Rail Budget

The rail budget has been to my expectations. Reduction in fares accross the board, looking at the popularity desired for the elections next year. The reduction in rates are of course welcome. These will balance some cost pressures due to the increase in fuel costs.

What is amazing and creditable is that Laloo has been able to provide these rate cuts and post a big surplus as well. There is no doubt that he has turned around the performance of Indian railways. It is not without reason that major management institutes are eager to analyse this turn around in terms of a case study. Laloo has also been invited by these institutes to share his tips.

Tips.. really:
Catch the bull by the horn, not the tail
If you don't milk the cow it will fall sick

Such ideas have tremendous potential as he has demonstrated. The problems of the sick Indian railways have been met head on. He has increased capacity utilisation by innovative means. Hats off to Lalu.

HDFC and CBOP banks merger

HDFC Bank is set to merge CBOP (erstwhile troubled Centurion Bank, which merged with Bank of Punjab) with itself. Usually in a merger of unequals, the smaller bank (CBOP) benefits more. This is easily reflected in the stock markets reaction to the news. HDFC Bank share price fell from (1540 to about 1450) while CBOP share price increased (from 50 to 60). I feel that besides the synergies identified like size and reach, HDFC Bank is also set to gain quite a lot from the expertise of Rana Talwar of Sabre Capital who will join the Board of HDFC Bank. Rana Talwar has a lot of international experience by working with Citibank and heading Stanchart. The exchange rate of 1:29 values the share of CBOP at about 50 and that is where the stock trades currently.

India Outlook

Yesterday I attended a conference on wealth management at the Grand Hyatt in Mumbai. It was part of the event Extravaganza organised by Shorex Ltd. A lot of the talk at the conference was focussed on the India growth story. There is no doubt in the minds of these finance professionals that India is on a growth path for the next 30-40 years. Since we are just at the beginning of this growth cycle, it is a very good time to invest in the Indian stocks.

How can we say if it is the right time to invest now? Well, looking at the growth of the Indian economy for 30 - 40 years, we can expect the stock market to grow for atleast about 15 years.

How do we judge if the market is overvalued or not? What about the PE ratios? Currently the Indian market has a PE ratio of about 18. We know that the economy is growing at about 9 or 9.5%. The inflation is about 4-5%. In nominal terms we thus have a growth of about 14%. This applies to the entire Indian economy. Now, the corporate sector is at the forefront of this growth. Hence, the PE of 18 is entirely reasonable. We can definitely see a increase in the PE levels from here as the sentiment in the market improves, but that is another story. At the current PE, we can easily expect a 20% growth from the Indian stock market for the next 15 years. If the PE increases to above 30, it might be a good time to come out of the market and wait for it to come down again, as historically the PE has gone above these levels only during the scam times when markets were overvalued.

Overall the sentiment was in line with my feeling. We can see a flat market or it might go down (giving more buying opportunities), but the long term growth is simply positive. Keep investing, stay invested.

Markets ahead

The crash continues! Last week we saw hopes of market recovery being dashed. The market could stay flat in the next weeks. The budget could be a stimulus for the market. Everybody is expecting a populist budget because of the election year. I feel there could be some surprises for the market.

Meanwhile Reliance Power, the heavyweight IPO lists today. Everyone has made predictions on the listing price and from listing premiums, now we are speaking about discounts. Let us see what effect the listing has on the markets.

Credit cards

How many of you would be interested in high interest rate unsecured loans? You don’t want to associate with high interest rate loans.. right?

In my view a credit card is just a facility to avail very high interest rate unsecured loans. Hence, I would like to share with you my views on a few important aspects of credit card management.

Indeed! Credit cards are very convenient. They help you meet emergencies. They help you make online purchases. Banks also make the credit cards very attractive to you. Most of the credit cards are offered by Banks free of cost for life. You can avail 45 to 52 days interest free credit period. You just need to pay a minimum amount. Rest can be repaid later as you wish. Multiple credit cards allow you to even roll over credit from one card to another. Credit card purchases entitle you to special offers and discounts. You can earn and redeem points on your credit card spends. All this convenience leads you into a trap which is difficult to move out of.

For example, I read about a Software professional, who earns a decent salary. He pays 30% of his salary towards his home loan EMI, 15% on his car EMI and 25% towards his credit card bill. He earns a decent amount. But, he is still struggling with his finances. He is not able to save or invest. He is caught in the credit card trap.

Let us look at some of the important features of credit cards and discuss what they actually mean.

Consider the interest free period. It is like the free samples of products that we get. We can enjoy the samples free, but if we want to enjoy the whole product we need to purchase. When we like the sample, we are tempted to make a purchase. Similarly credit cards offer you interest free credit. If you want to extend the credit, you have to pay interest. Generally, a credit card would have a one month billing cycle and about 2 to 3 weeks period to make the monthly payment. If you pay your bills on time, no interest is applicable. But you need to keep in mind that all your purchases do not give you a 52 days interest free period. Only the purchases that are made on the first day of your billing cycle, would give you the maximum interest free credit. For purchases made on the last day of the billing cycle would give you only about 20 days interest free credit. Hence be familiar with your billing cycle to get the maximum benefits.

Next, how much of the bill should you pay? You have the option to pay only a minimum amount. But, resist the temptation to do that. You should clear the entire bill as soon as possible. If the credit is availed by paying a minimum amount, the interest charges apply not only from the date of bill payment, but from the date of purchase. You are in fact paying for the free samples as well. The interest free period is applicable only to payments cleared within the time limit. Further, there is no interest free period even on future purchases till your outstanding dues are cleared. Hence, do not opt for minimum payment option. Clear your outstanding dues as soon as possible.

Also, you can withdraw cash using your credit card in case of urgencies. Never do that. Cash withdrawals do not have a interest free period. Interest free period only applies to credit card purchases. Besides, the interest rate is also very high. It seems nice to hear figures like 2.5% or 3%, but these are monthly interest rate. If you want to know annual rates, multiply by 12.. yes 30% to 36%. That is not all. Every following month you would have to pay interest on accrued interest. This is called compounding effect. If we consider compounding, the interest rate works out to something like 35% to 43%. It is certainly better in such situations to take a personal loan that has lower interest rates and also spread out the repayment.

What I have tried to convey is that, having a credit card can be a boon or a bane depending on how you manage it. Try to cash on the advantages the card offers. Understand the billing cycles and capitalize on the interest free period. If you are disciplined, you can use them to your benefit. The decisive factor should be your budget and not the limit that the credit card offers. never withdraw cash with your credit cards and clear outstanding dues as soon as possible.