Cost of labour in India

I have been noticing this interesting trend on cost of labour in India. I am not referring to the usual information technology cost of labor arbitrage that is now a norm for any IT organization. I am talking about regular labour costs for administrator / janitorial labour. Let me illustrate with an example, we bought a car about a year ago and we are paying a monthly outgo of Rs 5000.00 for the car. During that time we hired a driver for the car and we paid him Rs 3500 per month. That in itself represents about 70% of the cost of the car. Well that was the going rate for drivers at that time. A year passes and its time for a raise and we end up paying him Rs 4000 Per month now. This is now 80% of the cost of the car. At this rate, we will be paying him the cost of the car in two years from now plus other additional 'bata' that we pay him for over time.

This came as a revelation to me since I have seen the cost of labour being extremely high in developed nations leading to economic models where buying a new product is cheaper than getting an existing one fixed due to the cost of labour required to fix it. It looks like we are also moving in the same direction. How would the middle class indian society adopt to this kind of change? I am not sure. Maybe they will become more self reliant and move away from the hired help model? That I am afraid would actually reduce the number of available job opportunity which could mean a bad thing.

Whatever be our evolution path, I think that labour costs are going to raise to very high levels in the future and we need to learn to cope with it in new ways than what we have done before. Maybe the world of kaamvalis will be gone for good.

Mutual Funds - The indian scenario

Mutual funds in India have been attracting investment from retail investors for a few years now. Gone are the UTI mutual fund days of guaranteed returns and controlled economy. Today's funds are completely linked to the market and they are open ended and fully redeemable. Unfortunately, the investment community in India still looks at them like they way a day trader looks at stocks. They get in and get out quickly hoping to make a quick killing. The only people who get rich in that process are the fund managers. I wonder if this attitude will ever change in India.

RE: Invest in art, get fantastic returns!

rediff has this interesting article on how investment in art will have fantastic returns over a period of time. You can read the article below - here is a small quote and a link

Art as an investment is an increasing area of interest for many financial institutions, high net worth individuals and even connoisseurs of art.

[Via rediff: Personal Finance]
Also in the economic times, I read the headline yesterday that investor wealth jumped by something like 18K crore due to the current boom in the market - obviously we indians have a lot of disposable money now and so we have a unique problem - where do we wisely invest our money? Thus avenues such as art start appearing as investment options. Is this good or bad? Only time will tell.

Fixed deposits - Are they really worth it?

I have had a very strong view on putting money in fixed deposits(FDs) - CDs for you Americans :-) and why should we go about doing them. FDs in India has been the first love of retail investor for a long time. They have appear in so many shapes and forms to satisfy the investor's palette - all the way from automatic credit from your savings accounts to FDs to large and small companies themselves offering fixed deposits albeit at a higher rate. The big buffet of options exists I believe simply because fixed deposits are the apple of the eye for the retail investor. So let me take my stand here - I don't like fixed deposits! Why ? Today's interest rates are in the 5-6% range, The returns are 100% taxable since the days of section 80CCC are gone. Every paise that the institution pays you is taxable and so they will eventually have TDS before you lay your hands on the money. So effective return would be in the 3-4% rate. This is obviously less than today's inflation so net result, your money is slowly decaying away. So how do you handle this one may ask? The answer is basically many fold but the underlying philosophy for FDs which I am elaborating below should be your checklist for FD creation.

• Philosophy 1: Quick access to money for emergencies : One of the key principles of creating an FD is the fact that we need quick access to money for emergencies. So much of money does one need for quick access? If you have a formula for it, great otherwise a 3 month salary would be a good yardstick to use. Anything beyond that in a FD would be underutilized funds.


• Philosophy 2: Safe and secure returns : This is a bit of a misnomer. If you had followed the logic in the first paragraph, there is no " real return" from a FD post inflation. At best you can feel that your money has not vanished but it is still around. A lot of people found out this is not true during the days when companies that offered fixed deposit vanished overnight.


• philosophy 3: Temporary parking space of excess cash:A lot of people park excess cash in FDs for short periods as a temporary parking space until they find better investment opportunities. This is a good practice since the returns from a savings account is a lot less than what at 3 - 6 month FD can give you. Interestingly there are new and better avenues to park cash.

Now that we have reviewed what the primary goals for having an FD are, let us explore what are the options available to satisfy these goals to better manage our money.

• Philosophy 1: Quick access to money for emergencies : To have quick access to cash (< 8 hours), there are very few options available in the market other than a fixed deposit linked savings account. Most banks have such accounts where the money is transparently swept into a FD from the savings account until you attempt to withdraw the money. At that point in time the FDs are "broken" to handle the request. Having said that FDs are the traditional option here, there are a few other options that one can look at to get better benefit. Credit cards provide access to reasonably large sum of money without physically having money available until the next billing cycle. Thus make your emergency payment through a credit card and then when it is time to pay those credit card bills (typically within the month) you access your funds from other sources and pay the card off.


• Philosophy 2:Safe and Secure Returns : In today's world this is hard to come by but there are various options out there that can provide this option for your money with reasonably higher return than the FD. The post office monthly income scheme (POMIS) is a good option here - it is guaranteed by the government so it is as safe as it can be. it pays 8% returns with 10% additional maturity bonus thus a higher effective rate than the average FD. In terms of liquidity, it does not score well - it does allow encashment after 1 year but the penalty clause of 5% of principal is pretty high. Investors have to wait for 3 years if they wish to close without penalty.
  Investors who are able to digest slightly higher risks can look at debt mutual funds. They provide good liquidity and sometimes very good returns but these instruments are fundamentally more risky than a government backed investment schemes


• Philosophy 3: Temporary parking of excess cash : If you are one of those fortunate souls that has excess money that should be temporarily parked, you should explore the following options - Liquid mutual funds with their typically better returns than FDs will offer a good parking space for cash. They are highly liquid (you will get your money in a couple of days) and unlike a few FDs, there wont by any clauses for sudden exit. They thrive on the ability to provide parking space for large amounts of cash.

With this we have explored various options for money management beyond Fixed deposits. Hope you folks get into active money management beyond FDs through the various routes mentioned here. Do send in comments and feedback if you have other means/options of managing your funds.

Credit rating - The new Mantra in India

I received a note from my credit card provider that they would be reporting credit history to an RBI appointed agency for tracking my performance. That is the good part. Further they said they would also share the data with any agency that they thought would be deemed fit. That I have a problem with. In a country like India where both privacy and information security are relegated to secondary levels of importance before roti, kapda aur makhan, I think getting a letter from the credit card company was in itself a positive note unfortunately their practice of sharing to who they see fit is a problem. The good thing is that they have given me an option to raise a redflag if I want to and I have done that today. Let us see what the response would be.

personal finance in india

Buying property in India - The common man's guide - Part 3

Having successfully purchased your piece of the world, it is time to complete the final formalities. We have to make sure that the final leg of the journey is successful. The steps are easy. So let us go ahead and do it

1. Get an encumberence certificate : If you get an EC after a week of registration, it will typically contain your name on it. That is a good indication that you own the property :) .


2. Get a Patta : The patta is another significant document that will reinforce the fact that the ownership of the property is registered in your name. You can typically get a patta in Tamil Nadu in 2-3 months. I suggest you apply for one soon.

Thats all there is to it. Good luck with property buying!

An interesting approach to Investing

Santhosh at IndexNeXus has an interesting approach to investing in stocks using google. Here is a quick excerpt - you can read the full article at his site (URL below).

Many of us trade in stocks becos our friends told us to do so or found the recommendation on some business channel or trade magazine. But this is not an intelligent investment. The Internet so full of information that you can at-least do some basic research there and back up your decision with info you have researched

I am not into stocks. I am not a stock savvy person. So dont treat this as a very serious advice. But this way of gathering information is just another way of cross-verification and company profile research.

I have used Google for in genereal web search and Google News for finding the latest information from various news sources around the world. The other most important tool is the company website itself, from where you will get the pointers what to search ?

[Via IndusNeXus.com (beta) - Free Social & Business Networking | Community Blogging | India ]

Buying property in India - The common man's guide - Part 2

Having covered the legal verification of the real estate property in part 1, I will address the legal documentation for sale and the actual registration process in part 2. For successfully execution of sale, you need to have a document that clearly describes what is being sold and this should be signed by you (the BUYER) and the seller or a person authorized by the seller. This sale has to be registered with the government so that it will be recognized in a court of law. This registration is done in a sub-registrar's office.

First let us cover the buyer (you ) scenarios. There are basically two options here, you pay for the property yourself or you have a bank fund the purchase.

• Funding yourself : If you are funding it yourself, you will have to have a legal document signed with the seller - this document is called as the sale deed. It is a legal document that will be printed on stamp paper and will describe the property and its surroundings. Then it would clearly describe the fact that the seller is selling the property to the buyer. This document should first be reviewed by the lawyer before it is executed on the stamp paper. So ask the seller or the VENDOR for a draft copy of the sale deed and have your lawyer review it and suggest corrections if any.


• Funding through a bank: Banks offer loans to purchase realty. The process they undertake would be to do a verification of the property papers (legal review through their lawyers), verify if the property price as negotiated by you with the seller is fair market value (through a property surveyor) and finally ensure that there is an agreement of sale between the seller and buyer, executed by the seller or his representative. Once they are satisfied with the three steps, the will finance the purchase and have you execute the registration process through the sale deed (similar to funding yourself). The only difference being that they will have physical possession of the sale deed until the loan is repaid.

During the registration process there are a few items you need to verify to ensure that there are no hitches in the future for the property ownership.

1. Registration Price :The price quoted in the sale deed. Ideally this price would exactly match what you pay for purchasing the property. In reality though, this seems to be hardly the case when I spoke to a few buyers and sellers . You should ensure that the difference is not too large for the simple reason that you are paying a higher price for purchasing than what is being registered for would mean that if you decide to sell the property in the future, the net gain on which you pay tax is higher than what it really should be. Further the logic of reduced cost in the sale deed to reduce registration cost (which is a % of the sale price) escapes me since what you gain marginally in registration costs you pay a substantially higher penalty during a future re-sale of the property - bottomline it is not worth the trouble.


2. Execution of sale:The sale execution, the process of signature on the sale deed at the registrar office should be done by you and the seller or an authorized representative of the seller. Nobody else is authorized to sign this document from either yourself or the seller's behalf. Ensure that the power of attorney given by the seller to the authorized representative is valid on the day of sale registration.
   


Congrats, you have now completed the sale and own the property. In the next article in this series I will cover the post sale steps that you need to take to protect your property.

Buying property in India - The common man's guide - Part 1

Buying property in India is a very complex affair. (Where in the world is it easy anyway you ask!) The reason why I say that is because the fundamental premise the property industry in India operates would be to withhold information about the buying process so that the buyer has to be content with what he or she thinks is right or takes the best smooth talker from the property vendor as the right thing to do. I had recently got myself involved in buying some property in the boonies so I wanted to share the experience and at the same time try to elaborate the property buying process in India.

So let me start off with the process - The plots are typically part of a large acreage of property that is owned by one or more vendors. These plots are sold by an organization that is called as the VENDOR and the buyer of the plots is called as the PURCHASER which would be us. The VENDOR in many cases will not own the property themselves but they will be representing the owner of the property who would be the actual seller. The vendor to represent the seller will have a power of attorney from the seller.

The first step in the game is to check out whether the property is legally OK for purchase. I would advise that you should do this step even before you start discussing the price of the lot that you want to buy. The legal check is the non-negotiable part of the deal - If the lawyer says no, I suggest you walk away.

You will have to pay a small advance to get a copy of the original paperwork for the property. If you have a good VENDOR he will give you an entire file of documents that will look positively daunting. At this point in time you need a competent lawyer who can check the paperwork for the following key items (and a lot of other things)

1. The seller has complete current ownership of the property : If the property is under lein or there are multiple owners then necessary steps have to be taken by the seller to sell the property (get all the owners to sign, close the lein etc.., ) . This is typically found through what is called as an encumberance certificate (EC). Thus most lawyers will demand for an up to date original EC. This can be easily obtained from the local body which handles registration of property (Sub registrar office typically). In Chennai and suburbs, you can actually apply it on the web and have it delivered at home - how is that for convenience? The website is http://www.tnreginet.net


2. How did the seller obtain ownership of the property : If the seller bought the property himself then this is the easy part - they have every right to sell it off. Otherwise check if the property that is being sold is not inherited (gifted property)


3. Patta, Chitta and Adangal documents : This is the part where I am also a bit hazy. The patta is the official definition of the property that is being sold (dimensions etc..,) and also says which government survey number that the property is part of. If anybody has more details on this, please let me know.
   
4. Plot have been defined according to the rules :Check whether the defined plots on the lot has been done according to the town planning rules that is prevalent in that location - for example have the roads been gifted through a gift deed to the local town planning body say the panchayat so they are responsible for owning & maintaining the roads.
   
5. The VENDOR has sufficient authority to sell the property: Verify if the power of attorney (POA) granted to the VENDOR by the seller is current and rightfully states that the VENDOR has sufficient rights to represent the seller.


6. Originals verification : This is one step that you should insist your lawyer do even if he does not show keen interest for the same :). He should verify the paperwork that he has reviewed has an equivalent original document either with the seller or in case of registered documents with the registrar. This will ensure that the copy of documents documents that you have verified have not been "altered" during the copy process.
   

This is by no means an exhaustive checklist but these are critical things that needs to be looked at for sure. Your lawyer is your friend during this part of the transaction. Since he represents you, he has your best interests in mind. You should definitely find an independent lawyer if you don't have your own already. During this process you will be involved in a lot of back and forth discussion with the VENDOR or seller and what the lawyer wants. If you have a vendor/seller who is not ready to cooperate with the necessary paperwork, it should ring some danger signals to you.

If your lawyer is happy with the paperwork that he has seen, he will give you a report saying that this property is good to be bought. Sometimes they would give a report that says the property is OK to buy subject to certain conditions being satisfied. You should followup with the seller or the VENDOR to ensure that these preconditions are satisfied.

Congrats - if you have reached this point, the property is good enough to buy. You should start negotiating the price on the vendor and start on drawing up the sale deed and sale agreement if needed. In the next article, I will touch upon what are the steps that you need to take with you lawyer if you are planning to finance on your own vs. Your are financing through a financial institution. The rules are slightly different. On the whole, you have crossed the big legal hurdle if you have reached this point.

Offtopic: Amazon has a 30 day price drop policy!

I found out that Amazon has a 30 day price drop policy!. Being a big fan of amazon myself, I was plesantly surprised by Amazon's price drop policyAmazon's price drop policy. Thanks to this blog for showing me the way.

Infosys ADR conversion priced at $67

Well folks the ADR conversion has been priced at $67/share that is about Rs. 2881 per share (assuming $1 = 43 Rs.) . So all the lucky folks who get the offer are going to have a 30-50% returns. Here is the flip side - the offer as I said before is oversubscribed. Thus not all of your shares that you have offered for conversion will be converted to ADRs. You will have some if not all shares returned back to you.

Now what can happen going forward? I believe that the price has only one direction to go - down in the short to medium term. Here is my rationale behind it - the ADR at $67 is now going to have a large free float thereby increasing the available volume for trades on NASDAQ. This new float will bring a volatility in the price due to the market adjusting to the available float. The stock price which was about $60 has recently run upto $67 post ADR announcement. Thus there is a good reason for the price to swing back to its original levels. This will definitely have an effect on the Indian market. The price in the local market will be influenced by the ADR price since the ADR float is now larger. Thus the price locally would also come down.

So what can one do at this moment? Short Infosys in the futures market. That would be a good strategy if you were not lucky to be on the $67 gravy train.

Hedging using derivatives - Can we really do it?

In india, the derivatives market is relatively new and some of the quirks are yet to be ironed out. This is especially tough for the individual investor who is looking to operate in the market with a smaller capital base (say < 1 lakh). Let me attempt to explain the problem - The contract size is different for each stock: Unlike the US, the where one options contract represents 100 shares, the contract size in the Indian market is dependant on the underlying stock. I am not aware of the logic behind the sizes but here is a sample 1 Infosys contract = 100 shares, 1 Wipro contract = 300 shares. Also, the margin amounts that need to be provided for taking a short position in any of the options requires the investor to put in a certain percentage (around 20%) of the money as margin. This has the following disadvantage - I can hedge at a minimum of 100 Infosys or 300 Wipro shares - not less than that volume. The cost of such volumes of Infosys/Wipro at today's price represents about 2 lakhs. Further to buy one contract, the margin is 20% of 2 Lakhs which is another 40K. Thus the total cost of maintaining a position with fixed return (100 shares of Infosys and sell 1 call option) is about 2.4Lakhs.

As a side note, the whole concept of options and options strategy is a fascinating concept and one of my favourites. Do spend some time to understand the mechanics of it. If you like complex problems with elegant solutions, this is probably an area that will offer hours of fun. There is very good book on options - considered one of the best books written about various derivative instruments. The book is Options, Futures, and Other Derivatives - John C Hull

Starting Simple : Small savings reviewed

For the individual investor there are basically the following options for small savings or secure savings. They are

1. RBI Bonds (Currently 8% taxable returns)


2. Post office monthly income scheme (8% taxable monthly income + 10% maturity bonus)


3. Voluntary provident fund (currently 9.5% non-taxable)


4. Public provident fund (currently 8% tax free)

So if you think about it, the first two options are not really that good for a simple reason. They are taxable returns. For people in the highest tax bracket, that means 30% of the returns are gone poof. Thus the 8% really means 5.6% effective returns and the POMIS with the trick involving the POMIS and RD supposedly gives a return of 11%. This would still be 7.7% post tax return. Thus the real race is between the VPF and PPF. Currently the VPF's 9.5% tax free return is absolutely unbeatable. So there you go folks, the absolute winner is VPF. Go ahead and have a quick chat with your payroll department. Ask them to post a large chunk of your pay back into the VPF and you are rest assured that the money is earning 9.5% returns.

So what is the downside you ask? Provident funds are illiquid instruments - i.e. you really cannot get to your money if you want it in a hurry. VPF especially can be accessed only under some special circumstances such as building a home or children's education etc..., So there you go, park some of that surplus cash in a VPF before it reaches your purse.

The Infosys ADR conversion for local investors

Let us start this off with the Infosys ADR conversion option that has come into the market. It has been oversubscribed by 5 times. So what does it mean? the herd felt that there is quick buck to be made and have opted for it since the ADR has always traded at a premium to the local price. Interestingly there has been nearly 5 times the number of shares offered by the investors compared to what the company had originally planned. Thus, not everybody's offer will get accepted. So a lot of people will have their money locked up since the shares have been transferred from the individual account to an escrow account. It will be released only after the conversion reaches a certain milestone. Thus any appreciation of stock price during this time will not be available to the investor. Further, due to the fact that the Indian market tends to follow the US market, post the conversion, due to increased free float in the US market, there could be a dip in prices reflecting in drop in the local prices also. Thus a double whammy it seems. One has to wait and see the outcome of this interesting option.

Hello World

Hello - I have started this blog to talk about various personal financial options available in India. I am not going to be talking about the obvious things that everybody seems to write large articles about neither am I going to profess knowledge about what I am talking about here. These are ramblings pure and simple. Take it if you want, that too with a pinch of salt. I just want to cover the various aspects of complex new world of finance that is emerging in India.