the loan, how are they valued etc. For whatever it’s worth the issue is rated high by CRISIL so you can probably take that into account in your decision making as to what the additional risk is worth.

In my mind, this additional 1.25% is definitely not worth exposing a large part of your savings, and I personally would never invest more than 5% or so of my savings in this, if even that.

How to “Arrange by from” in Gmail the way it’s done in Outlook

Last week a reader emailed to ask me if there’s a way to sort email by Sender in Gmail like the way it is in Outlook. People who use Outlook for their work probably use the “Arrange By From” function a lot, and it’s a very handy thing too.

That feature is also available in Gmail, but it’s not as visible as the one in Outlook, and as a result I think not many people know about this.

In order to use that you have to simply go to the Search Gmail box in the top section of your Gmail and type “from:onemint@gmail.com”.

This will show you all the emails that were sent by onemint@gmail to you and works pretty much like the Arrange By From filter in Outlook.

The only difference is that if you have the “Conversation” view on then you will also see other emails that were part of the conversation.

Sometimes, I find it handy to first turn off the Conversation view and then use this filter.

You can turn off the Conversation view by going into Options –  General – Conversation view off and then search using the from filter. This is shown below.

Gmail Turn Conversations Off
Gmail Turn Conversations Off

Along the same lines, there is another useful filter called “is:unread”. Using this filter will show you all your  unread email.

I often combine this with the from filter if I have a feeling that someone sent me an email that I somehow missed and is now buried at page 6.

For example: [is:unread from:onemint@gmail.com ]

This will show you all the unread emails sent to you by the email address you type in.

Like the Gmail chat list feature – this is quite simple to implement, and is very helpful as well.

How real is your gold bangle?

A friend recently told me this story, and I thought it was worth sharing here. My friend was at a jewelery shop in Delhi, and a lady came there to sell her gold bangles. After weighing the gold, finalizing the gold rate, negotiating the deductions – the jeweler said that they will cut through the bangle before buying it.

Apparently, this is common practice and jewelers do this while buying gold ornaments that weren’t sold by them.

When they did cut the bangle in half – the lady was stunned to see that a copper wire ran through it, and it wasn’t pure gold like she thought it was all these years!

I was amazed to hear this story because I’ve never heard anything like this before, and I don’t think my family has ever done any test on their gold, so who knows how much copper they will find! I just hope this is an exception and doesn’t happen all that often, especially when you buy from reputed jewelers.

Some time ago a reader had left a comment about a jeweler telling him that his gold has lost its purity in the locker, and though my knowledge about gold jewelery is very limited, this sounds like a case where the jeweler was misleading the reader.

Niraj Kothari – a regular commenter on gold related matters here, answered that comment and also provided some information on how you can get your gold purity tested. I think that’s very useful information for people wondering about that kind of thing, and I’m pasting his comment below (with minor editing) as regular readers may not have come across that comment.

Dear Mr.Nole,

Firstly I would like to clarify some myths which exists in the market for gold jewellery

1. GOLD no matter whatever purity you buy will never get impure / corroded/ degraded / decrease or increase in weight even 0.o5o grams, if you keep it in a safe place even for 100 years, it is this property of gold that has made it valuable.

So, the jeweler who advised you that your purity of gold changed while you kept in the locker for a while is incorrect.
The purity of gold when you buy it from a jeweller will remain same and will never change with time, if someone says that the gold is of less purity than you had bought it, then it implies that the jeweller from where you bought the gold has sold you gold less than the assured purity.

Now , concerning your point of testing your jewellery through a spectrometer, as you rightly mentioned spectrometer / karotometer ( commonly used ) are very costly and the pricing of karotometer ranges between 6 lakhs to 12 lakhs!.

So how a common man should get his jewellery tested?

Government of India has recognised BIS hallmarking centres across India. These centres are usually located in main wholesale / retail jewellery market areas of a city, like in Chennai it should be located near T Nagar.

You can walk into these hallmarking centres with your jewellery and ask them to test the jewellery for the purity which jeweller has assured you.

During the testing the hallmarking centres are required to cut upto 0.100 – 0.200 grams behind every product and subject it to different gold testing methods like

1. Fire assay test.
2. Spectrometer test
3. Nitric Acid and Touchstone scratch test

They then take an average of all these different methods of testing and give you a certificate of purity for the jewellery product which you have given, and they also give you the 0.100 – 0.300 grams of gold back which they had taken from your ornament in the form of pure gold.

These reports are completely unbiased and authentic from a government recognised hallmarking centre. The charges are Rs.20 / per product or piece. The process requires between 3 – 5 hours.

Note: Kindly confirm the process with BIS hallmarking centre of your city before handing over your products for testing.

Link to BIS

I wasn’t aware of what Niraj has mentioned at all, and have no experience with this, so it was a good thing for me to learn, and I’ll be interested to hear if anyone has used this method, or if you’ve ever faced any other issues with your gold jewelery?

IFCI Bonds: Tier II Bonds Review

This is another post from the Suggest a Topic page, and today we’re going to review the recently launched IFCI Tier II Bonds. When I first heard of them I wondered if they had released another tranche of infrastructure bonds for this year, but that’s not the case.

These IFCI bonds don’t offer any tax benefits, and are like the SBI bonds that were issued earlier this year. They have a relatively longer time frame for maturity; will be offered in Demat form, and will trade on BSE thereafter.

I wasn’t able to download the prospectus of the IFCI bonds, so I won’t be able to get into as much detail as I went into with other bond reviews, and will focus on the information available on their website, with some thoughts on them.

The first thing that caught my eye was how high the bar was set on investing in these bonds. The minimum investment is set at Rs. 1 lakh, and that’s a fairly big amount for a retail investor to commit on just one bond issue. I don’t know why they would want to keep the limit so high, and I can only think that they don’t want to have a very large number of investors and feel confident that they will be able to raise funds even with such a high minimum investment amount.

This is a  subordinated Tier II unsecured debt issue, and from what I understand these bondholders are the lowest in creditor hierarchy and will be wiped out before all other creditors of the company. This will of course only come in play in dire circumstances, but since there are banks that offer interest rates close to the ones offered by this IFCI bond issue, I don’t see any merit in allocating more than say 5% of your capital in just this issue.

 

IFCI Bonds Highlights
IFCI Bonds Highlights

Here are some other important details about the IFCI bond issue.

Open and Close Date of the IFCI Bond Issue

The bond issue opened on June 1 2011, and will close on the July 15 2011.

Minimum Investment and Denomination

The minimum investment needed is Rs. 1 lacs, and one bond is worth Rs. 10,000. Since the bonds will list on BSE shortly after they’re issued, you will be able to buy one bond for Rs. 10,000 from BSE. However, it is quite likely that the bonds trade at a premium at that time, so you will probably have to pay a premium while buying these bonds from BSE.

Interest Rates and Series of IFCI Tier II Bonds

You have 4 options when it comes to these bonds – you can choose the 10 year or the 15 year maturity period, and then within that you can decide whether you want the interest paid to you annually or you want it to accumulate and get it all at the end.

The two series have call options from IFCI – the 10 year one can be called at the end of 7 years, and the 15 year one can be called at the end of 10 years.

What this translates into is that if you chose to take the 10 year bond, and at the end of 7 years IFCI decided that they want to redeem the bonds – they will repay you the money, and not have to wait 3 more years for maturity. Same thing with the 15 year bond.

Since the bonds are traded on the stock exchange – you can sell them at any time at market prices, but there’s no guarantee what the market price will be.

Listing Gains on the IFCI Bond

Some of you will be curious as to what price will the bond list on, and if there’s any opportunity to make listing gains, and make a fast buck on them.

I have absolutely no idea how they’re going to list, and the only input I can offer here is that the SBI issue listed at about a 5% premium. (I have fairly strong views on this topic which can be found here)

How does this issue compare to fixed deposits?

As far as I know – there’s no bank that allows you to lock on to a 10.75% interest rate for 15 years, or even a 10.50% for 10 years.

Karur Vysya is currently giving 10.00% for 1 – 2 years deposit, but as the time frame goes up the interest rate goes down. There must be a few other banks around that range, but I don’t think anyone is promising you this interest rate for such a long period. On the other hand, IFCI’s unsecured Tier II debt, is riskier than a bank fixed deposit.

Plus, the minimum amount will take it out of reach of a lot of retail investors, and this is probably just the beginning of many more bond issues from other companies as well.

Conclusion

Ultimately, you have to see if this fits into your asset allocation and doesn’t expose you too much to just this one asset. Also, think if it makes sense for you to wait for it to list, and then buy it from the secondary market. That way you can invest a smaller amount, but may have to a pay a premium for it.

As always, your comments are welcome, and much appreciated!

Northern Lights, Tatas and Mobile Payments

For the few of you who noticed – this was a rare week on OneMint, where there were no posts at all.

I was busy with other stuff, and a bit of blogging fatigue also set in. Just to be clear – I wasn’t tired of writing, and was certainly not short on ideas, but the other stuff that goes on behind the scenes got overwhelming.

This involves stuff like dealing with agents spreading misinformation, getting emails about infra bond refunds, comments from misinformed readers who accuse me of being an agent and other such nonsense.

A friend told me that these are good problems to have, and it’s much better to have to deal with this nonsense, than to have no readership at all. I totally agree with that, but sometimes you just need a break, and make little changes that help you deal better.  I’m over my fatigue now or so I hope, and we should get back to schedule in the days to come.

Here are some good reads from this week.

This week I’m going to start with these beautiful nature pictures from the Daily Mail, the first one and the one about the Aurora Lights are my favorites.

Next up, Shabbir writes about how to invest in mutual funds online.

A humorous account of Sarah Khan’s holiday to Jodhpur.

Barry Ritholtz writes this funny incident about how he threw his friend’s $1,000 in the trash.Gold bugs please read!

Deepak Shenoy on a new and easy way to make mobile payments.

The Indian media gave a lot of flak to Ratan Tata, but it looks like the Tata’s are in the clear. Did the Indian media misfire on Tatas by WSJ?

Roger Nusbaum on how it’s okay to not get some investment themes, and stay away from stuff that you don’t understand.

Enjoy your weekend!