What does negative bond yield mean?

In India, we have very high rates of interest and while we are quite familiar with negative real rate of interest, we don’t often come across negative bond yields.

Negative real rate of interest is when your nominal interest doesn’t cover inflation, but a negative bond yield means that the returns you get from the bond are negative even in nominal terms.

This recently happened for a brief while with some German bonds, and Dhruv posted the following comment in the Suggest a Topic section.

Dhruv July 7, 2012 at 5:04 pm

Recently I read a news about German 2 year note yields fell to record lows of minus 0.01 percent , what does this actually mean(the minus sign on bond yields)?

This situation with the negative yields gives a good opportunity to not only look at negative bond yields but briefly touch upon Zero Coupon Bonds as well.

Zero Coupon Bonds are bonds that don’t have an interest rate, and don’t make any periodic payments at all. Investors buy these bonds because they are sold at a discount and redeemed at face value, and that’s how investors make their money. So, a bond of face value Rs. 100 may be auctioned at Rs. 95 and then when it is redeemed at Rs. 100, the investor makes the 5 rupee difference. This is a good link that explains the Zero Coupon Bonds in brief and also has a calculator to calculate yield on such bonds.

Germany issued such bonds with a two year maturity last month called Schatz, and they were sold at 99.87 Euros for a 100 Euro Face Value bond. So that’s just a very small yield of 0.07% to begin with.

Then about a week after the issue when the bond began trading in the market, the yield turned negative, which means that the bond traded for more than 100 Euros for a short while. This happened again last week when the yield on the Schatz turned negative due to Euro area concerns.

This example is for zero coupon bonds, but the yield can turn negative even for interest bearing bonds if they trade in the market and if their price is greater than the face value plus the interest payments that are remaining on the bonds.

Low or negative yields indicate that investors are seeking a very high degree of safety for their money, and for this reason this kind of thing is only seen in the bonds of developed countries, and that too occasionally. It is highly unlikely that we will ever witness this situation in India.

This post is from the Suggest a Topic page.

Thoughts on Jago Investor’s Financial Planner Survey

Jago Investor, which is perhaps the best Indian personal finance blog, did a survey on what people wanted from a financial planner, and I thought the results were quite interesting, and worth sharing here.

I hadn’t taken the survey but if I had, my views would’ve fallen with the majority on almost all the issues, and none of the majority responses surprised me (the wording of the questions had a little do with that as well).

What did surprise me however was that 93% of the respondents were male. That doesn’t seem to be consistent with ratio of men and women readers.

Manish wasn’t surprised by the results and said it correctly represented his demographic. Although I’ve never done a survey here which would show the split between men and women, in answering comments and responding to emails, I would’ve thought the ratio is even or at least much more balanced than those results. This is something worth exploring further because if this ratio is correct then it doesn’t correctly reflect the ratio of working men and women, and it will be interesting to find out why that is.

The other thing that caught my attention was this result.

75% people said they will not go for any financial planning with corporates like ICICI Direct, Edelweiss or such firms.

On the face of it, this sounds like bad news of companies like ICICI Direct, but when you think about it some more, you realize that the financial planning market is just so small that it doesn’t make much of a difference to big corporates if people don’t want to go to them for their financial planning.

This does present a good opportunity to individual planners who are trying to build a business in this niche area and are taking risks leaving comfortable jobs, in many cases with these same big corporates.

This survey should hopefully give them some encouragement and gives a good perspective on this new industry, which is still in its formative years. The whole survey is a quick and interesting read and can be found here.

Higgs Boson 3D printed blood vessels to avoid busy trap

How can you start this week with anything other than the Higgs Boson? For most of us – this is the kind of news which is important because people smarter than us are telling us it is, and like it or not, some things are just like that. Here is a Reuters article about the god particle.

An interesting story from Businessweek about Indian companies’ push into the retail sector and two things about the story stand out in my mind.

First one is that big Indian business houses are investing heavily and rapidly in this segment and so far that hasn’t affected the kirana stores that everyone is so worried will die due to FDI in multi brand retail.

Secondly, even though they are investing heavily, this is not a very profitable business for them right now, and that also shows that foreign companies won’t come in and start making money from day one and drive everyone else out of business.

Financial Express had another interesting story about retail where they wrote about a new concept of connecting farmers to the urban market pioneered by Mr. Harsha Moily, who is the son of Corporate Affairs Minister, Mr. V. Moily.

I’ve written about 3D printing several times, and I’m really fascinated with it because there is no doubt in my mind that this is going to make a huge difference to how we live a few years from now. Here is an article on 3D printed blood vessel network.

Brad Feld has a fascinating take on what it means to be busy and he talks about his own work schedule and how we create a busy trap to avoid our fear of death.

Fast Company has an interesting article on Google Glass, which makes them sound quite useable (at least to me).

Finally, Indexed has a brilliant take on things you run from and things you run to.

Enjoy your weekend!

Thoughts on an Indian real estate bubble

Last weekend, I linked to a post which had a report from Lloyds TSB International about India being the fastest real estate market in the world in the last decade where property prices have risen by 284%.

This reminded me of a comment that was posted on the Suggest a Topic page some time ago, here it is:

Rakesh May 15, 2012 at 5:16 pm [edit]

You should write some articles on HUGE REAL ESTATE MARKET in India. Where are we heading? Are we going USA / Europe / UAE direction? OR India has potential to absorb all the way and will come out stronger and not like these other countries faced the position in real estate.

My opinion on this is that the price rise we have seen in the recent past is simply unsustainable but whether the whole market will collapse the US way, and a bubble in that sense is forming – I don’t know.

I’ve stated this view several times in comments earlier as well, and I have many reasons to think this way, but I’ll talk about two today, which have been on my mind recently.

In big cities where house prices are really high, for most people, there is no way to buy a house except to take a substantial loan and then be burdened by an EMI for a very very long period. I know a few people who have done this and the negative impact this makes on your lifestyle far outweighs any benefit that you get out of this.

I think sooner or later a lot more people will come around to this view and resist the peer pressure which is largely the reason people make these type of commitments in the first place.

The second reason is to do with land acquisition and developing real estate, which is a huge problem right now. There is a lot of land that developers aren’t able to acquire and in cases where they are able to acquire land, they sit on a lot of it so that the prices don’t collapse.

There is corruption and policy paralysis, and a great example of that are the thousands (if not lakhs) of buyers in the Greater Noida area who are stuck with EMIs on houses that don’t see much hope of getting constructed, and are in a terrible situation right now.

This situation also needs to change or demand for units that are under construction will fall down because anyone who has witnessed the hardship that you have to face if your money gets stuck in such a developments vows to never get into another transaction of this type ever again, and strongly influences anyone who is watching the situation.

In my opinion, the consequence of this will either be an improvement in supply where policy making is better or a reduction in demand because of the uncertainty such a thing brings about and both will lead to fall in prices.

Finally, from the perspective of an individual, I think you have to see how much sense it makes to buy a house thinking of it as an asset when deep down you know it is not likely that you will sell it because you are making a profit, and it will behave more like a liability because of the huge EMI burden that it places on you.

List of 10 Safe Investments in India

Over the past few days I’ve received a few comments whose central theme is safety of returns while providing moderate returns.

I think the bad performance of the stock market over the past few years has made people search for instruments where return of capital is more important than return on capital, and these questions are a result of that mindset.

In this post I’ll be listing out 10 instruments that I think are quite safe for investing along with their tenure, expected return, tax applicability and other notes. If you think something else should be on this list, please leave a comment.

S.No. Investment Tenure Expected Return Tax Applicability Comments
1 Bank Fixed Deposits Few days to several years Usually over 8% Taxable at the investor’s slab Bank failures are rare in India so bank fixed deposits are a very safe way to invest your money.You know the rates up front so there is no uncertainty there.Taxes can eat into your returns though, especially if you are in the high tax bracket, but even then a FD that compounds quarterly and is done for a long maturity will yield well.Here is a link to a post which has the list of some of the best bank fixed deposits that are available in India right now.
 2 Tax Saver Bank Fixed Deposits 5 years or more  Usually over 8.5% The amount that you invest in tax saver FD is deductible from your taxable income up to a limit of Rs. 1 lakh under 80C. The interest income itself is taxable. Like the bank fixed deposit, this is also a very safe and certain investment.The drawback is that money is locked in for at least 5 years, and the positive is that you get some tax benefit to juice up your return.Here is a link to some of the best tax saver fixed deposits available in India right now.
 3 Public Provident Fund  15 years 8.8% The amount you invest is eligible for 80C deductions and the returns are tax free too. This is also a very safe investment, and the returns are spectacular, specially for someone in the 30% tax bracket.If you don’t mind the 15 year wait period then no other fixed income investment can match the PPF return for the safety it offers.
 4 NSC IX Issue  10 years 8.9% Interest income is taxable. This is another safe investment with decent returns.Here is a post with this and other post office scheme details.
5 Senior Citizens Savings Scheme  5 years 9.3% Interest is taxable, investment amount is eligible for 80C deduction. A lot of readers have commented here over the years about how useful the SCSS is along with the monthly income scheme of the post office for their parents, and relatives and this is a good option as well.Here is a link to an image that has the interest rates for this and comparison with other similar instruments.
 6 Monthly Income Scheme 5 years 8.5% Interest income is taxable This is useful if you are looking for an instrument that gives you a monthly income.Here is link to a post about MIS.
 7 Tax Free Bonds They trade on the stock exchange so you can buy or sell any time. Usually upwards of 8% Income is tax free I would say that these bonds aren’t as safe as a bank deposit or a post office deposit but they can still be categorized as fairly secure instruments.If you buy these bonds from the stock market right now, they are trading at higher than their face value so your effective yield will be less but then there is always a chance to make capital gains if interest rates come down.Here is a good link on the NSE website that has quotes of all these bonds. 
 8 Fixed Maturity Plans 1 year or more Not fixed but usually comparable to fixed deposits This is tax efficient when compared with FDs. Read more for details. Although these are fixed income instruments, there is absolutely no guarantee or indication of what the returns will be like.To that extent, they are very different from the other instruments mentioned in this list.Even then, they are specially attractive to people in the higher tax bracket due to their eventual FD like returns and tax advantage.Read more about FMPs here. 
9 Debt mutual funds Varying maturities and can be bought and sold anytime. Not fixed. Tax on capital gains and dividends. These are like FMPs in the sense that the returns are not fixed, so they are not meant for you if you can’t handle the uncertainty.Their popularity stems from the fact that they are flexible to buy and sell and have given decent returns in the past.
10  Corporate NCDs Varying maturities  Higher than fixed deposits. Interest is charged according to your slab and capital gains are also applicable. These are higher risk compared with the other instruments mentioned in this list, especially if you invest in a  NCD of a company which doesn’t have robust finances.The higher risk means that their return is higher as well and they can be used to juice up your fixed income portfolio but you need to be careful while buying them.This post about 6 things to keep in mind while investing in company NCDs is a good way to get started on this topic.
11 Savings Account No Maturity 4 – 7% Interest is tax free up to Rs. 10,000 and then charged according to your slab. A reasonable place to keep your short term funds, but if you have a lot of money in a savings account then you need to consider a FD or some other instrument that can yield higher.

All these options are widely known and based on what you want to do and what the rest of your portfolio looks like, you can pick and choose one or more for safety and reasonable returns.

Finally, would you like to add anything to this list?

Update: Added Savings Account per Ankur’s suggestion, please excuse the inaccurate title.

Post Office Schemes – Departure of KVP, Introduction of NSC II & Other Recent Changes

This post is written by Shiv Kukreja

Once quite popular with the investing community, post office small saving schemes have recently gone out of favour with the investors. No hike in the interest rates of these schemes for quite a long period of time, higher interest rates on other instruments like bank fixed deposits, NCDs, tax free bonds etc. and aggressive marketing by the banks and other issuers have played their role in people not investing in post office schemes in large numbers as they used to do earlier.

In fact, with bank deposits giving over 9% return, NCDs of companies like Muthoot, Religare Finvest, Manappuram etc. yielding 13% plus returns and the tax free bonds giving a similar “tax-free” return, investors are switching their funds into these deposits and hence there has been a net outflow from the post office schemes.

To make these schemes catch up with other market instruments and following the recommendations of Shyamala Gopinath Committee, the government decided in November 2011 to link their interest rates with the market rate of interest. It has also been announced that the rate of interest on small savings schemes will be aligned with the rates of government securities of similar maturities on April 1 every year.

Earlier there were media reports that the interest rates on all small savings schemes have been made ‘floating’ but later on Finance Ministry clarified that the interest rates will remain fixed till the maturity of the schemes except for PPF, for which the applicable rate will remain floating and will change on April 1 every year.

PPF – Still Quite Attractive

The one thing I’m certain of is that it has made Public Provident Fund (PPF) a darling of a scheme for the investors, especially people in the 30% tax bracket who are looking for long-term investment avenues. Rate of interest on PPF has been hiked twice from 8% to 8.6% w.e.f. December 1, 2011 & then to 8.8% w.e.f. April 1, 2012. The effective rate of interest for a person in the 30% tax bracket works out to approximately 12.73%, which I think is amazing, considering it also gives you a tax deduction under section 80C. The ceiling on annual contributions to PPF has also been hiked to Rs. 1,00,000 w.e.f. December 1, 2011 from Rs. 70,000 earlier.

I think this is the first time in the history of Indian fixed income investments that the interest rate on PPF has been fixed at a higher rate of interest of 8.80% against the interest rate on Employees’ Provident Fund (EPF) of 8.60% and at the same rate of 8.80% on General Provident Fund (GPF). Though the interest chargeable on loan taken against your PPF deposits has been hiked to 2% p.a. as against 1% p.a. earlier, the idea is to discourage investors to take money out of a scheme which is meant to be used for one’s retirement years. A loan facility of up to 25% can still be availed from the 3rd financial year till the 5th financial year while a withdrawal of up to 50% is allowed from 6th financial year onwards.

Popular Schemes – KVP Discontinued & 5% Bonus Withdrawn on MIS

Monthly Income Scheme (MIS) and Kisan Vikas Patra (KVP) have been the most popular schemes of post office with approximately 35% and 25% share respectively of the total outstanding of all small saving schemes put together.

Issuance of Kisan Vikas Patra (KVP) has been discontinued w.e.f. November 30, 2011 due to apprehensions of it getting used for money laundering (parking unaccounted money). It is important to mention here that KVP was a kind of bearer instrument as it did not carry the investor’s name on it, was freely transferable and no KYC requirements were there for one to invest.

The changes have also taken the steam out of Monthly Income Scheme (MIS) by scrapping the payment of 5% bonus on maturity, which has been the most attractive feature of this scheme.

Introduction of 10-Yearly NSC (IX Issue)

Post offices now have one more dish on their menu to offer – National Savings Certificates (NSCs) with 10 years of maturity. These new NSCs carry 8.90% rate of interest p.a. and like the older NSCs, the amount invested as well as the interest earned every year qualify for a deduction under section 80C.

Interest rates offered on Senior Citizens’ Savings Scheme (SCSS), time deposits (TDs), recurring deposits (RDs) and saving bank accounts have also been hiked in line with the market rate of interest. Though interest earned on all these schemes is taxable, these schemes have been left untouched as far as TDS is concerned except SCSS on which TDS is deducted if the interest amount is more than Rs 10,000 per annum.

Interest rate on SCSS has been raised to fetch 9.30% and it is payable quarterly. MIS and SCSS are the best investments for senior investors who desire regular stream of definite cash flows either monthly or quarterly. SCSS continues to enjoy deduction under section 80C though it is likely to change once DTC comes into effect.

Maturity periods of MIS and the older version of NSCs have also been reduced from 6 years earlier to five years now. In case of premature closure of time deposits after one year, the deduction from the applicable interest rate has been reduced to 1% p.a. from 2% p.a. earlier. An interest rate equal to the post office savings bank rate of 4% p.a. will be payable if the premature closure is made after the first 6 months of opening the time deposit.

I think passive investors looking for a reasonable risk-free return, can consider parking their funds in these post office schemes. It is just a matter of time that these Post Office schemes will again become lucrative from the interest rate point of view once the inflation comes down and banks start cutting rates on their deposits seeking direction from the RBI. The fate of many of these schemes will undergo many changes with the onset of the DTC but let us see how things pan out as the applicability of DTC continues to remain in question given the way it has been deferred year after year.

Twitter Transparency Report

Twitter released a transparency report today much like Google’s transparency report and this describes how governments around the world request Twitter for information on users and also request them to remove content from Twitter’s website.

The US accounts for the bulk of the information requests with 679 out of the total 849 requests that came between January 1st 2012 and June 30th 2012 originating from there.

India also figures in the report but with less than 10 requests, and Twitter didn’t comply with any of these requests.

Twitter says that this could be because of several reasons like the request was too broad, or it didn’t specify a user account, but beyond that they don’t see why they didn’t comply with the request.

India didn’t figure in any requests for removal of information and in fact there were only 5 countries  – France, Greece, Pakistan, Turkey and United Kingdom that sent in requests for removing content.

This is a great report by Twitter because it shows how different governments request data from it and it will be especially interesting to Indians who have seen their government make noises about clamping down social media from time to time.

The number is low right now, and let’s hope that it remains that way always.



UTI ULIP is the only ULIP run by a mutual fund company in India, which is interesting because for insurance cover they pay LIC and then get you under a group insurance cover from LIC.

They also say it is the lowest cost ULIP, and while I’m not sure if this is the lowest cost or not, the costs do seem to be lower than most other ULIPs.

Like any ULIP plan, this has got an insurance component and an investment component, and as far as maturity goes, you can opt for the 10 year plan or the 15 year plan.

This also seems to be structured differently from other plans, and it took me quite a while to figure out the terminology used, and let’s start with the harder part first, which is the insurance component.

UTI ULIP Insurance Component

The plan has two terms of either 10 years or 15 years and you have to select either of these two terms first.

Then you have to select what they’re calling a “Target Amount”. The target amount is the money that you will pay UTI over the course of this policy.

So, if you choose a target amount of Rs. 15 lakhs for a 10 year policy, you will pay them a premium of Rs. 1.5 lakhs every year.

This target amount becomes your life insurance cover, and there are two types of life insurance covers that you can opt for.

  • Declining Term Insurance
  • Fixed Life Insurance

Declining Term Insurance

This is the first time I’ve heard of a declining term insurance and a little Googling reveals that this is a type of insurance that people take out to cover mortgage payments whose outstanding balance reduces as time goes by. So, you need lesser and lesser insurance every year to cover that payment.

Now, let’s see how this works or at least my understanding of how this works.

In our example, since your target amount is Rs. 15 lakhs, that’s your insurance cover and you pay Rs. 1.5 lakhs every year for 10 years.

Your insurance amount is what you haven’t paid to them yet. So, if you paid two years worth of installments which equal Rs. 3 lakhs then your insurance cover is Rs. 12 lakhs.

If you have done a SIP with them where you pay monthly installments; to calculate the unpaid amount they say that if you have paid 15 installments then they will consider that you have paid two years worth of installments which is obviously unfair to you.

Nothing is payable on death within 6 months of buying the policy.

You only get half of what’s due if death occurs between 6 and 12 months of taking the policy.

This would have made some sense if the premium charged in this case were less than the premium for fixed cover but that’s not the case so either this doesn’t make any sense at all or I have not understood this correctly. If you think I haven’t understood this correctly then I’ll much appreciate if you leave a comment explaining it the right way.

I’ve based what I say on their document and this is the relevant extract on page 23.

Under Declining Term Insurance Cover: Life insurance cover is to the extent of the unpaid but not due amount of the chosen target amount as applicable for the yearly instalment payment. No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount unpaid but not due. For example for target amount of `120,000/ – under the 10 year plan, the yearly instalment due is `12,000/ – and the unitholder has died after paying only `7000/ – (7 monthly instalments) the Life Insurance Cover payable is 50% of `120,000/ – less `12,000/ – i.e. `54,000/ – and not `56,500/ – (50% of `120000/ – less `7000/-). For 1 year and above 100% of the target amount unpaid but not due is payable. For example under the 10 year Plan for a target amount of `1,20,000/ – in case a unitholder dies after paying 15 instalments (`15000/-) the life insurance cover payable is `1,20,000/ – less `24,000/ – i.e. `96000/-).
Under Fixed Term Insurance Cover: No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount. For 1 year and above 100% of the target amount is payable.

Fixed Term Cover

The fixed term cover works like the regular term plan where your target amount becomes your insurance premium and you get that paid upon death.

The conditions that exist for the 6 months and one year period that is no insurance money to be paid out if death is within six months of taking cover and only half of the insurance to be paid out if death is between 6 months and a year is also applicable in this case.

The table for rates shows that for a 31 year old the premium is Rs. 1.30 per Rs. 1,000 sum assured and that rate looks quite less to me because you need to pay that for only 7 years and a Rs. 5 lakh cover based on that comes out to just Rs. 650 per year and that’s even lesser than comparable term plans. I’m not certain what’s going on in here as well.

Covered under Section 80C

This plan is covered under the Section 80C tax saving scheme so at least till the time DTC is not implemented you will benefit from the tax benefits.. There have been several changes in DTC and it won’t be surprising if the final draft allows some sort of tax saving schemes but at this point it is better to assume that they won’t allow any tax saving schemes since they have never said that they will do that anyway.

UTI ULIP Investment Component

The investment part of this ULIP will invest in a debt oriented scheme which can invest up to a maximum of 40% in equity products.

This is a reasonably big fund with Rs. 2,322 crores under management and this fund has done quite well over the years and Business Line had an invest recommendation in it last year. The fund page shows that it has returned 10.87% since inception, 3.88% in 2011-12, 8.81% in 2010-11 and 35.87% in 2009-10, which are fairly good numbers. The plan doesn’t pay out any dividend as they re-invest the amount back in the fund.

Maturity Bonus

There is a maturity bonus where you get 5% of the target amount on the maturity of a 10 year plan, and 7.5% of the target amount on the maturity of a 15 year plan.


Of all the ULIPs I’ve reviewed here, this one seems the best because of the low cost and good fund performance. However it was a bit confusing to go through all the terminology used and I don’t feel confident that I’ve understood everything correctly, so if I were to buy this I would first seek out someone who has already bought this fund and ask some questions or someone who is familiar with what it is that makes this fund low cost and still profitable enough for UTI to run it.

This post was from the Suggest a Topic page.