Monday, July 14, 2014

FMP's facing the heat

The Finance Minister has thrown a googly at the Mutual Fund industry by altering the tax rules for debt funds. For those who have not followed this development, the gist:

Till now, all debt funds held for more than one year were taxed at a concessional rate of 10%, or 20% post-indexation (where the purchase price is indexed for inflation, before ascertaining the gains subject to tax), whichever is lower. As against this, Bank FD's are taxed at full marginal rate (30% if you are in the highest tax bracket). This obviously is an advantage for debt MF's who have been garnering money from the public and lending onward to Banks/ Corporates.

The budget has now changed the rules. From now on, all debt funds held for less than three years will be taxed at the full marginal rate, i.e. be considered short term. This is in line with the definition of short term which is three years for all other capital assets (except equity which is one year). Also, the option of 10% is withdrawn. It will now be 20% post-indexation, like all other capital assets.

Fund houses are in panic mode. Some of them who had collected money recently have returned the money before deploying it. The Fixed Maturity Plans (FMP's), which are usually closed-ended funds specifically formed to take advantage of this tax arbitrage,  especially are going to be the hardest hit. People used to invest in FMP's for a little over a year to get the indexation benefit; and especially around March of every year, to get double indexation benefit, thus enjoying post-tax returns in the region of 9-10%. They are now going to queue up for redemption. And the redemption story is not likely to be smooth. So long as there are fresh flows to replace redemptions, fund houses could "roll over" existing loans, which in some cases could be a case of "evergreening" - allowing rollovers since the corporate is unable or unwilling to repay. It will be interesting to see what happens now. 

Expect some haircuts in FMP schemes, or intervention by the AMC's to bail out the funds.  It all started out innocuously enough with FMP's investing only in Bank CD's and triple A securities of corporates. But then, the race to show more returns soon takes over due to competition, and the asset qualities in the FMP's are not all triple A now. There is also likely to be "swap" of assets from the FMP's to the other debt funds of the same fund house, which may result in reduction in overall quality of the latter.

No financial institution will be able to sustain a run on its assets, where all its depositors queue up to withdraw funds on the same day. FMP's are supposed to be immune to this, since the fund managers are supposed to be investing in ultra-safe debt securities. However, we all like to behave as if the day of reckoning will never come, especially in the financial markets, and assets of suspect quality slowly find a place in the mix.

Industry lobbies are of course gearing up to lobby the Finance Minister. We don't know if he will oblige, and it will be interesting to watch the developments. Meanwhile, if you leave out debt funds (which still offer 20% post indexation taxation, albeit with a three-year lock-in), the post- tax returns on bank FD's are in the region of 6 to 7 percent (for those in the highest tax bracket), which is not even enough to take care of inflation.  On the flip side, there is some justice to the new provision - if you want to enjoy additional tax benefits, the least you can do is to agree to a three-year lock-in. 

( There is no such thing as zero risk - please see also link to a previous article of mine: )

(Thanks to Ravi Kumar for inputs for this article)

Saturday, July 12, 2014

Why life is not linear

I knew it. I intuitively knew that Malcolm Gladwell's famous ten-thousand hour rule would not hold under real-life conditions. But it sounded romantic and appealing. Practise for 10,000 hours in any field, he claimed, and you become an expert. Not merely any expert, but an acknowledged guru in the field! Of course, the unsaid assumption is that, to spend 10,000 hours on anything – it means three hours a day, every day, for ten years – you need to give up on a lot of other things.


In his book Outliers, Gladwell outlined this theory which caught the imagination of people. It appeals to our sense of fairness and how things should be with the world. If anyone has become successful in any field we like to think that they have paid the price for it. We get a sense of perverse satisfaction thinking about all the parties they missed while they were practising, poor sods; all the vacations they had to forego; and we visualize all the joy being sucked out of their lives like water from a sponge, leaving them dry of everything else but the skill they chose to become expert at. And then we grudgingly acknowledge their expertise at singing / dancing/ boardroom politics or whatever, all the while smug in our belief that we did not commit those mistakes and miss out on life.


Of course these are mere rationalizations. We really do not want to acknowledge that some people are very good at what they do, and at the same time enjoy other things in life as much or more than we do. They seem to have achieved levels of extreme competence, without putting in even a semblance of effort, or at least, by working on it as much as we do, no more.  The guy who was CEO in my previous company has a well-rounded life and goes home on time every day, the topper in my college used to be always on the football field, or playing cricket, and was very active in college plays with the stage presence of a Rajnikanth, and Richard Branson seems to make everything seem fun and effortless, including making lots of money. Your neighbor who was a no-good wastrel in school now has the biggest car in the neighborhood, and takes the most expensive vacations, and you don't see him really working even today.


We all like to think that life is a linear equation. You get what you work for; great achievements entail great sacrifices; you put in more effort, you get more reward; if you laze around, you are not going to make it in life – these are all comforting thoughts we encourage in ourselves since we find ourselves working so hard all the time.  Unfortunately, life is not so fair. Gladwell is wrong, and someone had to do a lot of research to prove it.  Of course, this research talks more about how some people, in spite of putting in lots of effort – significantly more than 10,000 hours – seem to be as clueless as when they started out. It seems depressingly similar to the story of my life L

( article on disproving Gladwell's 10,000-hour theory from the latest issue of Economist below: ) 


Practice may not make perfect

Musical ability is in the DNA

Jul 5th 2014 | From the print edition
  • Timekeeper

TO MASTER the violin takes 10,000 hours of practice. Put in that time and expertise will follow. This, at least, is what many music teachers—following Malcolm Gladwell's prescription for achieving expertise in almost any field by applying the requisite amount of effort—tell their pupils. Psychologists are more sceptical. Some agree practice truly is the thing that separates experts from novices, but others suspect genes play a role, too, and that without the right genetic make-up even 20,000 hours of practice would be pointless.

A study just published in Psychological Science, by Miriam Mosing of the Karolinska Institute, in Sweden, suggests that the sceptics are right. Practising music without the right genes to back that practice up is indeed useless.

Next, Dr Mosing tested her volunteers' musical abilities. Doing this by conducting recitals would be impossible. It would be hard enough to quantify the relative merits of people playing the same instrument, let alone to compare the skills of, say, drummers with those of saxophonists or singers. Instead, she used three proxy tests.
Dr Mosing drew her conclusion in a time-honoured way—by studying twins. She and her colleagues surveyed 1,211 pairs of identical twins (who share all their genes) and 1,358 pairs of fraternal twins (who share half) born between 1959 and 1985. They asked each participant whether he or she played a musical instrument or actively engaged in singing. Those who did were asked to estimate how many hours a week they had practised at different ages. From this Dr Mosing was able to calculate a score for each individual's lifetime practice. Anyone who did not play an instrument or sing got a score of zero.

The first measured a person's ability to detect differences in pitch. Each participant heard two notes. Sometimes the second was different from the first. Sometimes it was not. Participants had to say whether the second was higher or lower than the first, or the same.

The next test, of appreciation of melody, asked people to distinguish between two sequences of four to nine notes, in which one sequence would sometimes differ from the other in the pitch of a single note. The final test, of sensitivity to rhythm, required volunteers to decide whether two sequences of five to seven notes with the same pitch, but possibly different time intervals, were indeed the same or different.

Expert musicians are exceptionally good at detecting differences in pitch, melody and rhythm in these sorts of tests. Dr Mosing therefore expected to find that if someone had put in sufficient practice time his musical ability would be as high as an expert's. But that was not true. In fact, there appeared to be no relationship between practice and musical ability of the sort she was measuring. A twin who practised more than his genetically identical co-twin did not appear to have better musical abilities as a result. In one case the difference between two such twins was 20,228 hours of practice, even though the pair's measured musical abilities were found to be the same.

That is not to say practice has no value. Playing an instrument and singing are physical skills, and do take a long time to master. But, though the experiment could not measure this directly, it is a fair bet that only those with high musical ability in the first place can ever hope to master these skills—and Dr Mosing has shown that musical ability has a big genetic component.

One other curious fact to emerge from the study was that the practice of practice itself seems to be under genetic control. Even allowing for counter-examples such as the identical twins with a 20,000 hour difference in their lifetime practice regimes, such twins are more similar in their attitudes to practising than are fraternal ones. For children who find practising the violin a chore, this may be the study's most useful result. When asked by their teachers why they have not practised during the previous week, they can now blame their genes.

From the print edition: Science and technology

Wednesday, July 9, 2014

The latest Xiaomi phone!!!

The latest Xiaomi phone at 15,000. (see link at the end). Actually I am not sure if it's a phone. I am reading this and am confused:

"Qualcomm Snapdragon 800 8274AB 2.3GHz processor, Adreno 330 450MHz GPU, 2GB LPDDR3 RAM, and eMMC 4.5 flash memory."

Considering that I cannot understand a word of that, I am not sure if it's a phone. My friend who showed it to me was gasping with wonder and going blue all over - I think he forgot to breathe. The phone I have currently can make calls, send sms's and I believe it can take photographs too. To the best of my knowledge, all phones nowadays can do that. So why this great gasp of collective admiration, almost like a group orgasm, whenever a new phone is released into the market? 

He said "you don't understand. It has a snapdragon processor!". I thought about that. I am of course a fan of Saphira, Eragon's dragon in the eponymous series, and enjoy the occasional mention of dragons in Harry Potter. But this one failed to connect. "Ok - forget that - a 2.3 gig processor - can you believe that?" he gasped once again. "To process what?" I asked him. "Why, anything. For example, when I am in a restaurant, it takes all of twenty  seconds for me to load Google Maps, note the co-ordinates,  photograph what I am eating,  and post it in my facebook, instagram and twitter along with links to Zomato for the restaurant ratings, and Tarla Dalal's website for the recipe of each dish on my plate. Twenty seconds! Can you believe that?!!". I couldn't figure out why he wanted to do that in the first place, so I just continued eating my food. Meanwhile, he was too busy uploading photos of his food, and finally got around to tasting it. "See, the food is already cold. I told you my current phone takes too long". He had forgotten to chew and was talking with his mouth full, since he was checking his status for "likes". And then he went on to explain what an LPDDR3 Ram meant, the importance of flash memory, and the absolute necessity of a GPU, all of which was going right over my head. 

He didn't even finish the meal. He rushed off to contact his friend working for Xiaomi to see if he could corner a piece before it really hit the market. I continued munching my lunch in peace  wondering whether it's the other people who are losing it, or is it me who has lost touch with reality.