Wednesday, December 9, 2009

Part 9: More on Mutual Funds

You have an option to invest in either of two equity mutual funds.  Both are diversified equity funds, with broadly similar portfolios.  Let’s say Fund A has an AUM of Rs.100 crores and its NAV is Rs.20.  Fund B has a corpus of Rs.500 crores and its NAV is Rs.200. If you invest Rupees one lakh you can buy 5000 units of Fund A, or 500 units of Fund B. Which fund would you invest in? 

Actually, it makes no difference. Since their portfolios are broadly similar, your money would grow/shrink (depending on the market) in the same proportion once you are invested.  Think about it.

Why then the ads that we see saying “Your only chance to invest at Rs.10! Subscribe to the IPO now!”  It doesn’t make sense!  Another gimmick is to advertise “dividends” from a fund.  For a moment ignoring taxation aspects, what difference would that make? Would not the dividends come from your own corpus?

Continuing with our discussion on the different types of mutual funds, let’s talk about debt funds.  These are also known as “income” funds.  Money market or liquid funds are for investing short term surpluses.  These funds invest in overnight call money markets (banks and institutions lending to each other for a day or very short periods) or in very short duration securities maturing in less than 90 days.  Short term bond funds invest in short term bonds primarily with a duration of between 90 and 365 days.  Gilt funds invest in Gilts which are Government Securities, of varying durations, which could extend to a few years.

There are funds which could invest in a mix of securities including Gilts, Certificates of Deposits, call money markets, etc.  Certificates of Deposit are basically tradable debt of banks or companies which may differ in their maturities.  In all these cases the investments carry a credit risk / counter-party risk viz., the risk that the borrower would default.  The funds aim to minimize this risk through proper selection of the securities they buy. Bear in mind that to earn higher interest, the fund manager may invest in slightly lower rated securities as well. As we saw already, risk and return are inversely correlated. The risk is also minimized through diversification, i.e., putting the eggs in more than one basket.

There is another risk that we saw, which is the interest rate risk.  We saw how as interest rates go up, bond prices could go down, and vice versa.  This is especially true of longer duration securities, since the time period involved is larger.  Gilt funds, especially, always carry an interest rate risk.  If your money is invested in a long-duration gilt funds, and the interest rates in the economy go up, your NAV could see a drop.

I reproduce here the section from Part 4 that spoke about interest rate risk. “There is another kind of risk called ‘interest rate risk’.  Let’s assume you lend someone one lakh rupees and he gives you a ten-year ten-percent bond (that means he will pay you ten thousand rupees a year for the next ten years and then repay your principal – if he is still alive).  If you sell this bond to your friend after two years you expect him to give you one lakh rupees for it.  He will, provided the interest rates in the market are ruling at 10% then.  What if the new ten-year bonds in the market yield an interest of 12.5%, i.e., give an interest of rupees twelve thousand five hundred every year on one lakh of investment? He would then obviously pay you Rupees Eighty thousand for your bond – such that the rupees ten thousand interest on it works out to a yield of 12.5%.  Thus, if interest rates go up, prices of existing bonds in the market go down; if interest rates go down, bond prices go up.” 

Your best bet would be to invest in a large “income” fund which invests in a mix of all the above.  It would be the fund manager’s call to manage the maturity profile and mix of his investments in order to optimize both the above risks.  If, however, you have very short term funds which you may need soon and at short notice, you could look at investing in money market / liquid funds.  These funds are supposed to be without any (or very little) credit risk since their lending is only to large and reputed institutions, and that too, for a few days at a time.

So far we have looked at funds that are “open ended” i.e., you can buy units or redeem units of the fund at any time based on the prevailing NAV.  What if the same fund were to collect money which would be “locked in” for a specified number of years?  The fund in this case would not allow you to buy fresh units or redeem them except during some pre-defined windows.  This would give the fund manager more scope to invest for the long term without worrying about fluctuating inflows and outflows.  Such a fund is called a “closed ended” fund. However, in such a fund how would you invest or divest in case you need to?  This is done through listing.  The fund is listed on a Stock Exchange and unitholders can buy or sell the units among themselves, just like they would buy or sell shares.  The price at any point in time is expected to be very close to the underlying NAV of the units; however, in actual practice this may not happen. Several times, the prices are much below, or even slightly above the NAV’s.  Since they are traded on the Exchange, they are also called Exchange Traded Funds.

However, the term Exchange Traded Funds is generally used to denote a specific type of fund that trades on the Exchange. We shall see more about that in the next issue.

And we of course have Fund of Funds.  This would be a fund that invests in other funds.  There could of course be some additional charges involved! In return, you get the benefit of additional diversification.

That covers quite a bit of ground on Mutual Funds.  I’ll stop here – bye till next time!

Wednesday, November 11, 2009

Part 8: A primer on mutual funds

We have seen how to keep money aside, without which there can be no investments.  We also looked at how investments are evaluated viz., on the parameters of Risk, Return and Liquidity.  The Return of course has to be above the inflation rate, otherwise our money slowly becomes worthless.  Now comes the next question: what are the possible investment options?

I have heard many people say “Equity Shares, Fixed Deposits, and Mutual Funds”!  It’s like saying I like to drink milk, colas and the bottle!  Mutual Funds are not an asset class; they are just the vehicles to invest in some asset classes.  You can have Mutual Funds that invest in Equity, Funds that invest in Debt, in Gold, in Real Estate, and Funds that invest in other Funds!  This is a good time for us to understand what  Mutual Funds are – we need to know that if we want to invest in today’s times.  Not also forgetting the fact that we owe our living to the Fund business!

A group of people get together to give their money to a professional to manage.  Who then invests it in certain investments as per the mandate given to her.  Thus she could invest the money in Equity, Bonds, Art, Silver or even Antique Motor Cars (if you know of any Fund that does this, let me know).  Let’s say each of them invests a lakh of rupees.  The fund manager takes away 3% (say) on entry towards marketing and other expenses and invests 97,000 into the fund – and there are 100 people who have thus invested. She thus starts with a corpus (Assets under Management in Fund parlance) of Rs.97 lakhs.

She invests it, say, in rare stamps since it happens to be a philatelic fund.  At the end of two months, she has bought stamps worth Rs.57 lakhs and has cash worth 40 lakhs still left over, which she has parked in very short-term instruments – these instruments are currently yielding 4% p.a.  Now, ten more people, friends of those who have invested, want to join – will they each pay one lakh?  The premise is that once they are in, they are on par with the existing people, who are known as Unitholders (Shareholders in the U.S.).

That’s of course not fair.  The Fund Manager will carry out a valuation of the Fund’s assets on that day and decide what each of the current units is worth. Let’s say the market value of the stamps has gone up to Rs.65 lakhs; and the total cash lying with the Fund is Rs.43 lakhs.  That’s Rupees one lakh eight thousand per Unit Holder.  This number, 108,000 is called the Net Asset Value (NAV) of the Fund on that particular day.  The ten new people are invited to join the fund at Rs.108,000 plus an entry load of 3% - hence, they each pay Rs.111,240.  What if one of the existing unitholders wants to leave on that day?  He of course cashes out at Rs.108,000 less exit load if any.

That broadly is how a fund works. 

Let’s look at some common kinds of funds.  Equity Funds invest in Equity i.e., Equity Shares of companies.  Debt Funds invest in a mix of debt instruments, i.e. instruments that yield a fixed interest rate.  Within these, of course, you have several flavors.

A Diversified Equity Fund invests in whichever equities the fund manager feels like investing in.  An index fund invests in shares that constitute the index (the Sensex or the Nifty) in the same proportion; hence its performance will reflect the index within a small range of variation that is called a tracking error.  A Sector Fund invests in shares of companies in a particular sector, say, Infrastructure, IT, or Power.  A large-cap fund invests in companies with large market capitalizations; as opposed to mid-cap and small-cap funds. Some fund houses have come out with “multi-cap” funds which essentially means nothing - the fund manager invests in whichever equities he feels like.  Usually, all funds have a minimum market-cap below which they will not invest – this is due to the fact that a large pot of money always has to look at investments that are highly liquid, i.e., can be sold easily when the time comes.

There are funds which believe in “value-investing” which follow a “bottom-up” stock picking approach. These are funds that research individual companies and believe in the philosophy that a share should be bought when its market value drops far below the intrinsic value. The art lies in, of course, how the intrinsic value is computed.  Your number will always be different from mine!  There are funds which believe in “momentum” investing which try to time the market – they will buy any share that they think will go up in the short to medium term and sell or short what they think will go down in price.  Most individual investors like to believe that they follow the value investing approach; while, in reality they are momentum investors buying when prices are going up and selling when prices are going down. Which doesn’t necessarily mean that they make money.

Talking of making money in Equities, I am told the formula is very simple.  Buy Low and Sell High!  If you know how to do that consistently, go join Warren Buffett or Rakesh Jhunjhunwala.  You don’t need to read any articles on investments, least of all mine!

The Fund Manager is employed by a Fund House or Asset Management Company (AMC) to manage a particular fund under its umbrella of funds.  Some of the big AMC’s which manage several funds are Franklin Templeton,  Prudential, Fidelity, Vanguard, Reliance, etc.

How do Equity Funds get their revenues?   They charge a fee which is a percentage of the Assets under Management; in other words, a percentage of your NAV every year.  In India it varies within a slab rate mandated by the Securities and Exchange Board of India (SEBI – the regulator), but you can assume that the fund management fee is roughly 2% per annum on Equity Funds.  This is deducted from the returns the Fund makes; hence the NAV that you see is after deducting the fund management fee.  It should be obvious to you that, from the fund house’s perspective, a minimum level of Assets under Management (AUM) is required in order to survive in the long run. Funds that don’t manage to grow to a large enough size usually get absorbed into other funds of the same fund house, or get sold to another AMC.

My word limit for the article has been reached.  My apologies to those who knew all this already – I have to cater to a diverse audience!  And if you have reached this far, then at least I have managed to retain your interest!

More on Funds in the next issue.  See you later!

Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

Wednesday, October 14, 2009

Part 7: Why do we fall for these?

There are several schemes in this world which are designed to enrich everyone but yourself.  There are some things which are akin to cutting your veins, and keeping you comatose till you bleed to death.  There are certain tools which give you lot of power; but used wrongly, could lead to your destruction. Keeping balances on a credit card and paying interest on them belongs to all the above categories.

You want to pay interest at 3% per month? ... that works out to 42% per annum (it is compounded monthly).  You have to earn 61% interest before tax to be able to pay 42% on the other side.  Or, to put it differently, if you invest a lakh of rupees at 42% per annum for 10 years, what would it end up amounting to?  Work that out yourself – keep a glass of water handy.

If you paid only the “minimum” amount due of 5%, and the rate of interest is 3% (per month of course) – how many years would it take you to clear your dues and what would you have paid out by the end of it?  I don’t want to put down the number here – I find it quite horrific.

Did you go and buy that pair of Levi’s jeans on three installments – No way you say, “I can afford my jeans!”  Ok Ok, what about that TV, or that foreign vacation?  Your spouse was nagging you, so you charged your card.  And donated in blood for the rest of the year!

You are just comforting yourself saying you pay most of your dues on time anyway.  All you do is carry forward a “few” balances “sometimes”.  Here is what happens if you do.  Even if you have one rupee as balance on your card beyond the due date, you are charged interest for all fresh purchases from the date of purchase.  And you thought they were giving you a “free” credit period.  How Na├»ve.

The credit card company calls you and offers to increase the credit limit on your card and you grab the offer. Why would you want to, considering that you should not be carrying forward balances in the first place?  If your card were to be stolen, and used for a shopping spree, would you not be protected better if you had a lower credit limit?  More importantly, is not a lower credit limit better for your wellbeing?

What about the rush of power and feel-good feeling of euphoria that you get when you make that impulsive purchase and swipe your card for it? The feeling that you’re on top of the world – that you can afford anything?  Research has proved that you tend to over-spend when you use the card – counting out notes and handing them over, on the other hand, has a very sobering influence.

Just to make you feel better – having a card is not a bad thing at all, provided you pay off all your dues before the due date.  Before moving on to something else let us repeat a short prayer: “Oh Lord, this day I resolve to pay all my dues on time; especially credit card dues.  Forgive me for all my sins and keep me away from card balances. Amen!”

“Spend more to save more!”  “The more you shop, the more you save!”  “The more you spend, the more reward points you earn!”  You see such exhortations all the time.  I don’t think I need to spend time on dwelling on the absurdity of it.

“Become a Purple Citizen” – you are eligible to get a membership card to our store and you get the most exclusive privileges when you shop!  Our gatekeeper will salute you twice!  You will get a cola with crushed ice! And if you shop more than x thousand rupees a month, you will be elevated to Silver category.  Which is when you will look at the Gold member and feel envious – because the crushed ice in her cola is made of Evian water.  Gimmicks to get you back to the store and make you shop more.  The reward points usually work out to a discount of 1 to 2%; and stores that offer such schemes are usually more expensive than the market-street ones by at least 20%.

What about the store in Bangalore which has a “half price sale” for a month at a time every six months?  That place is my favorite shop – I land up there whenever there is a sale.  Don’t glare at me – I am human too!

I used to go to the movies often.  Till they razed all the old cinema halls down and built multiplexes. And raised the ticket prices by a few hundred percent. I still go often, but with greater reluctance – that’s because my wife’s party circuit swaps stories about the latest movies they saw; and my son only likes popcorn when he pays 50 rupees a pop.  The mineral water bottles there come in special sizes: that’s because it is illegal to sell above MRP – so they created a special size with a special rate, just for multiplexes! 

The one-rupee tickets offered by the airlines are great.  Except that the taxes are 2500 rupees.  We have got such wonderful bargains whenever we travelled in the last one year.  My travel spend for the family was rupees eighty thousand this year.  We are thrilled since the journeys were worth at least double that.  The year before that, I travelled as often and spent only rupees twelve thousand – we used to travel by train.

Oh, the frailties of human nature!  And who understands these better than salespeople?

I had a couple more interesting things to share – but I’ve got to run.  We’ve just got tickets to the latest blockbuster in town – free!  Westside gifted them to us as reward for our Dussera shopping.  And did I tell you – the doorman there knows us by name!

Bye for now!

Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

Wednesday, September 16, 2009

Part 6: An immediate action plan for investments

It is one thing to learn all the concepts before getting into the meat of a subject.  It is quite another to wait for an indefinite time period for some practical suggestions on what is to be done in the immediate near term.  Concepts are fine, and we need them to enable us to make our own decisions, but we need to be practical as well!

I just realized that there are quite a few concepts/theories still to be covered.  I also realize that I run the risk of losing the attention of my audience (I am making a big assumption here – that you have been avidly devouring every word written so far)!

So, what are those things that you can do right away in terms of a concrete action plan for your investments?  I am assuming that you already have a Third Bank Account and you have made it investment ready.  I am assuming you know how mutual funds work (at least the basics – we shall go in depth later).  And I am assuming that you do have some money set aside in a form that can be easily liquidated in case you have to make some adjustments to your investment portfolio.

If you strip the subject of all its complications and jargon, it’s not really that difficult. 

Do you have credit card balances?  Are you in the habit of carrying forward the dues and paying interest on them?  In case you did not realize it, the interest rates on cards are in excess of 40% per annum.  Your first priority should be to repay all your card (or cards’) dues.

Do you have an emergency fund to cover for three to six months’ expenses?  If you don’t, your next step would be to build that up.  This money should necessarily be in the bank – either in the savings account, or in easily cancellable fixed deposits.  Whether it is three months’ worth of expenses or six months’, I leave that to you to decide.  It depends on what  your spending patterns are, and what kind of social support systems you have.  You don’t want to be facing a sudden medical or family emergency without some liquid cash in hand.

Do you foresee some expenses hitting you in the near future – within the next couple of years?  It could be for marriage, for a house, for education, etc.  When you are keeping aside money for this, remember not to invest in “long-term” investments like equity shares or real estate.  This money should be preferably kept in Bank FD’s or in debt mutual funds that invest in securities of short-term maturity.  You could target the “liquid funds” or “short term debt funds”. 

Once you have taken care of these, whatever is left (the moment of revelation arrives – do you have anything left at all? J ) is for the long term.  Whatever is for the long term can be invested in avenues that are likely to offer a larger rate of return, though with some amount of risk and unpredictability due to volatility.  You could first keep aside some portion for investing in Debt Mutual Funds.  Your typical “Income Fund” of any fund house should fit the bill perfectly. You could also invest in equity mutual funds; or you could invest in Gold.  If you invest in equity mutual funds, pick out a large “diversified equity fund” of any major fund house. For Gold, you could look at Gold ETF’s which are traded just like shares; that is where you pay the least amount of trading margins / dealer profits. Remember, buying gold ornaments does not count as investment – at least not in my book.  You could look at buying gold biscuits (available in any quantity five grams onwards) – if you do, remember it is better to buy it from a jeweler rather than from a bank – the margins charged by banks are huge and unnecessary.

Depending on how much money you have at your disposal you could keep an eye out for buying that property or piece of land.  If it is your first and primary house which you need to buy –don’t delay – take that big loan and do it right away.  If you are already living in your own house (and probably paying a huge emi on it), and are looking for a second property, right now seems to be a good time.  The real estate markets, after a huge rally, have seen some correction in the last one year.  The market seems to be firming up now –  the potential upside is quite good. You should of course be prepared for the long haul – in real estate, the returns are normally good, but over a time frame extending to a decade or more. When you do buy that property, you are fully entitled to sell off all the other investments you have– keeping some emergency funds as a back-up, of course.

Do you have insurance policies that are running on which you are paying regular premiums?  We shall have a lot of things to say on insurance – but that has to wait for later.  For the time being, continue paying your premiums.  Before investing in any new insurance product however, pause: my advice would be to go in for “pure term insurance” where you pay only for life cover and where there is no savings/investment element involved.  The typical premium you will pay will be about Rs. 300 per lakh of life cover per year, for a thirty-year old. 

If you are keen on knowing more about how to manage your own finances and want to build up that mind-set over a period of time, it is not a bad idea to start reading up on the subject.  I would seriously recommend that you subscribe to “Outlook Money” and “Money Today”.

Do all this and you are all set, at least for a reasonable period of time.  In the meanwhile you can continue to pick up more on the subject so that you get more comfortable analyzing options and preparing to make your own financial decisions.

I know that I have covered a lot of ground above, which assumes a basic understanding of some underlying concepts.  We shall be covering all that one by one in subsequent issues.

Happy Investing!

Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

Wednesday, August 19, 2009

Part 5: All about returns - time for some math

Pay Yourself first. Open a Third Bank Account. Make it investment ready. Have a spending target. Put the balance into the TBA.

Understand that there are different kinds of risk – Physical risk, Risk of default a.k.a. Credit Risk, Risk due to inherent volatility, and Interest Rate Risk.  Evaluate assets on the criteria of Risk, Return and Liquidity.  In general, higher risk needs to be compensated by higher return.  Now that we have done some revision, we can move ahead!

Talking about return, it is measured in terms of percent per annum.  What would Rs. 10,000 in an 8% fixed deposit amount to, in five years?  Dredging our memories will yield the compound interest formulae last used in Class Six:

Amount = Principal x  (1 + Rate/100) ^ Period

Hence in this case, (10,000) x (1.08)^5 = Rs. 14,693, i.e. 1.47 times your Principal. 

8% for ten years works out to 2.16 times; twenty years to 4.66 times; thirty years to 10.6 times; forty years to 21.72 times; fifty years to 46.9 times; sixty years to 101.2 times;   Notice that as the time period increases, the rate of increase increases too!

Over a thirty year time period: 8% yields 10.06 times; 10%, 17.45 times; 12%, 30 times; 14%, 51 times; and 16%, 86 times.  Notice that over a long time period, an arithmetical increase in interest rate results in an exponential increase in return!

Moral of the story?  Every one percent increase in interest rate matters over the long term.  And the longer the time period, the more the beneficial effects of compounding.

Compound interest is the eighth wonder of the world! To use this principle to your advantage, you need to resist the itchy-fingers syndrome – once your money is invested somewhere, don’t give in to the temptation of booking profits in a hurry – be in it for the long term!

Continuing with the above example, if your Rs.10,000 is invested at 8% for 30 years it grows to Rs. 100,626.  If inflation in the meanwhile was running at 6%, what is your Rs. 100,626 thirty years hence worth in today’s terms?  That would obviously be:

100,626 / (1.06)^30 = 17,520 in today’s terms.  You can imagine what will happen if you keep your money lying around without earning interest.

Your grandfather bought a piece of land 50 years back at Rs.50,000.  It is worth 1.25 crores today.  You don’t have access to Excel – how would you calculate the approximate rate of return using only an ordinary calculator?  The money has grown 250 times.  2 raised to 8 is close to 250 (256).  Hence the money has doubled 8 times – 50/8 gives one doubling per 6.25 years.  If your money doubles in 6.25 years, what is the rate of interest?  It’s not 100 / 6.25 since it is compound interest we are talking about.  When you are dealing with compound interest you should use the “rule of 72” – calculate 72 / 6.25.  That gives 11.52 percent.  The actual rate works out 11.68 percent which is close enough. Remember the “rule of 72”.  It’s useful.

In the financial world 1% is sometimes referred to as 100 basis points.  So, an increase of 25 basis points means a 0.25% increase.

How does one measure Risk?  Let us say you are evaluating which mutual fund is better among a range of options.  They are all similar Equity Funds and all of them measure their performance against the BSE Index.  You first list down the “returns” that each of them has generated, say, in the last five years, along with the return on the BSE Index for comparison.  The absolute return is one measure and it’s a good one; but how do you account for the fact that some funds may be following a more risky investment strategy, i.e. their returns may be more volatile in comparison to other funds? Here you need some measure of measuring “risk” which in this case means the risk inherent in variability of returns.  There are several specific formulae to measure this (which we shall see much later in this series) but in general the principle followed is the same.  In order to measure risk, what is measured is the range and amount of deviation of the yearly (or any period’s) return from the average/mean return for each particular fund.  The resultant number, whichever formula is used, indicates the “risk” in the investment strategy followed by fund.

Coming back to the subject of “return” - you must use the principles explained above to discount any future returns to today’s terms in order to compare two different options.  Let me illustrate this with an example.  You invest Rs. one lakh upfront in Bond A which gives you a cash flow as follows:

Year 1: 25,000
Year 2: 45,000
Year 3: 50,000

There is another Bond, Bond B, where the returns on your one lakh are as follows:

Year 1: Nil
Year 2: 30,000
Year 3: 95,000

Which is the better bond to invest in? Assume that they are both equivalent on the risk scale.

Bond A gives Rs.120,000 over three years.  Bond B gives 125,000 over three years.  Bond B is better.  Hey, wait a minute!  What about time value of money?  If another Bond C yields two lakhs but after twenty years, would that make Bond C better?  We need to discount all the above cash flows to today’s terms. Let’s do that.

We have to first decide what interest rate to use for discounting.  Let’s use the long term average inflation rate, say, 7%.  The Net Present Values of the cash inflows on Bond A will be: (25,000 / (1.07)) + (45,000 / (1.07)^2) + (50,000 x (1.07)^3) = 103,484.

Bond B works out to: (0 / (1.07)) + (30,000 / (1.07)^2) + (95,000 / (1.07)^3) = 103,752

Bond B is better when you discount the cash flows to the present, but only marginally so.

What happens if we use 12% for the discounting?  Net Present Value (NPV) of Bond A works out to 93,784 and of Bond B works out to 91,535.  Bond A looks better! A change in the discounting factor could impact these calculations!  In this case, Bond B’s cashflows are backended and an increase in the discounting rate tends to decrease the values of cash flows which are farther in the future. Intuitively, you can understand why it is so. If inflation is higher, for example, your appetite for accepting the same promised return in future would be considerably diminished. Decision on which discounting factor to apply is critical in such situations – we may revisit this at a later point in time.

That’s a lot of math!  It is very important to understand how compounding works, and the impact of time on the value of money.  Hence the diversion in this issue.  A revision course in sixth and seventh standard math will help!

Bye.  Till we meet next.

Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

Wednesday, August 5, 2009

Part 4: There is no life without risk

From the moment you are born till the day you die, life is an unending stream of unpredictable events.  The financial sector is no different.  It throws various options at you ranging from your brother-in-law asking for a loan to the most complex financial derivative products which even the originators don’t understand.  In order to make financial decisions easier, and to be able to expose the bluff behind many tall and confusing claims, it is essential to know how to evaluate these options.  For this you need to know what are the different kinds of risks and their evaluation; evaluation of cash flows which vary in timing; concepts of present and future value, and a few other sundry stuff like that.

If this sounds like the beginning of complicated financial theory, don’t worry.  Except where absolutely necessary, in this column we shall stay out of complicated equations and needless computations.  Some amount of math is required especially relating to compound interest (as we shall see in the next issue) but not much more than that.

Understanding of Risk is fundamental to analyzing financial instruments. In the last issue we looked at “default” risk (which is also called Credit Risk) and “volatility / variability of return” risk.  Another fundamental risk is of course “physical” risk – the risk that someone will put a knife to your throat and force you to empty your safe.  Or encroach on your land. Watch Khosla Ka Ghosla to know what I mean.

What about ‘systemic’ risk?  When Kuwait was invaded by Iraq, Kuwaiti currency became worthless overnight.  The bank accounts of all Kuwaitis were inoperable; as to stock markets, even if they had existed, they would of course be shut.  In such a situation, especially when you are fleeing across the border, probably the thing that would help you the most is Gold.  Real assets like Gold and Real estate are just that – “Real” – they are held by you and are very tangible. Of course you could get mugged, or your land could be encroached upon. 

There is another kind of risk called ‘interest rate risk’.  Let’s assume you lend someone one lakh rupees and he gives you a ten-year ten-percent bond (that means he will pay you ten thousand rupees a year for the next ten years and then repay your principal – if he is still alive).  If you sell this bond to your friend after two years you expect him to give you one lakh rupees for it.  He will, provided the interest rates in the market are ruling at 10% then.  What if the new ten-year bonds in the market yield an interest of 12.5%, i.e., give an interest of rupees twelve thousand five hundred every year on one lakh of investment? He would then obviously pay you Rupees Eighty thousand for your bond – such that the rupees ten thousand interest on it works out to a yield of 12.5%. 

Thus, if interest rates go up, prices of existing bonds in the market go down; if interest rates go down, bond prices go up.  Interest Rate Risk is a fundamental principle in Finance – work out a few examples yourself so that you understand this concept well. 

Different assets have different kinds of risk profiles.  Risk is one way of evaluating an asset.  Another thing you have to be conscious of while considering an asset for investment is Liquidity.  Liquidity means nothing but how fast you can convert something to cash.  By definition, cash is the most liquid of all assets.  Bank Fixed Deposits are highly liquid since you expect to get your money out immediately subject to certain formalities.  Stocks are highly liquid.  Remember we are not talking of how much money you are taking out on selling compared to your investment, but how quickly you can take it out.  The settlement cycles on the Indian Stock Markets are highly compressed nowadays – you can get your money out in three working days.  Land is highly illiquid.  It takes a long time to sell.  Gold in any form is always highly liquid.

There are three pillars of Asset evaluation.  The first is Risk.  The second is Return.  The third is Liquidity.  Any investment that you consider must be evaluated on these three parameters.  You first need some benchmarks to start with.  Let us assume that in our case, the benchmark is the one-year FD rate of SBI which is, say, 7%.  Would you invest in Lord Yama Co-operative Bank (this is promoted by a bunch of people with shady antecendents) for a return of 9%?  You may, since the return is higher; but you need to assess whether the two percent is enough compensation for the additional risk compared to SBI.  Would you invest in Koffman Finance (promoted by an unknown group of people) at 20% per annum in a bond that is non-redeemable for five years?  In this case, the return is great but the risk is too high.  I would not.  Would you invest some money that you have kept aside for your daughter’s wedding (she is 25 now) on a plot of land?  I would not, since land is not liquid and is more of a long-term investment, and I would be hoping that my daughter at 25 would be getting married soon.  Would you invest your retirement savings fully in fixed deposits or other debt instruments (You are 25).  The returns on debt are known, they are steady, and they don’t cause sleepless nights.  For a 25-year old who is saving for retirement, the capacity to take risk should be higher than that.  You should be aiming for equity or real estate investments where the higher risk is largely mitigated in this case by the longer time period involved; but the expected returns are higher.  If I were you, in this situation, I would invest my money predominantly in a mix of equity and real estate.  Would you invest your retirement proceeds in equity (you have just retired at 60)?  That goes against the tenets of financial planning.  At the age of 60, your appetite for risk is supposed to be lower.

The more you understand and internalize the concept of Risk, the better it is. An understanding of Risk is fundamental to any financial decision.  Your own capacity to take risk is dependent on several factors including your age, current financial status, status of current investments, status and state of equanimity of spouse, your own financial goals, the certainty of holding on to your current job, etc.  Above all, your capacity to take risk is determined by your own personality. 

That was all about Risk. In the next issue, we shall look at Time Value of Money and its practical applications.  As you can see, it’s not that simple – we do need to understand some concepts and tools before getting into discussions on where to invest, etc.;  however, it’s not so difficult either! 

This is the fourth part of the series – I hope you have read the first three (available in ‘Archives’ in case you have not). Please feel free to write in your feedback now as well as at any point in time in future, along with any suggestions that you may have.  I hope you have enjoyed reading thus far.

Do write in.  Bye – till the next issue.

Wednesday, July 22, 2009

Part 3: Starting to worry about investments

Have you nominated one of your bank accounts as the "Third Bank Account"? (We can refer to this as the TBA going forward).  Have you made it investment-ready by linking it to a Demat and Trading account?  If you have not done so yet, you should seriously consider acting on it soon.

Now that we have resolved to set aside some money every month, the next problem is what to do with it?   Before addressing that question however, let us first talk about inflation.

What exactly is the meaning of ten thousand rupees?  It has no meaning except in relation to what it can buy.  What this money bought for you five years ago, is far more than what it buys today.  What it buys today will be far less than what it will buy five years hence.  Inflation, or the rise in the general level of prices eats up your money - it erodes it away slowly and imperceptibly - and before you know it, you are poorer than when you started out! 

The level of inflation keeps changing with time.  The official government statistics report inflation based on wholesale prices of a pre-defined basket of commodities.  This may be quite different from the inflation you face in your daily life since you shop in retail and your basket of consumption is different.  In the last one year, you would have noticed that prices of essential food items have increased far beyond the inflation figures reported in the newspaper.   Just check the price of Tur Dal in case you have not noticed.  Or the price of idly-wada at the local Darshini.

The technicalities of how inflation is caused and how it is computed need not bother us at this moment.  What we need to note is that money kept under the mattress, though high on the sense-of-security scale, is quite low on the sensible-thing-to-do scale!  You have to make your money grow or it becomes useless with time. 

If you have invested your money in a Fixed Deposit (FD) with a bank and the rate of interest that you earn is 8% p.a. and if inflation is, say, 6% per annum, then your nominal rate of interest/return is 8%, while your real rate of return is just 2%. The real rate of return is the actual increase in purchasing power.

You need to invest your money in assets that will grow in value over a period of time. Before diving into the different assets, let us first pause and think. Do we know what is an asset? 

Your car is not an asset.  It drops in value by 30% the moment you drive it out of the showroom and then keeps depreciating.  You also have to spend money on maintaining it.  Gold ornaments are not assets. Try selling the gold chain you bought yesterday, and you will know; you will get at least 25% less for it.  Buying a sofa for the house is not an asset.  You will probably get less than 20% of the value when you go to sell it, if you are lucky.  Since they are not assets, none of these items can be bought out of the money in the TBA; nor can the emi's on loans taken for buying them be paid out of this account.  If your regular expense account supports it, by all means go buy it.

Do stocks increase in value?  They may or they may not; but you invest in them on the expectation that they will.  It’s just that the risk of losing part of your principal is high since their prices are volatile and they don’t respect your purchase price.  Do Fixed Deposits increase in value?  You bet they do.  At a steady predictable rate without any volatility. If someone offered you an option to invest in an 8% FD vs. investing in a stock that is likely to yield 8% over the long term, what would you do?  You would obviously invest in the FD.  Since the expected rate of return is the same, you would (and should) prefer the certain cash flow to the uncertain one.  Assuming FD’s return 8%, what should your expected rate of return be, on equity stocks to compensate for the additional risk, which includes losing your capital?  You need not quantify the number; you just need to understand that volatility of return means risk; risk of losing part of your capital constitutes risk; and you need a premium over the normal return on debt to compensate for the additional risk.

What we spoke about above is the risk due to variability of return. The other and more fundamental risk is the risk of default.  Even within debt instruments, why does an unknown finance company offer more return than a co-operative bank, which yields more than an SBI deposit? The additional interest rate that you get is default premium.  Debt instruments are usually compared with SBI rates, or Government bonds, since all other instruments need to pay a premium over sovereign risk.

Higher the risk, higher the return you should expect.  In real life, the returns do not match the risks involved in direct proportion thus making certain financial decisions easier.  You should not invest in a plantation scheme since the promised rate of return may be high, but the probability of seeing your teak tree after twenty years is close to nil.  You can lend to your brother-in-law to maintain peace with your spouse; but from a risk-return perspective it is unlikely to pass muster.

Reflect on that.  If you have lent money to your brother-in-law start thinking about how to get it back.  We’ll meet again in the next issue.


Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

Wednesday, July 8, 2009

Part 2: Where does all the money go?

July 8, 2009

Hello All,

In the last issue we saw what could be the meaning of a "nest egg" or retirement corpus.  I hope you have had time to reflect on what your retirement number might be.  It's not an easy number; neither is it easy to answer the question "what would you do after retirement in case you had enough money to retire?". We don't realize how much we owe to our jobs - it gives us a reason to exist - at the very least, a reason to fill our days with some purpose.  Anyway, I'm sure most of us have a lot of time to figure out the answer to that one!  In the meanwhile, we continue to work, and continue to wonder where all the money went!

Talking of where the money went, do you know where yours went?  Try this small experiment.  List out what you think have been your expenses in the past three months in broad categories.  Once you get that number, compare it with how much you actually withdrew from the bank or cut out as cheques.  The difference is likely to be staggering.  The money just goes; you don't know where.  A little here, a little there, and it's gone - there's no way you can keep track of it.

Talking of investment, etc. is all fine, but first we have to understand how to put aside money.  In the absence of that, all talk of investments is just theory.

The key to solving this puzzle is to understand human psychology.  Do you miss your PF money that gets deducted every month?  Have you ever wished that you could have gone on that vacation in case the PF money had not been deducted for the last one year?  In most (as in 100%) of the cases, the answer is No.  Why is that?  That's because the money was never yours in the first place.  It got deducted at source.  So you never got used to considering that money as yours.

Your neighbor earns probably 3/4ths of the amount you do.  He stays in the same apartment complex, seems to enjoy the same lifestyle, and seems to be, on balance, as happy or unhappy as you are.  He has children and mother-in-law worries just as you do. (In case you're not married make that girlfriend/boyfriend worries).  In that case, why is it that you are not able to save 1/4th of your salary at least?  That's because, try as you might, the money just seems to get spent!

What happens when you get your annual bonus?  When you find that you have a balance of a couple of lakhs in your account?  The mind is very ingenious - it can think of a hundred different things that you absolutely need to have, but don't have.  In short, you are deprived, and you need to address the deprivation immediately.  How about that LCD TV?  If the Agarwals next door can go abroad every year, why not us?  And Kaya skin clinic has a new Botox treatment…. The list is endless.

Utilize human psychology to your advantage.  Put money aside by Paying Yourself First.

Let me explain what I mean.  List down your entire income for the year.  This includes annual inflows like bonus as well.  If you have a spouse and he/she works, list their income as well.  Now, plan what you want to (that should read as "have to") spend for the entire year.  Include all annual outflows like vacations and school fees.  Then follows a simple (A) minus (B) - and what do you get - voila, your savings for the year!  (If A – B is negative, stop reading further. I can’t help you; no one can).

How do you ensure that this planned savings actually happens?

Take your "annual spending" target above, divide it by 12: that's your monthly spending target.  Please note, we have derived a monthly spending target, and not a saving target.  Assuming you have two bank accounts (one yours; one your partner's), open a "Third Bank Account" for diverting this savings.  Every month, as soon as you get your salary, retain only what you have decided is your spending target; cut yourself a cheque for the balance.  Deposit this cheque in your Third Bank Account.  And school yourself to think of this account just as you think of your PF viz., not think of it at all!  Except to worry about how to invest it of course.

Do choose a bank which has demat account facilities and a trading desk as well - while you are at it, you might as well make it investment friendly.  Adhere to the corporate policy on this - make sure it is part of Fidelity's approved list of banks for this purpose.

Do you realize what you have just done?  You have ensured that you will start living within the means that you have set for yourself.  If you continue on your old dissolute ways, you will know by the middle of the month, when you run out of money.  You can't touch the Third Bank Account, since that is out of bounds.  As they say in Kannada you will learn to "Adjust Maadi"! 

Why did we have a spending target and not a savings target? That is to take care of the annual inflows like bonus - having a spending target will ensure that that money goes straight into the Third Bank Account.  The other beauty of this scheme is that you can now spend without guilt, since you have already taken care of the savings aspect.

As to what is to be done with the money kept aside for investment - that will be the subject of several more articles to follow.  However, like I said, all that is theoretical, if you don't "Pay Yourself First" and "Open a Third Bank Account".  Do it!  Do it now!!

And start training yourself to live with some amount of deprivation. 

Adios… till we meet again in the next issue, fifteen days from now!

Tuesday, June 23, 2009

Personal Finance Part 1: Retire Rich

23 June, 2009

Do you want to retire rich? Do you want to retire early? Would you like to be an expert at managing your money?
I know - I know - never ask dumb questions where you know the answers already! If only wishes were horses... Since I think I know your answers to these questions, let me continue.

I presume you know how to earn money - and I also presume you are earning close to what you think is your potential at this point in time in your career. You may or may not be sure of this one, but I am going to proceed on the assumption that you are; since how to earn more is outside the scope of our discussion. How to save more, and how to ensure that your savings grow, are however, very much within the scope. Questions that are seemingly simple - the answers, distinctly not so.

Welcome to the new column in the Fidelity-Newsletter-online-avatar. The column entitled "Perspectives on Personal Financial Planning" (as you might have noticed) will cover topics relating to savings, investments, investment options, types of financial risk, retirement planning, how to evaluate various financial products, how to avoid getting carried away by hype and mis-selling, concepts relating to insurance, and any other related topics that come to mind.

Talking of retirement:
Life spans are getting longer,
Filial bonds, not any stronger,
Medical costs, growing by the day,
Value of money, eroding away!

Job spans are getting shorter,
Ain't no pensions any longer,
Money "safely" stashed away,
Of late, is vanishing away!

A race where goalposts keep shifting,
And the track keeps meandering,
Where shall I keep my little hoard,
And grow it till the end of the road?

You have to plan for getting married, for a house, for children, for their education, for your own pension, and for touring the world - no harm building castles in the air - if and when you manage to retire. Quite apart from that, you need to live life as well. You don't want to reach your retirement and find out that you may have the money, but not the health and enthusiasm, to enjoy all that you had put off for another day! To live life, you need to spend - that's very debatable, but in this context, we'll let that stand - and to retire you need to save. Both, as you can see, are conflicting objectives.

How much money do you need in order to retire? What amount do you need in the bank in cash or investments that can be liquidated, to retire today? You can build complicated financial models that start with putting a span to your life; then think of events that may occur in that span, along with their likely dates. You assume a level of earning, and a level of spending; you assume an inflation rate, and a rate of return on your investments. All of which you project out for the next thirty years - or maybe fifty - discount it back to the present, and arrive at a number. And then take the next few days to recover.

How about a simpler approach? Think of what kind of lifestyle you would want to lead if you retire today. Then think of how much you would need in today's terms to sustain that lifestyle. Let's assume you decide you need Rupees 50,000 per month. That is Rupees six lakhs per annum. Let's assume an interest rate of 6%. You need Rupees one crore in the bank or in liquid assets to earn you six lakhs per annum. But wait a minute. You need to factor in inflation. Let's assume you will save half of your income every month; and this saving will go to add to your hoard constantly. That takes the number to Rupees two crores. What about taxes? Let's add, say, 20% to this number. We then get Rupees 2.4 crores. Remember, all such calculations are supposed to exclude your primary house, the one in which you stay; it obviously assumes that the housing loan is fully paid for.

Run your own numbers. And reflect on it. I'm sure they would be somber reflections. And think about how you would like to make the journey to that kind of financial security. This column will address some of these concerns in every issue.

Happy reflections!

Thursday, March 26, 2009

Gold in the current economic context

Gold is an asset class that is worth considering for inclusion in your investment portfolio.  Since there are not too many assets (as a class) anyway, it merits serious consideration.  In the current times, for more than that one reason as well.  In any case, what are the assets that one can invest in really?

The equity story, and the state of equity in every investor's portfolio today, is too well known to bear any repetition. Highly risky with potential for higher-than-normal returns in the long run.  Of late, prone to cross-border, cross-currency money flows. And highly prone to precipitous collapses.

Debt, the perennial safe fallback option.  Since it offers safe returns, at all times a couple of percentage points above inflation, it carries a lesser yield.  A yield that is steady.  The assumption of above-inflation returns is all set to be challenged in the US debt markets at least where 10-year yields are at a record low (2.5%); inflation is currently running at 0.4%, but not even the most inveterate optimist is betting on low inflation rates in the US in the next few years. This could make the real return negative, or push up the yields, which the government is trying its level best to avoid.  The currently favoured economic stimulation theory does not favour high interest rates. Also, the assumption that debt must be safe since it offers a low and steady yield has been tested severely in the recent past - the several bankruptcies of big-name institutions, and the FMP scare come to mind.  Lower yield, it turns out, does not necessarily imply lower risk in many cases; a double whammy - you don't get enough interest and you lose your principal too! 

Real Estate, the next option.  A real option and one that you must seriously consider.  The problem is, the money involved is usually high and the liquidity or ease of sale is low.  The returns are usually very good in the long run.  If you don't time the cycle right, make that in the very long run.  In recent memory, we've had three crashes - 1994, 2000, and the current one.  Talking of the current crash, we ain't seen the end of it yet - I expect a significant drop from the current levels in the next few months.  If you are thinking of buying property, start doing your research now, but don't commit your money in a hurry.  Interest rates are not likely to rise in the near future - in fact, there may be a fall - so even loans may be easier to obtain then.  If you have invested in a house which is currently under construction, start worrying.

We shall ignore options like Art and other esoteric investments meant only for the cognoscenti in those respective fields.  There are no other investment options.  Insurance, contrary to popular perception, is not an investment.

That leaves us with Gold.  Worth writing with a capital G, as in God.  It has other connections and similarities with God as well - every deity likes to be adorned with it, it's been worshipped down the ages, people have died for it, and its price movements in future are likely to be highly volatile - just like Gods, who can be extremely temperamental and unpredictable.

Gold is something that you hold with you (even ETF's, since someone is holding it for you).  Therefore the credit risk or the default risk is zero. 

Historically, Gold has always yielded a return higher than or equal to inflation.  It is the one commodity that is guaranteed to keep its value.  The way governments across the world are running their printing presses, currencies are set to suffer  massive erosions in value.  The US government has just announced a massive program to buy troubled assets and buy back home loans (yes, the Fed is becoming the biggest housing loan issuer!) that is going to inject a trillion dollars into the economy in the form of more money, a sure recipe for inflation that will follow.  And this is just the beginning.  The Indian government is running a huge deficit of close to 10% of the GDP if you add the deficits of the Centre and the States.  Right now, the government is prevented from monetising this due to the "Fiscal Responsibility and Budget Management" (FRBM Act) - but this can't hold for long.  If they want the interest rates to come down, they have to monetise this deficit, which is another way of manufacturing money out of thin air.  Other governments around the world are facing the same problem.  In order to apply economic stimulus, they have to run the printing presses.  This is bound to lead to inflation; probably higher than what we have been used to.  A major factor that is holding inflation in check is the recent drop in economic activity and in the price of crude after reaching record highs.  Oil is currently at $53, already seeming to be on the way up.  This is not a sustainable rate.  It will rise further, especially as economic activity starts picking up; and the price of other commodities will rise along with that due to the same reason.  All this is likely to erode the value of cash or cash equivalents that you hold.  A scary prospect, since you won't even realise it as it's happeing - as more money enters the system, the value of yours goes down.

Gold has always had a negative correlation to the US dollar.  Whenever the US dollar has appreciated in value, Gold has dropped, and vice versa.  This is because Gold tends to retain its intrinsic value even as currencies fluctuate.  A currency note is nothing but embodiment of trust in the government (governments don't deserve a capital G like Gold); Gold is something that has been considered as having intrinsic worth, over time, across cultures.  A part of the attraction that we have for Gold is genetically embedded!  You can go against history, but how long can you fight what's in your DNA?

The negative correlation that Gold has with the value of the dollar has not held in the last few months.  In the recent past, as the US dollar appreciated, Gold did too.  The explanation that is offered is "flight to safety" - both Gold and the US dollar are currently being seen as safe harbors.

Gold has traditionally been considered as a "safe harbor" or "flight to safety" investment.  In times of impending war or crisis people always rush to buy Gold.  Ironically in the last few months, the same reason, "flight to safety", has been offered for flight to the US dollar.  As economies collapsed around them, people flew to invest in US Treasury Bills!  Considering that the US is at the epicentre of the current crisis, this defies rational explanation.  Anything that seems that irrational is bound to reverse soon.

The appreciation in the US dollar that we have seen in the recent past is not likely to last.  The US currency is all set to suffer a devaluation in the months to come.  As the Fed conjures more and more money out of thin air, the value of the currency will start dropping. As the government is pump-priming the economy, not all sectors are going to respond with equal alacrity.  Financial services, business services and consultancy, and real estate will be slow to respond.  They will be continue to shed jobs for some time to come.  This means jobs have to be created in the manufacturing sector.  Whatever is manufactured, needs to be exported (also, though the consumption abilities of the US population are not to be underestimated).  This requires the dollar to lose value.

The US population has now started saving. In the last few years, the savings rate was negative, as the population was being encouraged to consume more through easy money policies.  However, compared to countries like India, the savings rate is very low.  The US government has huge debt on its books.  These are dollars that it owes to others, including sovereign nations who park their money in US government bonds.  As the dollar depreciates due to reasons already noted above, there would be selling pressure on these bonds.  There will also be pressure to take the money out of the country, further depreciating the currency.

As the dollar depreciates, the price of Gold will go up.  In Indian rupees, that may be partly offset by any appreciation of the rupee against the dollar.  However, if the dollar starts depreciating steeply, the demand for Gold may pick up which may serve to increase the price further.  The "flight to safety", this time, from dollar to Gold.

The outlook for the US economy in the near future is not very good.  It looks like this recession will take some time to correct itself.  In the meanwhile, if the Indian economy starts looking up, there would be some investments flowing back to India as well.  This would push up the stock markets and also result in appreciation of the rupee.  However, I do not see this happening right away - in my view, the latest rally in the Sensex that we have witnessed is still a bear market rally - I think the market is due for one more correction.  Hence, investing in stocks is fraught with uncertainty right now.

The last few months have seen a lot of talk around Gold.  It suddenly seems to be very popular.  Prices have reached record highs and there is talk of prices going up even further.  High-net-worth individuals are rediscovering it with a passion.  Swiss banks are announcing provisions of special vaults to store peoples' gold by the ton.  ETF's have gained in popularity in the recent past; Gold ETF's, more so.  These ETF's have started buying Gold since people have started buying more and more of their units.  There has been a perceptible drop in retail demand around the world due to the rise in prices; people are preferring to recycle the existing Gold that they have.  The drop in retail demand is likely to be a temporary phenomenon.  What is of greater concern, however, is the number of ETF's and high-net-worth individuals who are joining the party.  While they are helping to drive the prices up as of now, they also tend to have a herd mentality.  If they start selling, a lot of them will sell together. This development points to Gold becoming a more volatile commodity in future, than it ever has been.  Something for the ordinary investor to be wary about.

So where does all this lead us?  Is Gold going to go up or go down?  In the near future?  In the long run?  Should one invest in Gold at current prices?

It's time Gold formed a part of every investment portfolio.  As with any other asset class, I would suggest that it should be a percentage allocation, and not an all-or-nothing bet.  Given the current uncertainty in the world, Gold is the best protection - especially against the worst possible scenarios.  Quite apart from looking at Gold as an investment, I would also look at it as a proxy for cash.  It is likely to hold its value - against any currency, as the currency depreciates, Gold will rise in price.  However, the volatility factor is new to the equation.  Due to reasons mentioned above, we are likely to see Gold prices becoming highly volatile.  As with most other investments today, you need to have a strong heart to indulge in it.  A periodic cardiac check-up is a good idea.

Equities are currently a bit uncertain - but if you are convinced it has reached bottom (let me know when you decide this point has occurred - if you are right, I will hail you as a guru) you should invest significantly in equities at that point.  Real estate currently seems to be certain.  It is certain to drop.  Whether you are invested in cash, gold, debt, or equities, it's a good idea to keep an eye on the real estate market and pick up a property (or two) when the prices hit new lows.  All this of course assumes you have the money.  If you don't, anyway you have nothing to worry!

As to what form of investment is to be preferred, I would suggest ETF's.  Gold biscuits are also a good option.  If you don't intend to hold it for a long time, don't go for biscuits, since the buy-sell spreads there are higher.  If you do buy biscuits, buy them from a jeweller, not from a bank. Banks charge higher margins, and they don't buy them back from you.  Ornaments are good for adornment; they are not such a good idea for investment.

Silver is another good option.  I am quite bullish on silver as a long-term investment.  The only problem is, there are no silver ETF's in the Indian market, and it's a very bulky commodity to store.  If you have a large hidden vault in your loft, you could consider buying it.

Happy Investing!