Savings and Investment- Part 1

Before starting with this post, let me warn you that I am not an expert in investments and I do not claim responsibility for any actions taken based on this post. This applies for all my blog posts!

This will be a two part post. In the first post, I will give some fundamental ‘gyan’ on savings and the characteristics of basic asset classes. In the second post, I will try to give an idea on how exactly to proceed with things on the ground.

Savings Account
All of us earn. And all of us spend. Most of us manage to save something at the end of the day, which we put into banks. But, is putting money into banks really saving? Technically speaking, it is not. All of us have savings accounts, which generally give an annual interest rate of 3-4%. The actual inflation rate in India today is around 10% (Don’t go by the govt’s WPI figure of 8%. CPI is the worldwide standard, which is not measured in India and is typically 1-2% above WPI). This means that the value of the money you hold in your pocket is decreasing by 10% every year. i.e., if Rs.100 can buy you 10 chocolates today, the same Rs.100 can buy you only 9 chocolates after 1 year. So you know that high inflation is a real killer of money value. Most of us get a salary raise every year. Let’s assume that on an average we get an annual raise of 15%. Let’s also assume that the long term (over a 20 year period) inflation rate (CPI) for India will be 7%. This means that, in effect your salary increases by approximately 8% year on year. That is a pretty decent number. But consider your savings. Let’s assume that you save 20% of your salary every year and leave it in your saving account. This amount will grow nominally by 3% every year. In real terms, you have actually lost approximately 4% of your savings. If your annual salary is Rs.5 lac, a devil called Inflation just ate Rs.4000 of your hard earned money. You would have been better off spending those Rs. 4000 on buying yourself some new clothes rather than see it vanish into thin air like this! So you now know that Savings Account is a bad guy and you should limit your association with him. But Savings Account is a necessary evil for all of us because he is the most liquid asset apart from cash in hand.

Fixed Deposit
Today banks give 8% on FD. Considering that inflation is 10%, this is a slightly better choice than a savings account. But the downside is, FD lacks in liquidity. Since your money is locked-in for a fixed period, you may not have access to your money when you need it.

Gold
Gold is the traditional inflation fighting tool. Over the years, the price of gold has managed to keep pace with inflation. If you want to protect your savings against inflation, then gold is one of the safest bets. But due to the emergence of bullion/commodity markets, gold prices are bound to fluctuate; but over the long term, gold inevitably keeps pace with inflation.

Equities
Now, lets come to the interesting part. The asset classes that we’ve discussed till now are conservative with little or no risk of loss in face value. But with no risk, comes no reward. Equities or stocks, are an exciting asset class which actually help your savings to grow. Investing in stocks is like giving your money to a businessman who will use it to build and grow his business. When he makes a profit, he gives you a share of it. As we know, at all times, there are businesses that make profits in the economy. Hence there is always money to be made by investing in stocks. But again, like gold, stocks are affected by traders and speculators. Hence their prices do not always reflect their true value and they are vulnerable to short term volatility driven by “market sentiment”. This implies that there is risk involved even when you invest in a good business/stock. Knowledgeable investors will always make money in the equity market if they stay invested for the long term. Trouble is-most of us are not knowledgeable investors. So it makes sense to take professional advice. Go to Mutual Funds and stick with a fund for the long term. You will be rewarded.

Real Estate
How can one ignore this asset class. Everyone dreams of owning a house. There are some of us, who are lucky enough to afford a second or third home. For people with such kind of surplus money, real estate is a good option to have. During times of economic boom, returns from real estate can be mouth watering. But there are many risks associated with real estate. Lack of liquidity is the biggest risk associated with owning property. But if you are smart with your decisions and not too aggressive, buying property with your surplus money is a good thing to do. But again, remember that you are not an expert real estate dealer; So be conservative with your choice and stay invested for the long term.


This brings us to the end of this part. In the next part, I will dwell a bit on some of the more sophisticated saving/investment instruments and also hopefully give some broad guidelines on managing your savings.

Need your suggestion!

Long time no posts.. I've been very lazy. Sometimes I have the time and inclination to write something, but not much clue as to what I should be writing on. So, I am asking for help from YOU, the reader of my blog. Suggest any topic, and I will try my best to write a post on it. Please help me out- Any topic under the sun!

Abstract

• Sometimes trying is succeeding.
• The greatest leap is the leap of faith.
• When your heart wants something badly, you can’t listen to the mind.
• I live to enjoy the journey; because the destination will last but only a moment, whereas the journey lasts a lifetime.
• God, give me the courage to do what I must; and the intellect to not do what I shouldn’t.
• Pink Floyd: Don’t give in without a fight.

My favourite sports personalities

In this post I will talk about the people in sports that I have most admired in my life. I will divide the list of people I like based on the sport they belong to. As an Indian, it is obvious that I should start with Cricket.

Cricket:

Sachin Tendulkar- I started watching cricket from the 1992 world cup. That was the first world cup for the young star Sachin. Those days, Sachin was called “The little big man from Bombay”. He was the favourite among the commentators. Though India didn’t do well in that world cup, Sachin’s performance was well noted by the world. He was marked as a star for the future. And what a star he has been since then..

Mohammed Azharuddin- Despite the match fixing allegations and other scams, I have always enjoyed watching Azhar play. Not just his batting, but also his fielding. He was India’s best fielder for a very long time. I would really love watching him run between the wickets- he was such a wonderful judge of runs. He would almost never get run out.

Steve Waugh- I like Steve Waugh for his never say die attitude. He is one man you can trust to bat for your life. I cannot remember having seen a better fighter in world cricket.

Sourav Ganguly- To me, The prince of Calcutta was the best ever captain of India. The 3-4 odd years that Dada and John Wright were together, was the time I loved watching Indian cricket most. It was a time when the Indian team was characterized by determination, courage and a bit of arrogance. The Natwest Trophy final will remain etched in my memory. Apart from his captaincy, Dada is a fine batsman too and is a delight to watch when in full flow. If there is something more remarkable than his batting and his captaincy, it must be his grit & determination which he showed in ample quantities by making a successful comeback to the national side against all odds.

Tennis:

Michael Chang- He was never a very successful player. I think he won a couple of grand slams, but that was about it. I doubt if Chang ever made it to the No.1 spot in the ATP rankings. What I loved about this guy is that he never gave up. He would chase down every ball. You would hardly see any winners hit by his opponents. Chang would invariably reach every ball in this side of the court.

Formula One:

Frank Willaims- Though he is not a driver, I have been really impressed by this guy’s passion for racing. This has not been the easiest of times to lead an independent team in F1. The past decade has seen more than half a dozen independent teams exiting from the sport as manufacturers started to show their money power. At the end of 2006, most F1 pundits wrote Williams off, stating that it was only a matter of time before the team was sold off to another manufacturer. But old Franky stuck it out though the bad times. Today he has been finally rewarded. His team is fighting in fourth place in the world championship and also has one of the most promising stars of the future- Nico Rosberg- in its ranks.

Fernando Alonso- His reputation may have taken a beating after his unceremonious departure from McLaren last year, but Fernando Alonso remains my favourite driver on the circuit. 2005 & 2006 were the best years F1 has had in a long time. The battle of Alonso Vs Schumacher was just too good- especially in 2006. Even the mathematically closer 2007 championship did not match the intensity of the 2006 battle. If one were to ask Michael Schumacher to tell off the record, who is the best F1 driver at present, I am sure he would say its Alonso.

Basketball:

Michael Jordan- I watched basketball for 2-3 odd years around the years 1996-99. It was Bulls Vs Jazz in the NBA playoffs finals. It was my introduction to basketball, and I loved this guy, Michael Jordan. He was in complete control of whatever he did. He was cut above the rest. And the commentators were saying that this guy was actually making a comeback after a few years of sabbatical from the game. It was amazing. Come crunch time in a game, and Jordan was the man to give the ball to. His fadeaways and slam dunks are legendary. Unfortunately for me, my love for the game faded away as soon as Jordan left the Bulls and the game itself for a few years.

How about a world without cellphones?

Hypothetical situation:

Scientists in one the most advanced European research centres have finally gathered enough evidence to prove conclusively that communication waves generated by mobile communication devices including cell phones are harmful to the human body. A ten year old research has yielded a result that states that exposure to such signal waves increases the chances of cancer by 50% and brain tumour by up to 20%. In other words, if the world stops using mobile communication devices, the occurrence of cancer might come down by as much as 50%.

Back to Reality:

Almost since the beginning of mobile phones usage by the general public, debate has raged about their impact on the health of the users. Mobile phone manufacturers claim that there is no conclusive evidence that cell phone usage causes any physical harm. Today, it is generally accepted that cell phone usage should be restricted; long calls should be avoided; and usage of handsfree is being encouraged. People know that cell phones can be harmful and hence the above measures to reduce one’s exposure to the waves. But no one knows for sure as to exactly how harmful these waves really are.

Now let’s imagine that the hypothetical situation stated in the beginning of this article actually happens. For some people this might be reason enough to ban all cell phones in this world. But it is highly unlikely that such a discovery will ever be known to the world at large. There is simply too much at stake for the corporates that are in the business of mobile communication – manufacturers, service providers, software providers, et all. And it is not just the greedy corporates so to say, who would ignore such a finding. What about people like you and me and what about the way businesses function the world over today? Will today’s CEOs be ready to part with his Black Berry? Or would the Dalal Street trader retain his sanity if his mobile phone service provider were to shut shop?

Aren’t we all so very dependent on mobile technology today? Imagine two worlds- one is the present world with cell phones and another one without cell phones, but you will have 50% less chance of getting cancer. Which one will you choose? Well, I know it s a tough choice!

I like

Formula one, cricket, ar rahman, pink floyd, smirnoff, pink floyd+Smirnoff, kids- especially little girls, strategy computer games, relaxing at home, sipping beer in goa, mani ratnam, chilka, people who appreciate my sense of humour!, mom’s innocence, my unicorn, businessline, Frederick forsyth, Fernando Alonso, colour of the dawn sky, bawarchi briyani, wangs kitchen, besant nagar beach, mani’s, playing TT in GR Jani, IPO listing gains, rajnikanth, choosing a book from the library, ilayaraja

Mallya's leap of faith

Vijay Mallya is undoubtedly the most flamboyant businessman in India. In the Indian press, he is often compared with Richard Branson of Virgin. He leads a colourful life and is a successful businessman. His spirits group- United Breweries- is an industry leader. He also owns ‘Kingfisher Beer’, which is a reasonably known international brand. More recently Mr. Mallya has entered the airline industry. Doing well in this segment will be much more of a challenge as the competitive landscape is extremely tough right now, and the stakes are much higher.

When Mallya’s Kingfisher airlines entered Formula One earlier this year as a sponsor to Toyota F1 team, it seemed to be a good, measured move which would enhance the brand visibility of his airline just as it was about to start services in international routes. But Mallya’s latest move to buy the Spyker F1 team is a much bigger move and an extremely ambitious one. It is to be noted that Mallya will use his own money - rather than involve any of the shareholders of his publicly listed company- for buying and running Spyker. The kind of money involved here is huge. Buying the team will cost around 80 – 90 million euros (450 crore Indian Rupees). In addition to this, the operations of the team will have to be financed. Considering that Spyker is presently a loss making entity (it made a loss of around 30 million euros in the first half of this year), this will be a very costly affair. Moreover, Mallya will be hoping for a turnaround in the team’s fortunes in another 1-2 years. This will be the most difficult part. Teams like Toyota and Honda have proved that money cannot guarantee success in this sport. And anyway, Mallya can never hope to match the budgets of the manufacturer-backed teams.

My guess is that, having entered the deal, Mallya will stick on with Spyker for 2-3 years and control the financial bleeding of the team. He is smart enough not to believe in miracles. He will try and minimize the bleeding of the team financially. He will utilize the 2-3 years to build a well-known brand out of his airline. He will try and bring in an Indian driver and use him to endorse his company. He will also try and make sure that an Indian Grand Prix happens- latest by 2009. At the end of these 2-3 years, Kingfisher Airlines will be known world over and Mallya would’ve achieved his objective. At the end of this period, Mallya will start looking for a good price at which to exit his ‘investment’. Inevitably there will be another corporate entity somewhere which would want to utilize Spyker’s (or whatever it will be called then) services for achieving its own corporate objectives, and the story will continue thus…

Things could go wrong though, if Spyker’s financial bleeding cannot be stopped without severely hampering its competitiveness. Mallya is rich, but he is not stupid. He is not a Roman Abramovich, who is spending his personal fortune on a soccer team to simply amuse himself. Mallya’s move is strictly business oriented. This is a calculated gamble that he is making. He is hoping that the money that he will bleed in Spyker will be compensated by making Kingfisher the airline of choice for flying in and out of India. But this is a risky move since Mallya is totally inexperienced in running an F1 team. I doubt if he has ever owned any motorsport team.

Mallya is going for all or nothing here. He is entering untested waters and the only reward that will justify his risk is if his airline becomes the number one Indian carrier in international routes. Here’s wishing Mr. Mallya best of luck in his leap of faith!

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