The Investment Thread

B

Big Daddy

Super User
In a democratic system, you need to be able to weed out good information from bad information. There are all kinds of conspiracy theories, bad examples that you will see. Would I worry about them? Not at all. For the most part, I do indexing. So I don't worry too much about an individual bank or some article. Americans are good about creating all sorts of conspiracy theories to sell books and magazines.

Americans have figured out that human mind and emotions are unstable. Keep bombing human mind and emotions with different stories and you control humans (and in turn their money). No one really likes to hear all is well. Everyone thinks there is some conspiracy of set of people trying to press on some agenda onto others. There was a mortgage crisis, WorldCom, Enron, Afganistan War, Iraq War, MF Global, Lehmann Brothers, Madoff, Stanford etc. and American system handled all of that and still came back roaring. There will be other problems in the future (Syria, Iran, North Korea, Russia and China). A capitalist system encourages risk taking to maximize reward. With risk, there will be failures. However, when you do get rewarded, these rewards are much bigger. Besides as an investor, I really don't have to invest in US market and I don't invest all money in the US market. If US market is way risky, I will invest in a market that is less risky. I am free to invest money anywhere I want. US market has to manage risk to keep attracting investor money back into US companies. This whole thing is complex free market system which ends up working in the end.
 
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Yogesh Sarkar

Yogesh Sarkar

Administrator
Recieved the following email from my broker, there will be a special trading session for Gold on Saturday

This year the auspicious occasion of Akshaya Tritiya is on May 13. Starting a new activity or buying valuables on this day is considered to bring good luck and success. Traditionally, many people buy gold on this day. Keeping in line with traditions, Zerodha has decided to allow all our customers to trade Gold ETFs brokerage-free on the auspicious occasion of Akshaya Tritiya - this means that you can buy/sell all the Gold ETFs you wish to without having to pay any brokerage for your trades on May 13, 2013. The exchange has also decided to have an extended trading session and will waive off transaction charges for Gold ETFs on this particular day. Check out this circular to find out which ETFs can be traded in the EQ series and also the extended timings.

The extended trading session will be active from 09:00 AM to 07:00 PM (you can trade only Gold ETFs for free)
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B

Big Daddy

Super User
One of the things that was lacking in my portfolio was foreign bonds. Part of the problem was that by investing in foreign bonds, I was taking currency risk which increased the volatility of returns. Additionally, some foreign governments control their currencies as well. The problem with holding foreign bonds was that it did exactly the opposite of what bonds should do which is to minimize risk. Foreign bonds were risky.

However, things have changed! Europe needs more money, India needs money. Well who does not? So countries are willing to make sacrifices and have started entering into standard currency risk hedging contracts. Here is an example how that works: https://personal.vanguard.com/us/insights/video/2617-IBINT-01302013

These contracts costs money (ETF administrative fee/MF management expenses) that take a bite out of returns. However, advances in technology and mathematics have brought these cost low enough that US money can start flowing into foreign bonds. I will be investing in foreign bonds for diversification purposes beginning from next month.

One of the benefit I get with my foreign investments is a foreign tax deduction. I am at a point that I have to do substantial back paddling to get into lower tax bracket. It is getting to a point that I can either be in higher tax bracket and give more money to the government or give money to charity instead and get a deduction to get into lower tax bracket. Even deductions have a fine line because I am getting pretty close to hitting limit on those as well because any more deductions will mean paying another tax called alternative minimum tax (AMT). Ironically, I am finding Gold somewhat attractive because it does not pay any dividends (which increase my income) and if you don't sell it then there are no capital gains. I have tax exempt investments but some of them are subject to AMT if I take too many deductions. In either case, for now I have small room to take foreign tax deduction before I hit a limit on that as well.

So what does all of this mean to Indian investors. Well, it is somewhat of a mixed news. Foreign money inflows will grow the economy and foreign investors will pay dividend tax (to Indian government) on the dividend income but there is a cost. The cost is that currency hedging puts indian government and corporate bonds in direct competition with the US bonds. In the end, US investors will only increase their foreign bond holdings if these holdings give equal or higher returns than US holdings (there are minor exceptions like tax deduction benefits or diversification benefits that I have mentioned). This competition means two things:

1. If you hate your boss then you will hate him/her even more because the pressure on your boss to get more out of you has just increased
2. Indian government (or any other foreign government) has got its hand tied because printing more money would mean a weak :r: resulting in foreign cash inflows to indian bonds there by increasing the price of the bonds. Whereas, deficit increases in US will have an opposite effect. This dynamics will make US government and Indian government compete with each other for effective debt management. Well, in case of US government it will have to compete with governments of many other countries that welcome money from US investors.

The major result of these frequent cash inflows and outflows (due to currency hedging) is that indian bond market will increase in volatility. Or more specifically, volatility of Indian bonds will increase because you have a set of foreign investors who buy and sell Indian bonds based on factors independent of Indian economy (RBI interest rates, inflation, unemployment etc.). Funny how this thing works, currency hedging lowers currency risks for US investors but increases bond return risk for indian investors. The only way Indian investors will see lower bond return risk is if Indian government and corporations become more responsible (points 1 & 2) and embrace free market competition. In other words, capitalism across the world will grow ever so slightly; and the rich in the US have found another way to increase the size of their wealth! On the other hand, Indian government has also identified a new source to raise capital and increase tax revenue. The only problem is that the source is highly whimsical and retaining it will require constant hard work.
 
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Yogesh Sarkar

Yogesh Sarkar

Administrator
What better way to start a day than to get an email from your MF that they are giving dividend amounting to 20% of your investment :D.
 
A

ank12m

Member
Yogesh Sarkar said:
What better way to start a day than to get an email from your MF that they are giving dividend amounting to 20% of your investment :D.
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Hope it's an Equity MF sir and you are aware that your fund NAV is also getting stripped simultaneously during dividend payout!
And if it's a Debt MF, a hefty Dividend Distribution Tax @ 25% gets charged additionally as an expense to the Fund, thereby stripping your NAV further more, quite unproportionally to the overall gains!

I however, personally feel that Growth option in Diversified Equity MF is the best bet for long term. You are freed of the trouble of again looking for the avenues to reinvest the gains received in the form of dividend, unless one wish to expend it (at the cost of long term wealth creation). Dividend option is the best bet when you are investing in some sectoral or theme based equity fund, which again should not be the core fund in one's portfolio.
 
Yogesh Sarkar

Yogesh Sarkar

Administrator
It is equity MF and I am aware that NAV will go down, however since my investments in MF are something I do not plan to take out unless I am hard pressed to do so, it is good to get something back. Having said that, this is the only Equity MF I hold that I have chosen with dividend option, rest is with Growth Option, which I generally prefer.
 
B

Big Daddy

Super User
When companies make profit they can give dividend or buy back stock to increase shareholder value. Both options are great depending on your tax status. If retired, dividends are better option as you are most likely be in lower tax bracket. However, if you don't need money then growth based stocks (low/no dividends but increasing NAV) work out well to keep your yearly taxes low.

My personal preferences is to have both with dividends getting reinvested. The rationale for this is that in case of emergency when you need cash, you can remove dividend reinvesting option to boost your income. When emergency goes away then you can reinvest the dividends again. This way emergency situations do not require you to sell stock (if you are invested primarily in growth option). For me this works like opening flood gates on the financial dam during emergencies to provide flow of money. However, as rightly noted, dividends can make you pay high taxes so you have to choose tax-efficient investments. Indexed funds provide this tax efficiency. Managed funds will be inefficient as they may even make you pay for capital gains due to short term trading by MF managers.

I also use tax exempt bonds with dividend getting reinvested. Bond income is more stable than stock dividends. Bonds also provide diversification and stability to a portfolio. Also, bond dividends are paid on monthly basis and stock dividends are paid on quarterly basis. In case of emergency, when flood gates get opened, bonds would start providing monthly steady dividend income with quarterly boost provided by stock dividends.

Now let's add RBI interest rates into the mix. When interest rates go up both stocks and long term bonds will fall in value. However, short term bonds will remain relatively unharmed and may give better returns (money market). So, I would include short term tax exempt bonds as well. The whole idea is to have a financial reservoir built so that when flood gates get opened, you have steady flow with low volatility. This way you can live in peace and confidence.
 
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