Currency and Real Estate

Indian rupee appreciated in 2007 after almost 15 years of unidirectional decline.  From Rs 18/dollar in 1991, Rupee went beyond Rs 50/dollar. During this period, annual depreciation of Rupee by 4-5% was taken as given. In 2007, that changed forever. At this point in time, the probability of appreciation is more than depreciation in the value of the Rupee.  In general, the value of a Currency is a complex variable which reflects confidence of investors and overseas citizens/persons of Indian origin as well as the balance of trade in goods and services.

What will be the potential impact of currency movement on asset prices? that's an interesting question.  In a way, currency appreciation increase the prices of Indian assets in dollar terms and hence overseas investors make profits if rupee appreciates.  Investment flows in anticipation of rupee appreciation creates more demand for domestic assets and hence pushes up asset prices (be it equities or real estate).  The counter effect comes from decline in viability of export driven business or loss of competitiveness of domestic producers.  For example, rupee appreciation lowered margins of IT and IT Enabled Services which reduced their expansion drive in Gurgaon and hence resulted in steep decline in real estate prices. Other assets like gold and commodities are trade-able globally and their prices are determined on global demand and supply with little co-relation with domestic demand and supply.

There are other trends which suggest Indian real estate is a good asset class - high population density, migration of workforce from smaller towns to Metros, increased urbanisation of the society and higher income/savings rate. Real estate also provides a rental yield of 4-6%, compared to dividend yield of less than 1% for equities. Tax benefits on interest payments and easy availability of housing loans make investments attractive.

That said, property prices have appreciated significantly in last 6-7 years, for example, by 7 times in Noida and 4-5 times in Delhi, which is significantly higher than long term price appreciation trends. Is Indian realty good investment at current prices? There is no easy answer.  However, with strong focus on infrastructure growth across large Indian cities, betting on Indian real estate is not without merit.  Opportunities vary across locations and as always, buyers must conduct due diligence before committing capital.

Illustrations and ULIPs - 10% returns in a debt fund !!

I was surprised to find insurance companies using illustrations with 10% expected return using the fund management charges(FMC) for a debt fund.  We know that 10 year GSec bond yield ranges between 7.5% to 7.7% these days.  Good quality corporate paper offers a few percentage points more. Therefore, I find it hard to accept that debt funds can return 10% over a long tenure of investments which ULIPs expect.  Of course, insurance companies are trying to impress investors by using a lower cost fund as IRDA guidelines are silent about which fund to use. In almost all ULIP offerings, FMC for an equity fund range between 1% to 1.35% (thanks to the new cap by IRDA) while debt funds FMC ranges between 0.75% to 1.25%.

While comparing insurance policies on www.policybazaar.com, I found a few policies yielding 8.74% (on expected return on 10%) which is next to impossible if FMC charges for equity fund is close to 1.25-1.35%.

Please watch out for this when you look at the illustration. Here is my recommendation - use debt funds FMC when comparing based on 6% yield and insist on using the equity fund FMC for 10% yield benchmark.

I continue my search for lowest cost ULIP.  So far, Bajaj Allianz Igain II is best.