Railway Budget 2008

Railway Budget 2008

It is quite fashionable to criticise any budget exercise (especially when it comes from our own Lalu Yadav).

I was watching the railway budget on TV (without completely understanding due to both the din and the "Hindi" factor).

We must remember that any budget making exercise involves finding a common ground between politics and economics, and is not necessarily meant only to push the Sensex upwards. We must further remember that the mere fact of presenting a "populist" budget does not necessarily make it a bad budget.

Here are a few of my observations based on my limited understanding (and my memory, as I'm writing this after a few hours after the speech):

{BP - Budget Proposal; PI - Political Impact; EI - Economic/Financial Impact}

• BP - Reduction in passenger fares
• PI - More votes from the voters who will be happy that they can travel at lower prices and that there will be lesser inflation to that extent
• EI - Reduction in AC Fares is an excellent competitive move to wean away traffic (at least partially) from low cost airlines. The financial impact due to reduction in fares, can to a large extent, be taken care of by improving productivity
• BP - Reduction in freight fares for several items like petrol, diesel, fly ash, etc.
• PI - This is Lalu's contribution to reduce commodity prices all round, and hence in keeping inflation under check - Sure to be popular with the "Aam Admi" as there will be no runaway price increases due to increase in freight fares.
• EI - Will keep inflation under control. Will help in retaining market share vis-a-vis competition from road transport, for instance.
BP - Competitive (Read "Lower") freight fares on the "return leg" of commodity movements
• PI - Neutral
• EI - Makes a lot of commercial sense - Instead of coming back with empty wagons, can generate valuable additional revenue
• BP - Declaration of 70 days bonus
PI - Obviously pleases all railway employees, and hence the vote bank. Also a nice friendly gesture towards Left parties, keeping in mind the forthcoming general elections
EI - Recognition of the genuine contribution of the employees in the remarkable turnaround over the past couple of years, which would have been impossible without the active contribution of the employees. Will also help in "Buying in" their support for a lot of private-public partnerships being introduced, introduction of technology, etc.
BP - Announcement of several (53) new trains, including 10 Garib Raths. 
• PI - Appeases a lot of MLAs, MPs, their parties and the general public - Keeps everyone happy.
• EI - Whenever a new train is launched through a slightly different route between two cities, it generates a whole lot of unforeseen positive economic forces. The economic activity involved in launching a new train, by itself, generates a lot of temporary/permanent secondary and tertiary employment. Further, at every stop on the way to the final destination of the new train, there is scope for conversion of a village into a small town, a small town into a larger town, a Tier 3 city into a Tier 2 city, etc. This is precisely how urbanisation (and development) takes place. But for the British building the railway network, we would not have had as many cities and towns today as we have as of now!
BP - Announcement of 20000 new wagons, conversion of all wagons gradually into stainless steel, etc. Green toilets, modular toilets, etc.
• PI - Highly populist as it involves a lot of CAPEX, and can be counted as "investment" in the destination state. (Ask how happy Karnataka is about the InfoTech industry investing there or about how happy TN is about the various automobile companies investing in TN!)
• EI - Much needed modernisation of the infrastructure. Is also likely to provide better trains (and hence improved customer satisfaction) and increased productivity
BP - Smart Cards for Bombay Suburban Train Passengers
• PI - Good political response to keep "Mumbaikers" happy after the recent tug-of-war with Raj Thackarey. Can claim to be a good Samaritan and a statesman who does not believe in "retaliating cheaply" just because "some Marathi politician" has wrongly attacked Biharis.
• EI - Introduction of modern technologies is bound to improve productivity phenomenally (freeing up lakhs of passengers from purchasing season / daily tickets, freeing up counter clerks, saving time for lakhs of passengers daily, reducing ticket-less travel, etc.)
BP - Anti-collision devices, Building of elevators, escalators, Multi-level parking facilities, upgradation of stations, etc.
• PI - "Care and concern" for safety of passengers and hence good for the vote bank!
• EI - Modernisation, attracting more global investors into India, Reduction in accidents, convenience for passengers, additional advertisement revenues, etc.
BP - Outsourcing maintenance of trains, starting with major trains like Rajdhanis
• PI - Tag of reformist, with potential for promotion as Prime Minister in the future!
• EI - Backdoor entry of the Private Sector at an increasing pace.

Last, but not the least, why should we be bothered about the Railway Budget or about the General Budget? Some reasons:

• Got to have general awareness
• Be conscious of both prospective benefits and prospective legal duties (for instance, benefits to senior women citizens in case of today's railway budget and responsibilities like last date of filing income tax returns, Annual Information Returns, etc. in case of the general budget)
• Make the blog topical and interesting so that you people continue to read the so-called "educative" posts regularly.

Do give me your feedback regularly to keep me motivated to post equally regularly!

Regards,

N

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Introduction to Asset Allocation

Introduction to Asset Allocation

I've received a few phone calls suggesting that the term "Asset Allocation" may perhaps be a bit too complex for some beginners. They suggested that I give a primer. One of them has challenged me to write about Asset Allocation in a manner which can be understood by a teenage kid.

Here's my attempt:

Assets are of different kinds - You can keep your savings in a variety of forms - Some examples:

1. Cash
2. Savings Bank Account in a bank
3. Fixed Deposit with a bank or a company
4. Gold bars, biscuits, etc.
5. Jewellery
6. Investment in Public Provident Fund, LIC Money-back policies
7. Mutual Funds
8. Shares
9. Investment in Real Estate (buying a house, plot, etc.)
10. Investment in Antiques, Art, etc. (like buying a painting by MF Hussain with a view to selling it a few years later at a huge profit)

Each one of the above has its own advantages and disadvantages. I'll take just three of the above (No. 1, 6 and 10 in the above list) as examples to explain the concept of Asset Allocation.

Suppose we have some surplus funds of a few thousand rupees.

If we keep the entire amount as cash, the advantages are:

• We can spend it whenever we want, without any problems.
• There is no risk of the cash losing its value due to general uncertainties (except due to inflation)

Disadvantages:

• No returns - cash kept in a purse or handbag (or under the pillow) does not generate any additional income, unlike other forms of saving the money mentioned in the list above
• Inflation erodes the value (Rs. 1000/= could buy much more in the year 1998 than in 2008, for instance)
• Risk of being lost
• Chances of being spent off on somewhat unnecessary expenses.

If we invest the amount in Shares (basically shares represent part ownership of the company whose shares are being held by us), it results in:

Advantages:

• Generates periodic income by way of dividends as and when the company declares dividends
• Generates additional income by way of Capital Gains when we sell the shares

Disadvantages:

• If we want to buy something with the funds invested in shares, we can't do so unless we sell the shares and convert it into cash (this disadvantage is call illiquidity)
• Share prices can go (up or) down quite significantly. We can even lose the entire money invested in shares (This can happen even by investing in good companies - Ask the people who invested in companies like Infosys or Wipro in 2000 who had to wait for a few years before their share prices reached the same levels again) - This is called "Market risk"

If we invest the funds in buying a painting by a budding artist, it results in:

Advantages:

• Generates income only by way of Capital Gains as and when we sell the painting at a higher price, years later. However, if we are smart in identifying the right artist and buy the painting at the right price, the gains can be huge.
• Snob value by hanging the painting on our walls to "Show off"

Disadvantages:

• If we want to buy something with the funds invested in art or antiques, we can't do so unless we sell the shares and convert it into cash
• Very difficult to sell - Highly illiquid - Sometimes impossible
• Market price of such paintings is highly uncertain and unorganised. Completely unpredictable. 

I've just mentioned some of the advantages and disadvantages. Obviously, it does not make sense to keep all our surplus funds in any one particular form of assets in the list mentioned at the beginning of this page.

Depending on the requirements of each individual, we'll probably have to keep some funds in the form of cash, but the rest of our surplus funds must be invested in one or more of the forms of investment mentioned above. This process is called  "Asset Allocation".

What percentage of one's surplus funds should be invested in different types of assets mentioned above? That would be determined by various factors, including:

• Age of the person
• Financial position of the person
• Risk-taking ability
• Desired income / returns from the investments
• Time horizon of investments (short-term vs. long-term)
• Awareness and Understanding of different types of assets

More details on the modalities of actual "Asset Allocation" for a specific individual will have to be identified on a case to case basis.

Something topical for the more advanced readers who may find the above stuff too basic and not worth the bother:   Nice to know that Anil Ambani has taken care of Reliance Energy Shareholders as well.   Moreover the bonus ratio also seems to be quite liberal compared to expectations.   But nevertheless, I'm uncomfortable about the fact that Anil Ambani is treating "non-promoter" shareholders differently - Equity shares are among the riskiest class of assets. Such being the case, such actions tend to create a scenario (unreal, nevertheless) that IPO investments, especially in ADAG group IPOs are somehow "not risky". I think that in the long run, it would have been better for the investors to have suffered the losses than get such placebos! Wonder how many of the Reliance Power investors would agree with me?!?!?

Do keep the comments flowing in!

Regards,

N

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Why Bother? Part II

Why Bother? Part II

In continuation of part I on the same topic, this post will talk about the relevance of fiscal prudence and financial planning for each of the examples that were mentioned in my earlier post.

Original comment is mentioned in a smaller font. My rationale / reasoning is mentioned in a bigger font.

• CHILDREN - "After all I'm a child - my parents, my elders will take care of such things - things are cool as long as I get my pocket money to buy all the stuff I want!".
  •  "Start teaching the child about the importance of savings, thrift. Train her that a piggy bank full of coins can fetch her surprising goodies! Teach him that money in a bank grows."
• TEENS - "I've got enough of things to worry about - my education, my girl friends / boy friends, my looks, my future career, my weight, my wardrobe, my waistline - who has the time to worry about stuff like Finance?"
  •  "Talk about the power of compounding. By this stage they must have their own bank accounts and must be trained to save a percentage of their pocket money. They must also be able to differentiate between capital expenditure (like buying a mobile phone) and revenue expenditure (like buying an ice cream). Teens must be encouraged to bargain/negotiate in shops, to evaluate different brands objectively before deciding on which bike/car/TV to buy, etc. May even be encouraged to read a bit of financial journals/newspapers to get an awareness of different investment avenues available"
• YOUNG ADULTS - "Have just got into my first job - these things are more relevant for middle-aged folk who need to plan for the future - Let me concentrate on increasing my pay packet
  •  "Power of compounding must be explained with practical examples. Must be encouraged / motivated to start saving a (significant) percentage of their income. Need to become fairly knowledgeable about various investment options. Must start investing in mutual funds (and, if possible, directly in shares)"
• NEWLY WED ADULTS - "Have just got married - Got to establish a great relationship with my spouse - Am sure stuff like finance can wait"
  •  "Commitments are even greater - You've got a spouse to take care of - Your sense of fiscal prudence should increase even further. You must identify explicit financial goals, develp a financial plan and start executing the same. You must learn about the importance of Asset Allocation."
• PARENTS OF A NEW-BORN BABY - "I'm earning enough and more - let me focus on enjoying life at the moment. My new-born baby should get the best of all the things that money can buy - So what if I splurge a bit (if required by taking loans). In fact, I'm being smart by borrowing money and living it up on credit cards - After all, my income is only growing day by day and the economy is booming"
  •  "Commitments are even greater - You have a full family to be concerned about - You must systematise the process of periodically reviewing your financial goals, financial plans. You must introduce appropriate mid-term course corrections, as required. You must become versatile with Asset Allocation and ensure that you decide the appropriate asset allocation for your family's unique requirements. Start looking at appropriate insurance policies - both life and general, if you haven't done so already."
• MID-CAREER MIDDLE-AGED PROFESSIONALS - "As it is life is stressful - who has the time for stuff like finance? As long as I'm earning enough to take care of my expenses, my life style and my EMIs for my housing and car loans, why should I worry?"
  •  "Now is the time to focus on serious wealth-creation - You must ensure that you've bought your own house. You must have a serious portfolio of all kinds of assets. You must continue to review and modify your Asset Allocation"
• WOMEN AT LARGE (Especially home-makers) - "There is enough and more for me to bother about - let my husband / father / son take care of such things - After all they don't have to take care of household chores like cooking, washing, cleaning, managing the servant maid, and all the 1000 other things that I need to do!"
  •  "All the above points are applicable equally well for you - if anything, even more so! What are you going to do in case of unforeseen (and undesirably negative) events like divorce, death of the husband, etc.? Even if he has left behind a lot of assets, you need to be able to maintain and grow them further so as to continue to maintain your life style."
• LATE-CAREER PROFESSIONALS (Especially those due to retire in a couple of years) - "I guess that stuff like my PF and whatever that I've saved in things like PPF, Postal Savings, etc. should take care of things. Hopefully I can repay my housing loan before I retire - Even otherwise, I'm sure that my kids will take care of me - Probably it is too late for me to start stuff like financial planning. Any way, I don't know anything about things like Equity, Mutual Funds, etc. Also, at this age, I can't take undue risks!"
  •  "Start planning actively for retirement - Review your Asset Allocation carefully - Probably decrease equity and increase debt component. Hasten the repayment of loans wherever possible. Review number of credit cards & drop any unnecessary cards. Start shifting investments that will generate reasonably regular monthly cash flows from around your date of retirement. Consider preparing a will if you have not done so already. Educate your spouse about your financial position as well as ensure that she/he is involved in your financial plans fully if that's not currently happening. Re-check your investments to ensure that nominations are in place and current"
• RETIRED FOLKS, JUST RETIRED SENIOR CITIZENS - "What financial planning? My money is barely enough to make both ends meet - As it is I've been forced to compromise on a lot of my earlier life-style expenses. Too late for me now!"
  •  "Review your Asset Allocation once more and make necessary corrections. Review your monthly cash flows and ensure adequacy. Re-confirm if you are fully prepared for contingencies, especially medical contingencies. Review your insurance policies and ensure that you don't continue unnecessary ones. Keep re-checking your will periodically to ensure that it is current and adequately appropriate. Do some rigourous tax planning to ensure that the "family income" is maximised"
• 70+ SENIOR CITIZENS - "I wish I'd started out in my younger days - I've been telling all my children, my nephews, my nieces, my neighbours kids, etc. about the importance of stuff like Fiscal Prudence, Financial Planning, etc. - But who listens these days? Unfortunately, I never had anyone to tell me about all these things in my younger days!"
  •  "Review your Asset Allocation, cash flows, will, insurance policies, etc. periodically. Start fine-tuning an estate plan to bequeath all your assets. This is especially important for those who are in the middle class, vis-a-vis rich - because the rich have lots of things, which can be easy to divide. The middle class may have very little to bequeath, and hence difficult to divide (for instance, a single house to be bequeathed to the spouse, one or more children, etc. in an equitable manner)"

Hence, do take care of the entire process of financial planning quite seriously. The time to act is NOW.

A request to the more advanced readers who may find the above stuff too basic and not worth the bother:   If you have my identify and my email ID, send me direct contributions likely to be relevant for this blog by way of: Articles Tips on what shares to buy or sell Inputs on choosing apt investment products for different risk profiles Recommendations on forthcoming IPOs / Mutual Fund offers and anything else that is likely to be of interest to the typical readers of this blog.   If you don't have my email ID, leave a comment with your mail ID and I'll directly get in touch with you seeking your valuable contributions to this blog.   Thanks in advance!

Regards,

N

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Why Bother? Part I

Why Bother? Part I

Over the years, I've seen too many people not bothering about

• Personal Finance
• Financial Literacy
• Financial Planning
• Fiscal Prudence

Each one has his / her own basket of reasons:

• CHILDREN - "After all I'm a child - my parents, my elders will take care of such things - things are cool as long as I get my pocket money to buy all the stuff I want!"
• TEENS - "I've got enough of things to worry about - my education, my girl friends / boy friends, my looks, my future career, my weight, my wardrobe, my waistline - who has the time to worry about stuff like Finance?"
• YOUNG ADULTS - "Have just got into my first job - these things are more relevant for middle-aged folk who need to plan for the future - Let me concentrate on increasing my pay packet
• NEWLY WED ADULTS - "Have just got married - Got to establish a great relationship with my spouse - Am sure stuff like finance can wait"
• PARENTS OF A NEW-BORN BABY - "I'm earning enough and more - let me focus on enjoying life at the moment. My new-born baby should get the best of all the things that money can buy - So what if I splurge a bit (if required by taking loans). In fact, I'm being smart by borrowing money and living it up on credit cards - After all, my income is only growing day by day and the economy is booming"
• MID-CAREER MIDDLE-AGED PROFESSIONALS - "As it is life is stressful - who has the time for stuff like finance? As long as I'm earning enough to take care of my expenses, my life style and my EMIs for my housing and car loans, why should I worry?"
• WOMEN AT LARGE (Especially home-makers) - "There is enough and more for me to bother about - let my husband / father / son take care of such things - After all they don't have to take care of household chores like cooking, washing, cleaning, managing the servant maid, and all the 1000 other things that I need to do!"
• LATE-CAREER PROFESSIONALS (Especially those due to retire in a couple of years) - "I guess that stuff like my PF and whatever that I've saved in things like PPF, Postal Savings, etc. should take care of things. Hopefully I can repay my housing loan before I retire - Even otherwise, I'm sure that my kids will take care of me - Probably it is too late for me to start stuff like financial planning. Any way, I don't know anything about things like Equity, Mutual Funds, etc. Also, at this age, I can't take undue risks!"
• RETIRED FOLKS, JUST RETIRED SENIOR CITIZENS - "What financial planning? My money is barely enough to make both ends meet - As it is I've been forced to compromise on a lot of my earlier life-style expenses. Too late for me now!"
• 70+ SENIOR CITIZENS - "I wish I'd started out in my younger days - I've been telling all my children, my nephews, my nieces, my neighbours kids, etc. about the importance of stuff like Fiscal Prudence, Financial Planning, etc. - But who listens these days? Unfortunately, I never had anyone to tell me about all these things in my younger days!"

The above are typical responses that I've actually heard from a wide range of people at different points of time. These are just examples - the actual basket of responses will run to several pages of vivd imagination. The poor ones will say that they can't afford financial planning. The rich ones will claim that they don't need!

In Part II of "Why Bother", I'll try to explain the rationale behind my hypothesis that each of us, irrespective of age, gender, stage of life, fiscal position, etc. should bother about financial planning, fiscal prudence, etc.

Something topical for the more advanced readers who may find the above stuff too basic and not worth the bother:   Anil Ambani has promised "free bonus shares" to non-promoter shareholders of Reliance Power. This may seem to be a nice gesture on his part to the Reliance Power shareholders.   However, what about the impact on the non-promoter shareholders of Reliance Energy. Why should they suffer for no fault of theirs, just because Anil Ambani wants to shore up the valuation of Reliance Power? Is this not a case of "Oppression of Minority Shareholders" u/s 397 of the Companies Act, 1956?

 

Regards,

N

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