Capital Mind

No Dividend Distribution Tax for Debt Funds?

2010-09-02T18:57:00.001+05:30

The Direct Tax Code has no DDT for debt or non-equity funds. Currently, for liquid funds, dividends are taxed at 25% plus the surcharge and cess, which adds up to nearly 28.5%. (Which I argue is still better than a fixed deposit)

So what’s the catch? Dividends will be taxed for non-equity funds, as if they are your income. Plus, there’s a dividend “withholding tax” – a sort of Tax Deducted at Source – 10% for residents (for >10K dividend), 20% for NRIs and companies.

That makes dividend income equivalent to a fixed deposit, where you get paid a certain amount of interest every year and the bank holds back 10% as TDS. It also makes life more cumbersome – you now need TDS confirmations for each non-equity mutual fund (dividend option) that you hold. (Luckily, now the system is automated, so your TDS credit is visible online. Register here.)

Impact: Growth Plans will make more sense to the investor. Even if you want regular income, just sell regularly, and that gets qualified as either a short term gain or a long term gain depending on how long you’ve held. Short term gains on non equity funds get taxed at your marginal rate too, but have no withholding tax, which is better for cash flow. Long term gains give you indexation benefits for inflation, which is great for debt funds. For a return of 8%, if 6% is inflation, you will pay tax on 2% – again, much better than FDs where you pay tax regardless of inflation.

Example: Take a fund or FD that makes 1% a month, and you put 50 lakhs in it. Assume you’re in the 30% tax bracket.

Investment	Interest	Withheld	What you get	Tax Pd later	Net Return
Fixed Deposit	50,000	5,000	45,000	10,000	35,000
Fund (Dividend)	50,000	5,000	45,000	10,000	35,000
Fund (Growth)	50,000	0	50,000	150	49,850

This is for the first month, since your gain is very little. If you buy 500,000 units at Rs. 10 each, the NAV would have gone up to Rs. 10.1, you will sell 4950 units to get your Rs. 50,000 – that has 49,500 of principal and Rs. 500 of capital gain. Tax at marginal rate = Rs. 150.

As the gains increase, the tax amount goes up, steadily (since now more of the return is gain). But after about 24 months – the longest you need to hold for going into the “long term” bracket – you get the first 6% free of tax due to indexation, and are only taxed on what’s above that (again, at your marginal rate). In the 25th month, the same 50,000 will consist of 10,600 gain and remaining as principal – yet, the long term gain concept keeps that tax at only 2,500. That is far cheaper than the mutual fund (dividend) or FD, where the total tax is Rs. 15,000 every month.

That means: Monthly Income Funds need to be relooked. So does every non-equity fund where dividend was used as an option. With the 10-20% equity kicker in them, they make sense for a reasonable income plan, but the monthly income as dividends will be taxed at a high rate. You might want to use the growth plans instead.

Downside: You need to have the discipline to sell every month, and you’ll need some work in the year to calculate your tax liability. The difference, though, is substantial, even at the 10% marginal tax bracket.

At Yahoo: Too Few Investors

2010-09-01T14:40:00.001+05:30

I speak about the lack of active investors over at Yahoo: Too Few Investors.

A question [1] was asked in the Rajya Sabha of the Namo Narain Meena, MoS in the Finance Ministry about how turnover was distributed in the National Stock Exchange (NSE) among different classes of investors. The answer was enlightening - 30.9 lakh different entities traded in the cash segment of the NSE in the first quarter (April to June) of this financial year.

But this is top heavy; of the entire turnover in this period, just 451 entities were responsible 50% of the total. Of these, around 156 were "proprietary" traders, meaning members trading on their own behalf, rather than for clients. In the Futures and Options segment, about 557,000 entities traded in this period, with just 106 accounting for 50% of the turnover - again, 58 of this was prop-trading.

The minister's response to yet another question [2] revealed that more than 60% of both cash and derivative markets are "intraday" trades - that is, both the buy and sell are executed on the same day.

This triggered angry reactions from parts of the media, some saying that the market is really a casino for concentrating volume in the hands of a few. And that the rampant speculation, evident by high intraday trading, is benefiting only a few people.

In my view this is outrage at the wrong issue. That our markets are top-heavy isn't a surprise. Of the 1,400 stocks traded on the NSE, just the top 50 account for more than half of the total market capitalization - the Nifty 50 market cap is Rs. 34 trillion (lakh crore) of the total NSE market capitalization of 64 trillion. Just the top 15 stocks account for 1/3rd of the NSE market capitalization. (All data from the NSE web site) In terms of traded volumes too, most of the trades happen in the largest stocks, both from the data on NSE and from the Ministerâ€™s replies. Our markets are top-heavy and will be for the foreseeable future.

(Read the whole article)

Comments as usual are deeply appreciated.

More Yahoo Columns:

Survivorship Bias (Comments)
The Problem with Multi-Level Marketing (Comments)
Planning for the Grim Reaper (Comments)
Of Options and Choices (Comments)
Credit Default Swaps (Comments)
Four Investing Myths Busted (Comments)
(The Whole Lot)

Will India’s Share of World GDP Mean Revert?

2010-09-01T11:33:00.001+05:30

An interesting presentation on the Asian Financial Sector by Pedro Rodeia, Head of Asian Financial Institutions Group at McKinsey. (Thanks Arvin for the tip!)

Awesome presentation, and for an insider who can invest in Indian banks, very useful.

Oil Bill up 51%, Trade Deficit at $43B

2010-08-31T14:56:00.001+05:30

India’s Oil Bill is 51% higher than last year for the April to June quarter. Sure, the average oil price has moved up from $60 average last year to about $70 average today. There is also the fact that since oil payments may have been hedged at lower levels (remember oil was in the $30s in December 08).

The oil bill for this quarter is about $25 billion; at $70 per barrel that’s 4 million barrels per day! Even if we presume $75 per barrel, we are at 3.7m barrels per day. Imported, remember – we produce around 700K barrels per day. Now 4 million barrels per day is a lot of barrels – we consume about 3 million barrels of crude per day, and of that we import about 2.3m. If you take last year Q1’s imports that comes to about 3 million barrels per day – meaning the extra must be what we refine and export?

With that assumption do we now import more than a million barrels a day to refine and export? That’s very interesting, because the stuff we buy and refine is largely the heavy forms of crude which is cheaper and has slightly higher margins.

The trade deficit for June was $32 billion and July has gone to $43 billion – at this rate we’ll have about $100 billion as the trade deficit (which is as much as our oil import bill, really). It should be interesting to chart this.

India Direct Tax Code Bill Tabled in Lok Sabha

2010-08-31T01:40:00.001+05:30

The Government introduced the Direct Tax Code Bill today. After some serious amount of searching, I found the bill online, after struggling with pages timing out, debugging communication messages and guessing IP addresses. (Read: It was darn easy in the end, but I had spent so much time I needed to make it look like it was a bloody difficult job).

What matters is not that I found it. What matters is what is in it.

First, this bill of the DTC applies from 1 April 2012, so heave a sigh of relief.

For salaried income: Deductions are Employment Tax, Travel allowance (currently Rs. 800 a month), actual reimbursements, employer’s contribution to pension [upto 10% of salary], retirement or provident fund [upto 12%].

Housing rent allowance is fully exempt, without the complex formula – now it is limited to the rent actually paid. Nice.

Property income: Only rent actually received is taxable. You get to deduct local taxed and 20% of the gross rent, plus all interest paid on a loan for that property. If you take on a loan before the property is ready, you get to amortize the interest paid before possession over the subsequent five years, equally.

Securities Transaction Tax stays. We will now pause for a minute to pray for the arbitrageurs that died after that sentence.

Capital Gains: First calculate the gain as selling price minus cost price minus all intermediate costs. For shares and equity mutual funds on which STT is paid and held over a year, ZERO. Rejoice.

Shares and MFs with less than one year of holding – 50% of the gain (or loss) is “ditched” and the rest added to income.

For debt MFs or shares transferred off-market or Gold ETFs or things like that: To qualify for LTCG (Long Term Capital Gains) you have to hold the asset for “one year from the end of the financial year in which the asset is acquired”. If you buy on April 1, 2012, you have to hold it till after March 31, 2013 – that’s two years at the extreme. Then, you get to index the costs to inflation. If you’ve bought the asset before 2000, then you must assume indexation from 2000, but you get the option – and I mean it’s your choice to do this if it works in your favour – of using the price on April 1, 2000. This is incredible, for me, because my family owns shares held for over 20 years.

Any other short term capital gains are simply added to income.

There will be a Capital Gains Deposit Scheme where you can dump the proceeds (not just the gains, the entire proceeds) of capital asset sales (long or short term) and not pay tax. You can buy a house or agricultural land to offset cap gains taxes, within a year after the sale or use the Cap Gains Deposit Scheme, to park money upto three years to invest in such a tax-offsetting asset. You get to do this for max two residential properties for a person.

Deductions: Everyone gets a Rs. 100,000 deduction for money put into “approved funds”. What we don’t know – are ELSS mutual funds “approved”? Are "ULIPs” approved? Most likely no to both. They do mention that approved funds are –

PF, retirement or gratuity funds
Pension funds
Any thing else specifically approved

An additional Rs. 50,000 is deductible under 3 heads – 50K is the limit for all of them added up.

Pure life Insurance – defined as any policy where the premium is less than 5% of the sum assured for ALL years of the policy,
Health insurance
Two children’s tuition fees (including pre-school fees). But no donations or “development fees”.

Housing: This gets interesting. First, no principal deduction. Second, interest is only deductible if the house is completed within three years of the loan commencement. (And the pre-completion interest is amortized forward over five equal yearly installments. You don’t get the deduction during the pre-completion phase) The interest deduction limit is Rs. 150,000.

Higher Education loan interest is deductible for seven years, but it’s gotta be from a bank or FI (not relatives) and for a course the govt. recognizes. (Sorry, IIPM. Perhaps even ISB will not qualify!)

Medical expenses get a 40K deduction if you actually spend the money on medical treatment. 60K for treatment of senior citizens. Oh, and if you get insurance, that much is not counted.

Tax slabs: Upto 200,000 a year, no tax.
Rs. 200,000 to 500,000: 10%
Rs. 500,000 to 10 lakhs: 20%
> 10 lakhs: 30%.

It’s progressive, and slabbed. For senior citizens (65+), the first slab is 250,000. For companies, the rate is 30%, and Minimum Alternate Tax is 20% (but you can claim it back within 15 years)

Dividends and Insurance income distribution from “Equity Oriented Insurance Schemes” (ULIPs) get taxed – at 5%. The 15% dividend distribution tax stays. That means to go through equity mutual funds you actually pay a lot – first companies pay 15% tax on dividends, then the mutual funds get a tax hit of another 5%.

Wealth tax: 1% of whatever’s above 1 crore rupees, every year. But not including the house you live in. This is just horrible, but amounts to just 1% more income tax, if you look at it. But if someone has money in illiquid assets like multiple houses, or equity, they’ll find the going tough. Think of the promoters of Indian companies!

With about 35 lakh crores under private sector ownership, that alone will give the government more than 30,000 cr. of wealth tax revenue.

But the section actually doesn’t count assets like shares and bonds! This needs lawyer input but it seems like for wealth, they consider land, farm houses, cars/yacht/aircraft, jewellery and bullion, antiques and paintings, expensive watches, cash, and shares held in foreign companies. Nothing about Indian company shares, or bonds, or mutual funds.

EEE or EET: NPS goes Exempt on withdrawal – commutation of pension (lumpsums) upto 1/3rd or 50% of the amount in different cases.

Life insurance paid on death is exempt. This is still a great way to transfer assets without a will.

All exemptions for donations to non-profits, political parties etc. stay.

Nothing much changes, really, other than a few exemptions gone, and wider tax slabs. Retaining LTCG at zero for equity markets is good, of course, but it won’t last that long. Wealth tax can be a huge issue or a non-issue, if there is clarity on whether it applies on share/bond holding.

To me this is no big deal – just business as usual. But the equity markets have reason to rejoice.

SEBI allows Mobile Trading, Smart Order Routing and More…

2010-08-30T13:25:00.001+05:30

In a sudden flurry of announcements, SEBI changes the technology game.

Mobile trading will be allowed. Meaning, you will soon be able to trade directly from your mobile phone. I believe this is useful for people that travel a lot in the day. Mobile trading may be possible using “mini” sites like Sharekhan has recently provided, but the functionality is limited (can’t easily see order book changes, modify orders etc.). A mobile app will be more useful and can easily piggy back the current layers that brokers use online (SSL, web service layer). Plus mobile charting, screeners etc. are useful in that you can use them to actually place trades. The mobile operators, though, are of no use – brokers don’t even need them other than if they will cut costs dramatically.
Smart Order Routing. When you place your order it has to go on a specific exchange. With Smart Order Routing the broker can check the pricing on different exchanges (currently BSE/NSE but MCX-SX is coming soon) and place the order appropriately. Divided into chunks, this makes a lot of sense for automated order routing for which complex algorithms have already been designed; institutions like mutual funds or pension funds can use such a facility to auto-route orders appropriately. It’s strange that this needed “authorization” from SEBI – brokers should have been able to do it already, or provide the programs to the client to do it. Strange, indeed.
Call Auctions at market open: Brokers allow investors to place orders outside market hours, and these are placed into the exchange at 9 AM during hte market open. If there are a lot of orders at “market” there is a problem – the “market” hasn’t yet been discovered for the day, and prices can go haywire (they indeed do, as noted in many stocks, and brokers/punters take undue advantage). Call auctions help streamline the price discovery process – the original circular was a July 15 one.
Private treaties to be disclosed by media. Many press entities like Times of India own stake in certain businesses as part of “Private Treaties”, in return for (partly) advertising real estate and coverage. This skews incentives in that sometimes negative news about the entity is held back or is spun around because the equity ownership may otherwise be in danger of losing value. In India selling editorial space is considered okay – that is, you buy an ad, and they’ll write a column about your company; I have been offered this kind of deal at multiple times. SEBI along with the Press Council has decided that such private equity ownership must be revealed on the media web sites. [I think this is a good rule, though our media companies will continue to act like hedge funds until they can.]

Food Inflation at 14.75%, Scary revisions 2%+

2010-08-27T12:12:00.001+05:30

Primary articles inflation (mainly food) was announced at 14.75% but as usual what is worry is the restatement of past data. Primary articles inflation of 18th June was revised to 16.92% up from the earlier reported14.75%. Click the below figures for more.

That just means the latest figure could be revised to as much as 2% higher. We’re inflating much higher than we’re being told? At least at the food level.

Direct Tax Code Bill Kinda-Sorta Happens

2010-08-26T23:27:00.001+05:30

The Union Cabinet has cleared the Direct Tax Code bill, which means nothing other than it will actually be cleared by December if it’s tabled on Monday, and that means sometime in the next decade it might actually happen.

The DTC simplifies tax slabs. Upto 2 lakhs, nothing, it seems. 2 to 5 lakhs, 10%, 5 to 10L, 20% and above 10L, 30%. Nothing earth shattering – the current limits are 1.6, 5 and 8 Lakhs.

Corporate tax goes to 30%. From 33%. That’s nice. MAT for those fellows not paying tax is 20% of book profits.

PF is exempt from tax, or so they say, but the rest get taxed EET. Dividend distribution tax stays the same. Life Insurance payments and mutual fund income gets a 10% TDS. (10% of what? We don’t know).

I don’t know if STT is out. I don’t know what happens to various random exemptions. I don’t know I can’t really say until I see the full bill – everyone’s taking data from an interview of the Finance Minister, where it’s likely there weren’t enough questions asked or answered. Anyone have a copy?

On Yahoo: Survivorship Bias

2010-08-25T12:28:00.001+05:30

My latest at Yahoo, on Survivorship Bias:

"If you had bought Praj Industries at Rs. 2 in 2003 for just 100,000 rupees, it would be worth Rs. 40 lakh today!"

We hear something like this, as advisors and brokers coo about the long term greatness of the stock market. If you bought Infosys in their IPO in 1993, you would make a gazillion rupees, so much that you would be reading this article in your holiday home in the Bahamas. Yet, in the early 90s , IT stocks weren't the darling of the markets - more popular was a stock called Arvind Mills, which still exists and has done fairly well for itself; but if you had plonked your hard earned money into Arvind, you would have seen a stock going from Rs. 400 down to a relatively meager Rs. 43 today, only 18 years later. And that was still lucky; a number of other stocks simply went to zero.

What happened? We counted the winners. If you count only the survivors, no accident has casualties.

While survivorship bias is a classic problem with benefit of hindsight, it teaches us important lessons - that what is visible isn't everything and that it's critical to diversify. For a person investing equally in a number of stocks from stock market darlings to pariahs, the losses on one set of stocks could have been made up by gains in others; remember that you can't lose more than 100%, but you can make many multiples of your investment when you win ("multi-baggers"). If you research stocks well, chances are you will have a few multi-baggers and losers - sometimes many more losers, but the winners more than make up for the losses. The winners become the survivors and investors become geniuses for discovering them; the real genius though was the diversification.

(Read the full article)

Thanks in advance for your comments!

More Yahoo Columns:

The Problem with Multi-Level Marketing (Comments)
Planning for the Grim Reaper (Comments)
Of Options and Choices (Comments)
Credit Default Swaps (Comments)
Four Investing Myths Busted (Comments)
(The Whole Lot)

IFCI Infra Bonds: Saves You Tax Too

2010-08-24T19:18:00.001+05:30

IFCI has some infrastructure bonds open for purchase, and they give you a tax exemption on a limit of 20,000 per year.

Scheme: http://www.ifciltd.com/Portals/0/IFCI%20Infra%20Bond%20Series%20I_IM_web.pdf

10 year bond, with no exit till five years, but will trade on the BSE – but you can’t exit before 5 years are over. Purchasing these bonds on the BSE is unlikely to provide the same tax benefit (it probably only applies for a purchase directly from IDFC, a primary purchase – not secondary purchases). To be honest it all depends on when they list the bonds and whether on listing such bonds will still have a lock-in etc.

Rates: 7.85% if you want to sell them back after 5 years, 7.95% otherwise.

Options: Cumulative (interest reinvested annually) or Annual Interest Payout.

Issue Closes: August 31, 2010. You have a week from today.

Issue details: http://www.ifciltd.com/IFCIBonds/InfrastructureBonds/Issue201011/tabid/212/Default.aspx

You need a demat account. Business standard says no harm waiting for other such bond offers for the 20K tax benefit.

Let’s now analyze the non cumulative schemes.

If you’re in the 30.9% tax bracket, investing 20K will save you Rs. 6,180 in tax in the first year, and give you Rs. 1570 in taxable interest, which means a net income of Rs. 1,085 per year. Over five years that’s a total return of 11,604 or about 10% a year, which is nice. Unfortunately the Rs. 20,000 cap on the tax exemption makes it uninteresting for the people in the 30% bracket.

At the 20% bracket the net return, calculated the same way, is 10,352 or 10.35% per year. For the 10% tax bracket it means about 9.1% net yield per year. (Net yield = total interest/investment)

At the cumulative option interest goes to 12.92% net yield per year, which is definitely very interesting. I might be tempted to wait for more as the year goes by, but to people in the 20% tax bracket this could be invested in immediately, with say 10K (leave the rest for a later offering).

Update: There is an awesome comment by reader Kaho Pyare, who specifies that the return is higher because you can reduce the tax from the investment amount. For someone in the 30% bracket, the cumulative option works out to a return of 13.77%, since your investment is about 13,820 (20K minus the tax benefit) and the return after five years post tax is 26,345. Just don’t overpay taxes.

The absolute amounts are small for the 30% bracket (>8 lakhs a year) and perhaps only marginally more significant at the 20% bracket (>5L). It does make sense at the 10% bracket, surely, even if calculated returns are just 9.5% net of taxes over five years.

This isn’t investment advice, just my opinion.

Thinking Aloud: SMS Spam

2010-08-23T13:17:00.001+05:30

Reading about Spam SMSes I’ve realized that the reason spam is prevalent is that costs are low. [Warning: Long, rambling post]

From LiveMint:

Today, Singh sends close to 20 million SMSes per month, roughly half of them on behalf of real estate developers, who have become the most prolific and annoying spammers in this particular medium. It takes Singh just a minute to send 100,000 SMSes, for which he charges Rs4,000; for one million SMSes, the rate drops to 3 paise per message. “If you call 100,000 people, even at 30 paise per call, imagine how much more expensive it would be,” Singh points out.

This is incredibly cheap, and I like that. I remember the days when you couldn’t go under a rupee per SMS. It’s very useful for business, to send quick and non intrusive status updates. The email of the mobile phone, so to speak. But is it?

More business users are likely to use email anyways because 140 characters with no images doesn’t cut it, there is no way to properly “reply all” or even archive/search messages etc. But Email has a much slower delivery than SMS. In general, you would expect email to take longer than an SMS to arrive, plus people get obscene amounts of email and don’t bother opening them all. SMS’s non-archival is also very good in the Indian context where shady deals are being done, and people don’t want to discuss it over official email.

The economics works at the 4p or 3p per SMS at a small scale and 1p/2p at a large scale. And this is helpful. I get an update every time I do a transaction on my credit card, or do an online transaction from the bank account. I get SMSes from my broker for each transaction, plus an end of day summary of each market I trade. I get SMSes from NSDL if my shares are moved in or out. This would not be possible if SMSes weren’t cheap.

And SMSes are cheap because of the heavy amount of marketing on it. Which as we all know is a pain in the wrong place. I suffer email spam and instead of bothering to send legal notices I simply delete the message. Or, I report as spam to my email provider, Google – which gets smarter and doesn’t allow such messages in again. No such luck with SMS. Additionally, when I’m out of town, I pay to receive such SMSes inspite of my not-wanting to!

We will probably benefit from something of that sort on the mobile. An app that sits in, uses (perhaps) J2ME so it can run on most mobiles, hooks in to the messaging API and automatically records as spam any message that says “TM-“ etc. which isn’t a known non-spam entity. I wonder if such apps exist.

Back to the SMS spam. The figures are immense:

The largest sender of such SMSes is ValueFirst Messaging Pvt. Ltd, and its chief executive officer Vishwadeep Bajaj estimates that 150 million marketing messages—of both spam and non-spam variety—are sent every day in India; his firm sends a full one-third of these. On a half-wiped whiteboard at his office in Gurgaon, Bajaj chews through the numbers; assuming each message costs, on an average, 3 paise, that would bring the industry’s annual revenue to Rs200 crore.

The article says the mobile operators charge a paisa per SMS, which means 40 cr. in net revenue. They plan to go public, as does One97, another such mobile messaging and VAS intermediary.

What happens now? Do people get sick enough of spam that TRAI announces blanket bans on marketing SMSes? Will that hurt these mobile businesses a lot? Time will tell; but the real story in SMS will be how it can be used for our benefit at this low cost, not to spam us.

Food Inflation at 14.85%: Dangerous Past Revisions

2010-08-20T12:39:00.001+05:30

Food Inflation – the “Primary Articles” part of the WPI – is quietly inching downwards, at 14.85%.

Click for larger images.

While inflation looks like it’s moderating, what’s really happening is that past data is being revised constantly, and these revisions have thrown the inflation numbers earlier.

The most recent revision is for that of 12th June (2 months earlier) which has pushed up the Inflation figure then to a whopping 19.79%, from an earlier reported 17.60%.

I’ve spoken about the dangerous revisions earlier:

A major concern now is how this data is being corrected. Usually after two weeks a preliminary figure is quoted, and that is corrected after two months. The last weeks have seen tremendous upward corrections. For the week ended May 1, primary articles (food) inflation was announced as 16.44%, but it has now been corrected to 18.64%. (Get Data Here)

Here’s how it goes.

I don’t have access to data before 18/5 right now (the press releases are not archived), so can’t chart prior revisions.

NIFTY Changes, Stocks In and Out

2010-08-19T19:19:00.001+05:30

Three stocks are being replaced in the NSE Nifty, as of October 1.

Going out	Coming In
ABB	BAJAJ-AUTO
IDEA	Dr. Reddy
UNITECH	SESAGOA

Typically stocks coming in tend to go up as index funds load up on them, but remember that the weightages of these stocks are very small, and the new stocks coming in aren’t going to change the indices a heck of a lot. The sum of the weightages of the stocks going out is just 1.3% of the Nifty today; and that is less than even the weight of TATAPOWER which is 1.31%.

I’m long some of the “Coming in” stocks, before I even knew of the change – but it may be worth taking a position in them just in case.

IIP, Seasonally Adjusted, is a Positive

2010-08-19T19:10:00.001+05:30

The Index of Industrial Production which I mentioned in my earlier post as a negative (only 7.13%) is strangely, a positive move when it is seasonally adjusted. From cycle.in:

More MLM: Insurers, Fraud MLMs and Videos

2010-08-18T17:17:00.001+05:30

I’ve been getting a dramatic number of emails regarding the Multi-Level Marketing article. Some comments:

From @monikahalan – a Mint write up about how Insurance agencies were trying to copy this MLM model by making people buy policies but get kickbacks as they sold the concept to others.
A couple of people asked me to consider http://www.rcmbusiness.com which supposedly is a “better” MLM scheme. While the products look inexpensive, I have no idea how good they are, and their incentive schemes are quite biased towards getting more people on board.
Oh and it seems there was something called Japan Life Mattresses – sold for 1 lakh – where the idea was again MLM. A number of people fell into the trap, and the owner Vasant Pandit basically said “too bad”. (Oh, he’s seriously connected, this guy)
Two excellent videos by CNN-IBN investigating how MLM companies have cheated consumers in the past. (One, Two)

On Yahoo: Multi-Level Marketing

2010-08-18T10:24:00.001+05:30

My latest at Yahoo: The Problem with Multi-Level Marketing

A few years ago, a member of my college's alumni association called and said he wanted to "speak business." A few hours later, he landed up at my office and after an introduction, asked me:

"Do you want to be really FREE?"

"Huh?"

"How would you like to run your own business?" I was the co-founder of a software startup, which I suggested qualified as running my own business. But he persisted:

"No, I mean imagine you can take holidays when you like, without worrying about money. You can retire, and still keep making moneyâ€¦"

As you've probably realized by now, he was pushing me to join Amway, which is a worldwide "network marketing" company, a concept otherwise known as multi-level marketing (MLM). After a very long and frustratingly meandering discussion, Amway turned out to be this company selling consumer goods like shampoos, detergents and dietary supplements.

You were supposed to join a "program" where you paid a fee (currently Rs. 995), and used these products or sold them to your friends. You got a commission on every sale, and if you enrolled any of your friends into the program, you got a piece of their pie as well. The products were overpriced, but supposedly fabulous. I was then propositioned to join, and in the manner of all politely bankrupt individuals, I smiled and refused.

That was fortunate. Although I hear a number of individuals have made substantial amounts of money being Amway superheroes, MLM wouldn't work for a person like me. And the reason is emotional - I cherish friendships and relationships to the point that I neither want to sell nor be sold anything -- especially overpriced shampoo.

MLM, on the face of it, is noble - you get a piece of what you would spend anyway, and you get to build an organization ("downline") which keeps feeding you money back as it grows. But the specifics in the real world muddy the waters.

First, the products tend to be quite expensive - this is the case with at least three MLM organizations I've seen. The pitch here is that the products are superior, and in any case you make some of the money back. But even with the 20% kickback, paying Rs. 125 for toothpaste isn't very financially sound when regular FMCG competitors are at Rs. 50, and I'm not sure how advanced you can get with toothpaste.

Second, the MLM recruits are pushed quite as much to get new people into the organization, because just "selling product" doesn't do much. An Amway "Sales and Marketing Plan" builds scale primarily from getting more people into your "downline" organization. Additionally, you get a fancier designation as you get more people in. Selling a product is a far easier proposition than trying to get someone else to enroll, and the incentive to enroll ensures most distributors don't care about selling the product. Indeed, in their eagerness, the good people who designed the brochure above decided that the average family of four would need protein powder, multi-vitamins and dietary supplements collectively worth Rs. 3500 a month, which is unfathomable to most of the remaining residents of the country.

Third, people in the organization are encouraged to sell at every opportunity they get; and because they try to enroll people they know well - remember, you can't put up a shop and sell to total strangers under the MLM model - they end up with relationship pain: from disgust to suspicion of their motives every single time. This causes almost universal hatred of anything MLM, probably from the feeling of being scammed as the MLMers start with freedom and end with an entry fee to sell soap.

Lastly, instead of product sales, a new way to make money seems to have become popular: selling "tools". Once you're in, you'll find someone in the hierarchy will have built motivational tapes, or will be charging for his/her seminars. Paying for this adds substantially to your cost, and might make a great return for someone up the line. (How do you know what paid for that fancy car?) A DateLine video reveals how prevalent this was.

….

(Read the entire article)

Comments, thoughts and brickbats, all appreciated.

ICICI Launches Online Term Insurance

2010-08-17T08:46:00.001+05:30

ICICI Launches an online iProtect plan – for a 35 year old, the premium is just 24,000 for a 30 year, 1 crore term insurance. This is bought entirely online (no agents).

This is fairly cheap, but the only problem I have is that this is ICICI insurance and I’ve had a bad experience with their claims process.

Their comparable other product, the offline Pure Protect, offers 50 lakhs of insurance for 18,000 (30 year term). The online product, for the same conditions is 30% cheaper at 12,850.

I like this competition to Religare’s iTerm, and I really hope LIC jumps in. I trust them a lot.

Nifty Earnings Per Share Growth at 6.76%

2010-08-16T18:37:00.001+05:30

Nifty’s EPS growth has just not happened, again stagnating at 238, a growth of 6.76% over last year. The current P/E ratio is 22.76.

This is after most of the Q1 2011 results are in, and we saw exemplary growth in the economy. Are the top 50 companies so far distanced from our economy?

On a normalized level (taking the P/E of last year, versus actual growth seen today) here’s the distressingly widening gap. The blue line is the P/E last year (the “Expectation”) and the maroon line the actual growth this year (the “Reality”). Markets have in the last two years been terribly optimistic.

In the past, EPS growth peaked about one quarter before the markets fell,and we see a relative EPS growth peak in May 2010; is this the time that markets start to underperform (compared to say fixed deposits)?

June Monthly WPI at 262.5, Inflation at 9.97%

2010-08-16T18:01:00.001+05:30

From the monthly inflation release desk, the WPI goes down to 9.97% from last month’s headline number of 10.55%.

What’s scary? Like last month, the May numbers are revised to show inflation of 11.14% versus the 10.16% that was earlier reported. We might be seeing the current number too revised higher, in about three months.

The fuel price hike in June was 10%, and reflected in 3.2% month on month increase in the fuel index.

What happens now? Will inflation be the party pooper? Inflation continues to stay high despite the “low base effect” – we are now in uncharted territory in terms of the Wholesale Price Index, and the graph shows a steady, steep rise. If they have to use interest rates to control this inflation, it might need rates to go to 10% or 12% (you have to overcompensate). A double dip recession in the west might change things somewhat, though, but that stuff can take many months to reflect in our economic data.

June 2010 IIP at 7.13%

2010-08-14T14:34:00.001+05:30

MOSPI released the Index of Industrial Production (Quick Estimate) for June 2010. The headline general number came in at 7.13% increase over last year. This is the lowest figure since May 2009 and the first sub 10% growth number since Oct 2009.

The revisions were minor – May was revised from the earlier number (312.6) to 312.1. March was revised upwards, from 348.5 to 350.4. Is the best behind us?

Mining was up 9.5% from last year, Manufacturing 7.3% and Electricity 3.5%. Consumer goods grew 8.3%.

Nothing great about this report, as it’s a dull month in general. Diwali based production should perk up the numbers in subsequent months, otherwise we’re heading for the low single digit numbers for a while.

At cycle.in, they show the IIP appropriately adjusted for seasonality. This is majorly negative (month-on-month change, 3 month moving average) – and it only has data till May 2010, June figures yet to be plotted. Let’s wait for that, perhaps next week.

Rupee Symbol Test

2010-08-14T00:15:00.004+05:30

This is just to check the rupee symbol out. You won't be able to see it on your RSS reader, or in IE 6, so ignore this post.

Rupees 400 = ₨ 400.

Random Technical Details:

I got this idea from Paisa.com which was launched today by Infinitely Beta. Good site, fast and clean. Do check it out!
The funda is - instead of using images which cause the server to get hit over and over again everytime you use the symbol, you use CSS. CSS 3 for those that are curious. The @font-face rule, for the even more curious. If you're still reading, read this article.
Warning: Reeely technical. What you need is an @font-face definition - in this case, the font TTF is base-64 encoded, and embedded using the url(data:... format using a font-type attribute. I've used some of it earlier for images and seen it mentioned on Brajeshwar's blog.
Once you thulp that into the CSS, you link the CSS file using a <link... tag. Since I'm using blogger I hosted the file on my deepakshenoy.com server.
Then when I need to type the rupee symbol, all I have to type is:
<span class="rupee"&rt;& #8360;</span&rt; (No spaces)
But I won't do it. It doesn't appear on RSS readers very well and around 3,300 of you will be pissed off. Not my idea of fun.

Links – Private Banks, MMYT Lists, China’s Empty Apartments

2010-08-13T17:42:00.001+05:30

A new discussion paper by RBI on the entry of New Banks in the private sector.

MakeMyTrip goes up 90% in their US listing. Pile onto the India Bandwagon, people! MMT hasn’t made any money and won’t in the near future, but who gives a rat’s ass. This is great for people like @Cleartrip who supposedly are profitable on a cash-flow basis (twitter conversation). I think all of them should go public.

Dhirendra Kumar on Fundamentals Weighted Indexes and how market-cap weighting (Sensex, Nifty) on Indices has skewed stock returns.

Through Business Insider: China has enough empty apartments to house 200 million people. That’s about 65 million empty apartments.

An article on Independent Financial Advisors versus Banks in the MF game, with some excellent data and graphs.

Steve Keen on “The Roving Cavaliers of Credit” on Banking, the absence of a money multiplier, a credit economy and how private banks are the ones that actually create money. Incredible read. HT @tejus_sawjiani.

US 30 Year Mortgage Rates at 4.4%

2010-08-12T20:40:00.001+05:30

So says Yahoo.

Mortgage buyer Freddie Mac says the average rate for 30-year fixed loans this week was 4.44 percent, down from 4.49 percent last week. That's the lowest since Freddie Mac began tracking rates in 1971.

The average rate on the 15-year fixed loan dropped to 3.92 percent, down from 3.95 percent last week and the lowest on record.

To give you an idea – for a mortgage of Rs. 50 lakhs, the 30 year term 4.4% loan will mean a payment of Rs. 25,038. At Indian rates of 11%, the equivalent payment is 47,617, about 90% more.

Given a mortgage payment of 40% of salary, the person makes 62.5K per month, or 7.5 lakhs a year. At 11% the same person will need to make 14.28 lakhs a year.

From Calculated Risk:

If mortgage rates at this level don’t pick up housing in the US, it ng will. It seems rates were below 5% in the 1950s, btw.

Bank Credit Growth at 19.6%

2010-08-12T12:07:00.001+05:30

RBI releases India’s credit growth stats show Bank Credit at 19.6%, with credit coming down from 33.63 trillion (1 Trillion = 1 Lakh Cr.) to 33.57 lakh cr versus a fortnight earlier. Credit growth is down to 19.06% from 21.18%.

(Click to view larger image)

Note that credit growth last year came down substantially from March to September, so the next few months should see strong growth figures even if the absolute numbers come down. And in general we are still strong:

An Impressive Computer at $35

2010-08-12T11:09:00.001+05:30

In an NDTV Video, Kapil Sibal talks about the gadget that’s doing the rounds of the gadget world. This, sir, could be a game changer.

Impressive.

A $35 end cost – not BOM – meaning it can be priced at Rs. 1700, for a million units ordered. That means it can come down further.
This goes to all universities and then to their students with a further subsidy of Rs. 750 per unit. In 2011.
Open source OS, Video support, internet access/WiFi, SIM card slot, a USB out and a Video out. 2 watts, 2GB Solid State Disk, This is bloody incredible.
The device goes preloaded with educational videos, on top of an open source software built by an IIT.
Sibal says “This is a vehicle for knowledge”. He wants to bring the cost down to $10.

While the government hasn’t done a great job in the past – the big example everyone quotes is the Simputer – you have to be optimistic. It takes just one big success to wipe out failures – operational or otherwise – of the past. I’m quite looking forward to seeing something like this – at the sub Rs. 2,000 price point.

Update:

At Slashdot:

When we talk about a $35 tablet computer, "average price" is not even remotely in the picture. It makes no sense for you to compare averages when we're talking about something extreme.

Don't like ebay? Palm IIIx runs for about $25 at Goodwill. $20 on Craigslist. And $15 at Weirdstuff(and places like it). But I don't know why you don't like ebay, there are a couple IIIx in good shape for $7 on there right now.

Here's a $75 Palm m500 [amazon.com] on the same site you linked. Prefer color and WinCE? Dell Axim x51 runs for about $60 these days, which is coincidentally roughly what it would cost wholesale to produce with the same specs.

I have some idea what this stuff costs from working on the Kindle and other products, especially given that I actively tried to put together a minimalist low-cost tablet/ereader project. It is quite possible to get to a $35 BOM on a tablet computer, but I it won't be a very modern style tablet. sub-500MHz ARM9, no 3D acceleration, 128MB or less RAM, slow flash interface, poor battery life, not multi-touch, and the list goes on. I think with the right software it could be a practical gadget for the right purposes. But most people scoffed at me when I have proposed these kinds of minimalist devices at the places I've worked.

Also from there, a link to a currently selling device that has similar features, and wholesales at $73. I know it sounds zany but the target audience doesn’t need the fantastic-est touch screen response, 3D acceleration or the best battery around.