Newbie implementing PP in India

[krod16]

Portfolio update for 15-01-2015.

Nice!  What was the inflation rate?

Here is the list of inflation for the past few years.
http://www.inflation.eu/inflation-rates ... india.aspx

[LC475]

You've set up a very nice investing plan!  Looks good this first two months, return-wise, but don't get caught up in the surges!  Slow and steady...

Since you're out of the country anyway, now would be a good time to try to set up something outside of India -- a Norwegian bank account or gold storage account something -- just to have it.  Just in case the Rupee collapses (you never know), you have an emergency exit strategy.

[krod16]

You've set up a very nice investing plan!  Looks good this first two months, return-wise, but don't get caught up in the surges!  Slow and steady...

Since you're out of the country anyway, now would be a good time to try to set up something outside of India -- a Norwegian bank account or gold storage account something -- just to have it.  Just in case the Rupee collapses (you never know), you have an emergency exit strategy.

Thanks! Yes the Indian markets have started a bull phase so it's going good.
I already have a Norwegian bank account and some money stashed there. But now quite the opposite has happened.
Probably the fall in oil prices have affected the Norwegian economy, the currency fell from 10+ INR and is now hovering around 8.

We Indians love gold. If the rupee collapses, gold will probably shoot up and cover it 

[LC475]

We Indians love gold. If the rupee collapses, gold will probably shoot up and cover it 

Hmm, interesting idea; you might be right.  1 billion people suddenly buying gold would have an impact...

[reformed]

Hi krod16,

Since your original post, have you come across other Rupee-based instruments to help you implement the PP? Or alternatively, after a few months of experience do you believe that the instruments that you listed in the original post (copied below), remain the best ones for the job?

Thanks in advance.

I have already started investing using PP but I am keeping it simple and just using Mutual Funds. Are these funds good enough?
Cash:
DSPBR Treasury Bill Direct-G
UTI G-Sec Short-term Direct-G
Bonds:
HDFC Gilt Long-term Direct-G
ICICI Pru Gilt Inv PF Direct-G
Gold
HDFC Gold Direct-G
ICICI Pru Regular Gold Savings Direct-G
Stocks
HDFC Index Nifty Direct
ICICI Pru Index Direct

[krod16]

Hi krod16,

Since your original post, have you come across other Rupee-based instruments to help you implement the PP? Or alternatively, after a few months of experience do you believe that the instruments that you listed in the original post (copied below), remain the best ones for the job?

Thanks in advance.

I have already started investing using PP but I am keeping it simple and just using Mutual Funds. Are these funds good enough?
Cash:
DSPBR Treasury Bill Direct-G
UTI G-Sec Short-term Direct-G
Bonds:
HDFC Gilt Long-term Direct-G
ICICI Pru Gilt Inv PF Direct-G
Gold
HDFC Gold Direct-G
ICICI Pru Regular Gold Savings Direct-G
Stocks
HDFC Index Nifty Direct
ICICI Pru Index Direct

Hi reformed,

I think it's too short a period of time to evaluate the instruments. But I am quite happy with them as of now.

[krod16]

Here is the snapshot of the Indian PP for February 2015

[krod16]

Snapshot for March 2015

[MachineGhost]

That's quite a reversal in gold there!

[krod16]

That's quite a reversal in gold there!

Yes, maybe this is the reason:
http://www.moneycontrol.com/news/commod ... 32417.html

[krod16]

Snapshot for April 2015.

[dualstow]

Snapshot for April 2015.

Here's my snapshot: It's contained in the period at the end of this sentence.

[krod16]

[krod16]

May 2015

[barrett]

krod,

Are you rebalancing monthly as the near perfect symmetry of your PP seems to indicate? If so, are you holding your PP in a single tax-deferred account? Really appreciate these updates as figuring out if the PP works in any major economy is one of the most interesting angles from my point of view.

[krod16]

krod,

Are you rebalancing monthly as the near perfect symmetry of your PP seems to indicate? If so, are you holding your PP in a single tax-deferred account? Really appreciate these updates as figuring out if the PP works in any major economy is one of the most interesting angles from my point of view.

Hi barrett,

Yes. I am investing/rebalancing monthly as I am trying to save/invest a part of my income. The amount I manage to save is a bit higher because I am working out of India and earning a bit more.

Here in India we don't have something like a tax-deferred account.

The equity funds have zero long term capital gains tax (after one year) and the debt funds (including gold and cash) have a long term capital gains tax after indexation (after three years).

Apart from this we have a Employee Pension Fund that is completely tax free as of now which I do not consider part of my PP.

[barrett]

krod, Thanks for sharing that. I haven't been to India so there are a lot of things I don't know. Are taxes generally low then? And have you tracked down any others in/from India who are following the PP strategy? Any drawbacks to implementing it there so far?

Keep up the great job on the savings!

[krod16]

krod, Thanks for sharing that. I haven't been to India so there are a lot of things I don't know. Are taxes generally low then? And have you tracked down any others in/from India who are following the PP strategy? Any drawbacks to implementing it there so far?

Keep up the great job on the savings!

Yes, the taxes are generally lower compared to Western countries but then we don't have any good form of social security or medical assistance from the government. And the inflation is relatively high as well (sometimes reaches 12%).

I have not found someone who is following the PP strategy here. One reason to join the forum was to do that.

In India, the stock market is not mature enough so active equity funds are performing better than passive index funds. But I'm sticking with index funds for now.

One drawback is I don't have the past data of how a PP works here so I'm placing my faith in what I understand with the PP.

[barrett]

Got it and thanks, krod.

As you probably know, backtesting is really good at showing what doesn't work over the long term. With inflation that high, I am curious what the longest maturity bonds yield in India. In retrospect those would have been a great buy and hold investment here in the US back in the 1980s and early 1990s.

I have a sister-in-law in China and have wondered if a PP could work there as well (not asking your opinion... just thinking out loud). I believe they have the a similar issue with the stock market. At one point a couple decades ago Telefonos de Mexico was an astounding portion of the overall stock market in Mexico so an index would have been meaningless there.

Anyway, thanks for the input. Hope the PP works over the long run there in India.

[krod16]

I found this article on the analysis of how the PP would have performed in India.

http://freefincal.com/the-permanent-por ... -investor/

What do you guys think about the analysis? It seems to suggest that using the 60/40 equity/debt allocation is better than the PP in India.

[MachineGhost]

What do you guys think about the analysis? It seems to suggest that using the 60/40 equity/debt allocation is better than the PP in India.

Excludes the inflationary 70's.  Doesn't use true long-term bonds.

Its true that gold is a poor store of value and weak inflation hedge, however.

[LC475]

We have reason to think that gold won't work so great as an inflation hedge for India because the Indian rupee is not the reserve currency of the world, nor even a very major currency.  So if the rupee crashes, gold will not necessarily skyrocket much, if at all.

But, to solve that problem you have to set up a US-PP using US assets.  This is doable, as multiple Indian brokerages offer S&P500 ETFs, and bonds and bills are also available.  Oh wait, I forgot, you're physically in Europe, so even more so, yes this is doable.  But it is different than your current strategy.  Others will tell you to make a variation of the PP using country-specific assets.  But I personally have the view that the only real PP is a US PP.  That's the one you can count on.

[mukramesh]

We have reason to think that gold won't work so great as an inflation hedge for India because the Indian rupee is not the reserve currency of the world, nor even a very major currency.  So if the rupee crashes, gold will not necessarily skyrocket much, if at all.

Can you explain this? My understanding is if the Indian rupee crashes (i.e. undergoes hyperinflation), the price of gold in rupees would skyrocket. Meaning, one would be able to exchange 1oz of gold for far more rupees than before because rupees are worth less (it takes more of them to buy the same thing).

[LC475]

We have reason to think that gold won't work so great as an inflation hedge for India because the Indian rupee is not the reserve currency of the world, nor even a very major currency.  So if the rupee crashes, gold will not necessarily skyrocket much, if at all.

Can you explain this? My understanding is if the Indian rupee crashes (i.e. undergoes hyperinflation), the price of gold in rupees would skyrocket. Meaning, one would be able to exchange 1oz of gold for far more rupees than before because rupees are worth less (it takes more of them to buy the same thing).

Because the rupee is not the number one money in the world (nor the number 2, nor the number 3.....), if the rupee crashes the overall world price of gold will not necessarily be affected strongly one way or the other.  Its nominal price in rupees will increase, but there is no reason to believe it will greatly increase in real terms.  So your purchasing power on the global market will not increase.

So your gold will be safe, but it will not do super-well such that it offsets the poor performance of the other 75% of your portfolio.

To understand this, take an example: let's say we put together a Zimbabwean Permanent Portfolio in the 1980s.  Eventually, at the end of the 1990s, Zimbabwe did experience hyperinflation.  So the value of a your Zimbabwean long bonds and your Zimbabwean cash dollars both went down almost 100%, leaving you very small fractions of 1% of your original savings.  A Total Zimbabwean Stock Market fund would have performed pretty poorly also; I'm not sure how poorly.  Meanwhile gold trucked along pretty steadily.  So what does that mean?  It means after the hyperinflation you still have 25% of your life savings, and the rest of it is toast.

Now the nice thing about the PP system with its rebalancing is that it does give you time.  As the Zimbabwe Dollar fell, you would be rebalancing out of gold and into the other assets.  You'd do it once, and then twice in a single year.  If you are taking the opportunity to think using the perspective that Harry Browne has taught you in his books, this should alarm you.  You should realize, "Wow, there's something going very wrong in this country."  And so you could take the opportunity to move into foreign assets and out of the Zimbabwe Dollar entirely.  I think this could be a good rule of thumb for the PP, in fact.  If you have hit the rebalancing bands twice within 12 months, especially if it is in the same direction, that is a good time to do some serious introspection and research and thinking.  There is some major economic upheaval going on and you'd better adjust to it.  Anyway, if you noticed this early enough, you could have gotten out and saved more than 25% of your assets.  If you were using my two rebalances in 12 months rule, the rule would probably be triggered for you around 1998 which would give you a few years head start before the really bad hyperinflation began.  Perhaps a better rule would be: more than 3 years in a row of over 10% inflation and you pull out, put everything in gold, and wait a few years to see what happens.  This would have gotten you out in 1983 in Zimbabwe -- a much better result.

Now it would have also come very close (just a percentage point away) to getting you out of India in 2011.  Take that as you will.

[krod16]

Thanks for the analysis.

I am poor in my understanding about this. But I still don't see why gold would not play the same role in the Indian context.

Considering we are a major importer of gold, it makes even more sense that when high inflation hits the rupee, gold will get even more expensive and as a result of the inflation the demand for it will also increase regardless of how it's faring in the international markets.