Two big things to keep in mind while investing in company fixed deposits

Rakesh had a comment on what parameters should be checked before investing in a company’s fixed deposit, and when investing in fixed income there are two big things that you should keep in mind, and I’m going to talk about them first before getting down to specific parameters in a subsequent post.

Investing too much money in just one instrument brings risk without reward

Unlike equity, there is no disproportionate reward for concentrating all your fixed income investments in one instrument.

What this means is that if you had Rs. 1 lakh today, and you invested all of that in a stock with the hopes that the stock triples in a year you could go broke but you could also get rich because there is no limit to how high a stock can go.

But the same thing doesn’t apply to fixed deposits. If a smaller, riskier company is offering you 13% per year, and a bigger more stable company is offering you 10%, when you put all your money at 13%, your upside is just that 3% extra and your potential downside is simply too much because if the company goes bust then you stand to lose not only the extra interest but the principal as well.

I first came across this idea in 2009 when GM defaulted and a lot of its bondholders who had invested their life savings in GM bonds were left holding worthless paper.

I think this is a very important thing to keep in mind while investing in any fixed income instrument whether a company fixed deposit or otherwise.

You don’t know what you don’t know

Manappuram is one company that recently came out with NCDs and their stock along with Muthoot’s stock (which also issued NCDs) recently tumbled when news broke out that RBI was putting some restrictions on gold loans.

This news itself doesn’t threaten the NCDs issued by these companies but it’s impossible for a retail investor to know about these kind of things before they happen and take precautionary measure. There are simply far too many things that you don’t know and only when the event occurs you realize that such a risk even existed.

This is just one example, but this can happen to any company, and just last week news broke out that TV-18’s losses widened which is another company that issued NCDs recently.  While that was not as out of the blue as the RBI announcement, I think a lot of retail investors would have been surprised by it.

The two things I wrote about above are nothing new and I’ve written about them earlier as well in different contexts but if you think about them specifically with respect to investing in company fixed deposits, the big lesson to me is that you should always be humble about what you don’t know and appreciate that there is a big risk lurking somewhere and the best way to deal with that risk is to play it safe and spread your money around so that if something does go wrong it doesn’t wipe you off completely for what will be a few extra percentage points of interest.

In a following post I will write about the specific parameters that can help you build a negative list of NCDs that you shouldn’t invest in.

How can the government carry out disinvestment through ETFs?

I read an interesting article about the possibility of the government taking the ETF route to carry out disinvestment, and that can be a novel way to carry out disinvestment because the government did pathetically last year as far as disinvestment is concerned and things haven’t improved much since that time so it won’t be surprising if they aren’t able to do much with disinvestment this year as well.

A bit of creative thinking will help in these times and an ETF to disinvest stocks could prove very helpful in meeting the disinvestment target. This idea is based on Tracker Fund of Hong Kong fund  and they have already shown that the model works.

The way this will work is that the government will take a bunch of its listed stocks, and create a basket of shares which they will then sell to other ETF sponsors like Goldman Sachs.

They need to take companies that are already listed like Coal India because if those companies are to be part of an ETF then people need to see what the value of one unit of that ETF will be and that’s only possible if you have some frame of reference which in this case will be a listed stock.

The sponsor will then take those shares and create smaller units with them which can be bought and sold by Authorized Participants, and those APs will in turn buy and sell those shares to the general public.

People will then be able to trade the ETFs in the market and instead of buying a single stock, they can get an ETF with a bunch of PSUs.

The utility of the ETF will depend on the constituents and how low cost it can be and I’m skeptical that this will really be useful to an investor in the sense that it helps them fill a gap in their portfolio that they otherwise would have had.

Having said that, I’m fairly certain that this will do better than individual PSU stock sales because of the marketing muscle of the fund company that will combine with the buzz that’s always created when a PSU is disinvested and the novelty of this method. That alone should be enough to give enough legs to this scheme to succeed and that will be good for our cash strapped government.

Part 4: How should beginners approach investing in the stock market?

In part 1 of this series I wrote about the evolution of an investor to either a trader or a long term investor, and said that I favor long term investing to short term trading.

Then in the second part I wrote about the implicit assumption that a long term investor makes which is over a very long period of time the market will move upwards, and then also spoke about the nature of a share or stock. That nature I said was that a stock is a representation of the earnings of a company, and looking at it that way helps you stomach the volatility that exists in the market and deal with the daily ups and downs.

In the third part I wrote about regular investing, calibrating those investments and three big ideas that drive that type of investment. First one was my expectation that markets will edge higher over a time period of 3 – 5 years, second one was that markets don’t move in a linear fashion and a lot of the gains that have come in the past have come from small time periods that have surprised a lot of people so you don’t want to get out of markets completely, and finally I said that while timing is not be possible, you can vary how much money you put in the market and take advantage of falls.

I ended that post saying that I’ll deal with what are some of the instruments that you can use to execute this strategy, and that’s what I’m going to write about in this post.

ELSS Tax Saving Mutual Fund

If you want to invest in equities then ELSS funds are a great way to get started. They are one of the best options in the 80C limit since they have the lowest lock in period, and by investing the equity portion of your portfolio in ELSS, you ensure that you get some tax benefit right away which can be pretty significant if you are in the 30% bracket and the advent of some great tax free listed bonds also means that even if you don’t invest in bonds with 80C tax benefits you can still get good yields so you can keep 80C for equities.

Here is a list of good ELSS tax saving mutual funds that I updated late last year and this gives some good options that you can select one or two from.

I think ELSS funds should be on top of your list if you’re looking to get started with investing in shares.

Balanced Mutual Funds

Balanced funds may appear an odd selection when you first think about them because most of them invest about 35% of their assets in debt products, but past performance has shown that balanced funds have given returns comparable to good diversified equity funds, and that stems from the fact that the debt portion of it protects you from the sharp downturns that Indian investors have had to face many times during the last two decades, and there’s hardly any reason why that would stop from happening in the future.

Here is a list of some good balanced funds that you can choose from.

Good Diversified Funds

Hemant has a great article on some of the best diversified funds with some great comments that can be used to select a couple of diversified mutual funds to add to the balanced funds in the list above.

Nifty Index Funds

Internationally, index funds have done a lot better than active funds, I believe this is not true for India, and I’ve highlighted the reasons in this post (also read instructive disagreeing comments from Nitin).

Having said that, I feel if you are going to construct an equity portfolio, at least a small part of that should be a low cost index fund based on a large cap index like the Nifty or Sensex. I say that because costs eat into returns and index funds are lower cost (thought not as low as American funds) when compared with active funds, and have also performed decently in the past and give you the peace of mind that the fund manager won’t be screwing around with your money. The reason to stick to the big indices is that the Indian market is not very deep and volatility becomes quite high when you start moving towards the smaller caps.

These are some options from which you can consider choosing from, and as to the question of how much money you should invest – I think a little less than you are comfortable with is a good way to start.

I say that because it is hard for people to come to terms with how violently and quickly the market can fall, and how difficult it is to not panic and sell when you own funds that have gone down 15% or 20% in a month or two. Getting into the market with lower amounts will ensure that you’re able to deal with this volatility and get a grasp on how you feel about the market and feel more confident going in with bigger sums later on.

If you’re starting off then it is likely that you are in your twenties and still have a good 30 – 40 years of investing ahead of you, don’t rush to put all in and then later find out that you weren’t ready to risk that much money. More than losing the money, it will turn you away from the market completely and that means you lose out on what is potentially a great opportunity to steadily grow your money in years to come.

This is the last post of this series, and I must admit this was a lot harder than I thought it will be and took a lot longer than I thought it would take, so if you found it useful please do forward the links to your friends, and as always, all comments are welcome!


GS Nifty Junior BeES Review

The Goldman Sachs Nifty Junior BeES is an index ETF that aims to track the CNX Nifty Junior Index.

The CNX Nifty Junior Index is an index that comprises of the 50 most liquid stocks after the Nifty, and as a result is a mid cap index.

The GS Nifty Junior BeES is an index ETF and you normally associate low costs with index ETFs because there is no active management involved, however at a 1% annualized expense ratio – this ETF is not low cost and I’m not sure why they charge 1% because they charge just half of that for their Nifty ETF and this product is no different from that.

With just over Rs. 85 crores in assets, this fund is not very big either and given that it’s been around since 2003, it shows that it hasn’t been able to attract the attention of investors quite like the other funds.

Deepika, who originally commented about this ETF wrote that this gives a feeler of safe and attractive returns, and if you look at the chart below which shows the returns of the Nifty BeES along with Junior BeES you will see why she says that.

Nifty BeES versus Junior Nifty BeES
Nifty BeES versus Junior Nifty BeES

The Junior index has run up quite a bit this year and that’s probably the reason behind the interest in the index. A few months ago I did a post on the leading Indian indices and their performance details, and that post has 10 year returns data as well which shows that the Junior index did better than the Nifty in the 10 year period but the Sensex did better than both in the 10 year period so you can’t really conclusively say that the mid caps are better than large caps.

As far as returns are concerned you see that the Nifty and Nifty Junior are quite close and it’s impossible to say which will do better in the next 5 or 10 year period.

As far as safety is concerned, I think the calendar year returns chart for both the funds tells a great story. Here is the chart with data from Moneycontrol.

Calendar Year Returns Nifty BeEs  and Junior BeES
Calendar Year Returns Nifty BeEs and Junior BeES

As you can see, Junior BeES fell a lot more than Nifty BeES during bad years, and rose a lot more than it during the good years.

This is what you’d expect of an ETF comprised of relatively smaller cap stocks and it paints an instructive picture.

While the returns in the past may be similar or even better, they came with a higher volatility and you must have been willing and able to stomach that.

Personally, I’d favor the Nifty ETF instead of the Nifty Junior ETF because of the lower cost, lower volatility and higher assets under management.

This post is from the Suggest a Topic page.

Psychopath CEOs, 3D Holograms and End of Drachma

Truly horrible IIP numbers were released yesterday and Financial Express has a short column on how things have soured since last year, and without much needed policy reforms even 7% GDP growth will be difficult this year.

Sandip Sabharwal laments the multiple whammies that the market has had to take and says that the actions of government and regulators are clearly testing the patience of most investors today.

The delightful Psy-Fi blog asks if your CEO is a psychopath?

Meanwhile, the state of Nevada gives a license to Google’s self driving car, which sailed through the driving test.

In Star Trek fashion, you can now beam your 3D holographic images to someone and have a conversation with them as if you were really present there, well almost.

Greece’s woes are hitting center stage again, and Reuters examines the preparation that Greek banks are doing if they have to give up the Euro and get back to the Drachma.

Finally, NYT Magazine does a fascinating profile on Joe Weisenthal who is a financial blogger for Business Insider, and not only is this a great profile, it is a very instructive article for people who consume financial news. It gives you an opportunity to look at the perspective of someone writing the news, their motivations and goals, and that helps look at something that you don’t normally think about.

That’s it for this week. Enjoy your weekend!

Does the record $8.1 bn March FDI number mean anything?

It seems that every newspaper in the country used the exact same headline to describe that March 2012 had record FDI inflows of $8.1 billion which is 8 times the figures last March and this great number makes all the fuss about the Vodafone issue irrelevant

This is great news right? The country is doing so great that investors are falling head over heels to invest in the country despite all the flip flops that the government has done over policy issues in the recent past.

You should really be happy about this and stop reading beyond the headline.

Because if you read beyond the headline you will notice the following paragraph:

The USD 7.2 billion Reliance Industries-British Petroleum (BP) deal, announced in February 2011 contributed significantly to the inflows, even though funds from the UK oil major would have come in phases, they said.

Given that this deal was done in February of 2011, and that the statement clearly implies that BP hasn’t paid the entire $7.2 billion in March – how can you juxtapose this number against the Vodafone issue and say that it proves anything at all?

On the contrary I’d say that if you remove the $7.2 billion, then March FDI only amounts to 0.9 billion and that’s less than what they managed in March of last year!

Anyhow, since we are talking about FDI, here are the annual FDI inflows since the beginning of 2000 and that shows that there has been a gradual uptick in FDI over the years, and that’s something to be happy about, but at the same time, you can’t take this for granted as there are a lot of other great opportunities worldwide that investors have access to.

FDI Inflows in India
FDI Inflows in India

The numbers are in millions of dollars; here is the spreadsheet with the data and here is the source of the data. If you follow the stock market much (which you probably do) you may even be inclined to say – hey we haven’t beaten the 2008 highs yet!

Correction: Changed the deal month from March of 2011 to February of 2011.

Five aspects of Rupee depreciation to keep in mind

Swapnali posted an interesting comment yesterday which asked why the stock market is negatively correlated to Rupee depreciation even though it’s good for exporters, and I thought I’d broaden that question and write about five aspects of Rupee depreciation that came to my mind looking at his question.

Why is Rupee depreciating in the first place?

Before you get to the effects of Rupee depreciation, you have to consider why the Rupee is depreciating in the first place.

A lot of the downward pressure that’s been on the Rupee in the past few months has been due to the political environment in the country, and the uncertainty caused by issues like GAAR, retrospective taxation, inability to pass any policy reforms and other clouds surrounding the Indian economy.

Unlike the last time the Rupee depreciated which was a time of global crisis, things aren’t as bad globally this time, and most of the trouble that’s brewing is domestic (although things aren’t peachy globally either).

These circumstances hardly inspire investor confidence and as a result money has been flowing out of Indian equities and that’s led to the downfall in the market.

Effect of Rupee depreciation on exporters

If you look at exporters specifically, then all other things being equal, Rupee depreciation is good for them as the conversion rate is higher but the problem is that all other things aren’t equal and they have to face a slowing market in Europe and US, and that means that business is slowing down for them there. The recent Cognizant 2012 guidance, and the drop in share prices of all IT firms subsequently is a good example of that.

Effect of Rupee depreciation on oil bill

This one is the most talked about and I’m sure everyone has heard about this. Since India imports most of its oil from abroad, every time oil prices shoot up, India’s oil bill shoots up and since the government subsidizes oil, the oil subsidy goes up with this.

A lesser known aspect of this is that India has actually got surplus refining capacity, and oil also happens to be India’s biggest export item. While there are price controls in the domestic market, refiners are free to sell at market rates internationally, and that’s led to big oil exports from Indian private oil players, and helps offset some of the big oil bill. In fact in an earlier post about India’s exports in 3 simple charts I spoke of how oil exports might just hold the key to a trade surplus one day.

Effect of Rupee depreciation of Indian funds that hold US assets

Currently, I think there is just one fund in India which is the MOSt Shares Nasdaq 100 ETF which is a practical option to get exposure to the US markets, and this fund has grown about 20% Year to Date but the underlying NASDAQ has just grown 12.6% in that time period.

The remaining gains are due to the depreciating rupee as the stocks that the fund owns are worth more in Rupees now than they were when the fund bought them.

This is a slightly more complex relationship and you can’t really say that Rupee depreciation will always be good for the fund because the other variables that this depends on is how much money flows in the fund at that price level, what kind of redemption takes place at various levels, and how much the fund owns at any given time. I have however seen that the a falling Rupee is good for such funds, and I think if a fund continues to grow its asset under management steadily this would remain true.

Effect of Rupee depreciation on companies that have borrowed in USD

This could potentially become a big problem because a lot of Indian companies borrowed in foreign currency to take advantage of the low interest rates, but didn’t sufficiently hedge to protect themselves against the adverse exchange rate movement that could take place.

Now, they will have to spend a lot more INR to buy the same level of USD they borrowed and not only will this nullify any interest rate savings that they may have benefited from, it will put a big dent on their resources because this is akin to a penalty on the loan.

These are 5 things that come to my mind when I think about Rupee depreciation and these are not necessarily the five most important ones, just the ones that came to my mind as I read the original question.

What did I miss out?

This post is from the Suggest a Topic page.

Best Fixed Deposit Interest Rates for Senior Citizens

Updated: 28th Dec 2012

Continuing with the theme of fixed income, let’s look at some of the best fixed deposit interest rates that are on offer for senior citizens right now.

While it is common to see banks offer 0.50% extra over their regular fixed deposits to senior citizens, it is wrong to assume that the difference is always 0.50%. Some banks offer 0.75% and in the case of Yes Bank, they currently offer 1.0% extra over their regular fixed deposits.

The key thing that stands out from the list below is that there are several banks that offer upwards of 10.00% for a senior fixed deposit and that’s the minimum you should look for in today’s environment.

That’s the final list sorted according to the best interest rates I could find.





Interest Rate

1 Dhanalaxmi Bank

400 days


2 Yes Bank

15 months 15 days


3 South Indian Bank

1 year to less than 2 years


4 Karur Vysya Bank

Above 2 years to 3 years


5 Lakshmi Vilas Bank

1 year


6 Karnataka Bank

1 year to 5 years


7 City Union Bank

1 year


8 State Bank of Patiala

555 days


9 Axis Bank

18 months to 5 years


10 Indian Bank

9 months and above


11 Syndicate Bank

364 days to 2 years


12 Bank of India

1 to 2 years


13 Tamil Nadu Mercantile Bank

20 months 20 days


14 Punjab and Sind Bank

500 days


15 IDBI Bank

1 year to 5 years


16 J&K Bank

1 year to 10 years


17 Vijaya Bank

1 year and above


18 Indian Overseas Bank

1  – 10 years


19 ICICI Bank

2 years to less than 5 years


20 Kotak Bank

1 year


21 Andhra Bank

1 year to 10 years


22 Corporation Bank

12 months and above


23 Federal Bank

1 year to 3 years


24 State Bank of Travancore

1 year to 3 years


25 Canara Bank

1 year to 10 years


26 Bank of Baroda

1 year


One final thing about this is if you’re opening a senior citizen fixed deposit you should be aware of form 15H which you can use to prevent the bank from deducting tax at source if your total income for that year is expected to be lesser than the taxable income limit. Here is a good link that explains form 15H and form 15G in detail.

Edit: Corrected error pointed out by Paresh

Are interest rates headed up?

I got an email from someone who asked if NRE interest rates are likely to go up in the future and that really surprised me. For more than a year now people have been leaving comments here saying that interest rates have peaked and they can’t go any higher, and you should make hay while the sun shines and invest in fixed income instruments as soon as you can.

By and large that has been true as there have been some really good yields available to investors all of last year and continues to be available even now. What has not been true is the expectation that interest rates will come down.

When RBI revised the Repo rate last time, I thought that might prompt banks to lower rates more than they actually did. In many cases banks kept their highest interest rates still available but at a shorter maturity and I think in one or two cases banks haven’t reduced the rates at all.

Given that the RBI has said they are in no hurry to reduce rates further and how nothing indicates that the macro economic environment of relatively high inflation and high government borrowings will moderate – I think it’s safe to assume that interest rates will hover around these levels for a few more months.

But I don’t really see how there could be a big spike in interest rates in the next few months, and I wouldn’t wait to make a fixed deposit in the hopes of getting a higher rate. While you may get 25 or 50 basis points more – I don’t think it is wise to wait because the rates may as well come down from here.

If you want to invest in fixed income, there are good options right now in terms of tax free bonds, fixed deposits and there are quite a few FMPs that get announced every other week or so.

I don’t see any good reason to wait, do you?

India’s Declining Forex Reserves

The Rupee has fallen down quite a bit in the last few days and this naturally brings to attention the topic of what the RBI can do to stop this slide.

The last time such a slide happened the RBI did a few things, the most noticeable of which was making NRE deposits tax free which made banks give high interest rates on NRE deposits and given how this was tax free money, this drew quite a bit of attention.

Other than this there were some talks of RBI selling USD in the forex market but looking at India’s forex reserves data from July of last year, the size of those transactions can’t be significant.

RBI publishes the reserve position every week and I took data from July 2011 till the most recent date and charted it here.

I’ve also created a Google Spreadsheet with this data so if anyone is interested in using it you can access it here.

Here is the chart.

India Forex Reserves July 2011 - April 2012
India Forex Reserves July 2011 - April 2012

This chart shows that after being comfortably above $300 billion for several months last year, the reserves came down below $300 billion early this year and have remained that low ever since (although you do see a slight uptick in the last number reported where the reserves rose by $758 million).

Given the current climate, it isn’t likely that the reserves are going to increase any time soon, and if the RBI does sell Dollars to stop the Rupee slide, the reserves will come down even more and not even cover the 6 months current accounts that they do now per S&P.

Much of this slide is due to government actions that RBI has had to clean up. GAAR was just the latest hit that has dried up FII volumes, and also made other foreign investors more wary of investing in India.  India runs a current account deficit and depends on FII and FDI inflows to finance this deficit and if even that dries up then the Rupee is going to get hurt and go down even more.

That has a lot of implications, some known like oil prices going up (they may not get passed to the end customer but that just means that the government deficit on account of subsidy is higher) and some unknown like Jet Airways freezing hiring of foreign pilots or stopping foreign advertising to contain non rupee expenses.

Let’s just hope the slide stops, but the exchange rate and the forex reserves will be two key things to look at in the next months.

Earliesr post on what the RBI can do to manage the exchange rate