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.

Preparing for Attrition and Planning for Growth

As job market shows sign of clear revival, it is time to prepare for the hiring binge. Naukri.com JobSpeak Index for Nov 2009 is up 8%+ month-on-month. More importantly, it is up 15% for HR professionals, which is a leading indicator of hiring activity throughout the economy.

Recruitment is highly cyclical. In a downturn, first reaction is to stop all future projects and hiring. Hiring is also a long lead time activity. The whole process involves several steps – approval of the requisition (internal company processes), creating a Job Description, sharing it with consultant/internal hiring team, collecting resumes, short-listing candidates, interviewing, final decision, making the offer and waiting for the candidate to join. The whole process can take a minimum of 2 months to anywhere between 6 to 12 months. Therefore, if you are planning to hire for 2nd or 3rd Quarter 2010, you need to start now.

If you head the HR department of a company, this is what you may want to consider –

1. Restore all benefits which were withdrawn over the last 18 months.

2. If promotions were denied or salary increases postponed, consider them at the earliest.

3. Create a list of critical executives and make sure there is enough protection in terms of compensation (vis-à-vis market) and stock options (value of unvested stock).

4. Seek an estimate of attrition over the next six months, from the heads of businesses.

5. Seek hiring requirements from heads of business

6. Identify hiring targets by skills and role. Break the target by campus recruitment and lateral hiring

7. Seek high level business approval for hiring budget. If hiring team does not have sufficient resources, hire the recruiters first.

8. Ask the question – is the business willing to wait for a few months for new hire to join, if a critical resource leaves. If no, is it ok to hire for expected attrition?

9. Performance reviews happen in most companies in either the First or the second quarter of the calendar year. Attrition increases in and around this time. A large number of MBA aspirants (or for another post graduation course) leave in the second quarter. Take these factors into account.

Wish you a happy head-hunting in 2010!!

Standards are Essential for Lowering the Cost of Software

For decades, companies have resisted the need to adopt standards. Microsoft Office 2007 is the first version of MS Office which fully documents its file format. Prior to this version, software applications relied on their interpretation of MS Office format to build an import filter. For example, you could not import Word documents in OpenOffice without losing a part of the content or spending plenty of time in reformatting the document. Similarly, Adobe Photoshop does not retain layers when exporting to other formats except PSD, for a graphic designer that is a critical loss of information. If the content is locked in a proprietary file format, it is unlikely that a customer will move to a competing application. High cost of migration means customer continues to pay for maintenance and operating system linked upgrades.


DITA is another standard which has become widely accepted (thanks to OASIS and strong support from IBM). Translation and consistency requirements make it essential for the content to be structured and componentized. Moving the content to smaller topic based chunks stored in XML format makes it easier for companies to author, manage and publish content in a distributed and collaborative team.

Similar is the case with content management systems. While WebDAV is a well supported standard, it is very low level standard and a large amount of logic needs to be wrapped around this standard for achieving a good functional integration. However, a new standard is in the works and we may see more competitive intensity increase once the standard gets acceptance.

Standards reduce the cost of switching software from one vendor to another. This opens up opportunities for smaller and new companies to compete on features and functions. If you are buying software, insist on standards compliance even if the vendor is a large company. Your successors will thank you for making that decision!!

Free News Content- For how long?

Internet has benefited enormously because of free content. Since competition is really fierce between content providers and consumers can switch with one click, pricing of online content for newspapers and magazines is easier said than done. However, there are recent reports about Microsoft’s Bing negotiating for exclusive news content deals.

In this post, I try to draw a parallel between pay channels and free channels on DTH platform. Several channels in recent past have become pay channels. Almost, all channels after they became pay channels, offered their services for free for limited durations. Also, even after they become pay channels they have introduced “teaser promotions” for limited durations to gather more subscribers. Switching from free content to paid content is about trade-off between advertisement revenue and subscription revenue. If executed right, both can increase.

CNBC TV18 is one of my favorite channels and until six months ago, I had the package from my DTH provider which included it by default. I did not care if it was pay channel or a free one. However, with price competition in DTH service providers, I moved to a no frills package and it became apparent that I cannot buy this channel standalone, I need to buy a whole bundle which was fairly expensive. When the price became apparent, I considered the plus and minus of not taking the channel. From an analysis point of view, the channel’s coverage is the best. Competitors like NDTV Profit were also pay channels. UTVi was free (for limited duration), however, news coverage lacked depth and anchors had little knowledge or expertise. At the same time, UTVi served the limited purpose of information on share prices and charts, and I shifted to online transmission of CNBC TV18, its website moneycontrol.com and newsprint to make up for analysis and insight. For the moment, if I assume that moneycontrol.com or its online transmission was paid for, will I pay for my DTH package? Most probably yes, I like the content CNBC TV18 delivers and will probably pay for it, if I cannot get it for free on another alternate channel.

The point I want to make is about competition among delivery channels and how consumers trade off online with print and TV. It will help CNBC if it kept the access to http://www.moneycontrol.com and online transmission of CNBC TV18 free for some-time to have larger number of viewers during early growth stage of product adoption. Even though, it may lose some of its paid subscribers on DTH platform. It may want to switch to pay per use or subscription model for online content during the maturity stage.

In the Indian context, we are probably entering the second stage of growth in online content with 3G round the corner. My hypothesis is that online business channels will the first ones to benefit – if you can watch CNBC TV18 on your mobile phone while going from one meeting to another, in your car, or in a lift, you will probably do so.
Disclaimer – I am an investor in shares of TV18 network which owns and runs CNBC TV18.

ULIP vs Mutual Fund

A lot has been written on why ULIPs are expensive and how Mutual Funds combined with term plan provide a low cost insurance cum investment option. However, this choice ignores the important element of taxation here.
1. ULIP offer a fund of funds option. That means, you can switch between debt fund to equity fund and vice versa, without an incidence of taxation. In mutual funds, that is a major hindrance. The moment you switch, you need to pay short or long term capital gains (on debt schemes currently). Fund of funds options from mutual funds don't give a choice to an investor, the choices are automatically determined based on valuation (Dynamic PE fund) or fixed allocation is used.
2. Returns from ULIP are tax free as long as sum assured is 5X the annual premium.

With new direct tax code (if it becomes law in its current form), mutual funds will become unattractive from tax savings perspective, both short and long term capital gains will attract marginal tax rate. Also, ULIPs will require 20X annual premium as the sum assured. On that other hands, fund management charges for ULIPs must decline below 1.35% (after IRDA norms) effective 1st Jan, which is significantly cheaper than mutual funds.

I am therefore seeking a low cost ULIP plan which also has low mortality charges (20X cover).

45 Lessons

I am not the one who forwards chain e-mails. However, I retain an interest in philosophy. I got this e-mail from an old friend who recently reconnected with me after a few long years and somehow it struck a chord with me. I am therefore sharing it with everyone.
Written By Regina Brett, 90 years old, of The Plain Dealer, Cleveland , Ohio "To celebrate growing older, I once wrote the 45 lessons life taught me. It is the most-requested column I've ever written. My odometer rolled over to 90 in August, so here is the column once more:
1. Life isn't fair, but it's still good.
2. When in doubt, just take the next small step.
3. Life is too short to waste time hating anyone...
4. Your job won't take care of you when you are sick. Your friends and parents will. Stay in touch.
5. Pay off your credit cards every month.
6.. You don't have to win every argument. Agree to disagree.
7. Cry with someone. It's more healing than crying alone.
8. It's OK to get angry with God. He can take it.
9. Save for retirement starting with your first paycheck.
10. When it comes to chocolate, resistance is futile. (something I disagree with)
11. Make peace with your past so it won't screw up the present.
12. It's OK to let your children see you cry.
13. Don't compare your life to others. You have no idea what their journey is all about.
14. If a relationship has to be a secret, you shouldn't be in it.
15. Everything can change in the blink of an eye. But don't worry; God never blinks.
16. Take a deep breath. It calms the mind.
17. Get rid of anything that isn't useful, beautiful or joyful.
18. Whatever doesn't kill you really does make you stronger. (something I disagree with)
19. It's never too late to have a happy childhood. But the second one is up to you and no one else.
20. When it comes to going after what you love in life, don't take no for an answer.
21. Burn the candles, use the nice sheets, wear the fancy lingerie. Don't save it for a special occasion. Today is special.
22. Over prepare, then go with the flow.
23. Be eccentric now. Don't wait for old age to wear purple...
24. The most important sex organ is the brain.
25. No one is in charge of your happiness but you.
26. Frame every so-called disaster with these words. 'In five years, will this matter?'
27. Always choose life.
28. Forgive everyone everything.
29. What other people think of you is none of your business.
30. Time heals almost everything. Give time time.
31. However good or bad a situation is, it will change.
32. Don't take yourself so seriously. No one else does.
33. Believe in miracles.
34. God loves you because of who God is, not because of anything you did or didn't do.
35. Don't audit life. Show up and make the most of it now.
36. Growing old beats the alternative -- dying young.
37. Your children get only one childhood.
38. All that truly matters in the end is that you loved.
39. Get outside every day. Miracles are waiting everywhere.
40. If we all threw our problems in a pile and saw everyone else's, we'd grab ours back.
41. Envy is a waste of time. You already have all you need.
42. The best is yet to come.
43. No matter how you feel, get up, dress up and show up.
44. Yield.
45. Life isn't tied with a bow, but it's still a gift."