Do you see what I am seeing lately?

1. I see that Gold and silver are touching new highs globally – Gold has appreciated 5% in April alone.
2. I also see that even though crisis in  Japan and Middle east has overshadowed the Euro area debt crisis – it is far from over - and now it is the turn of Portugal to seek help from IMF and EU. I also see that Greece is close to defaulting on it’s debt obligations and it could end up in Greece  exiting the European Union. (http://www.telegraph.co.uk/finance/economics/gilts/8461745/Greece-forced-to-pay-sky-high-rates-to-borrow.html)
3.  I also S&P downgrading the US credit rating from stable to negative – Credit rating agencies had till now been unwilling to downgrade the US – but as we all know, the US Fed has been doling out US dollars through stimulus packages and that has put a massive strain on the Government finances and the fiscal deficit has gone up eventually resulting in this downgrade.  (http://www.bloomberg.com/news/2011-04-21/u-s-tried-to-dissuade-s-p-from-outlook-change-wash-post-says.html)
4. This week Obama has openly said that US finances are unsustainable (http://www.bloomberg.com/news/2011-04-20/obama-tells-facebook-audience-that-nation-s-finances-are-unsustainable-.html?cmpid=)
5. I also see Indian markets going up and down every fortnight –BSE Sensex was 20450  on Jan 1^st, went down to  17500 on 9^th Feb,  went up to 18200 on 18^th Feb,  dropped to 17500 on 23^rd feb,  again went up to 18200 on 3^rd March,  again dropped to 17850 on 18^th March, then went up to 19380 on 1^st April,  and down to 19071 on 18^th April and currently hovering at 19171 as of 20^th April – It looks kind of limp – low on energy –kind of directionless.
6. I also see inflation remaining high in India (http://www.livemint.com/2011/04/21115535/Food-inflation-rises-to-874.html?h=A1) and I see RBI having increased the interest three times in the last four months.
7. I see the Crude price fairly steady at $120 plus - at this level it is dangerously high for Indian economy and I do not see the unrest in Libya, Yemen and Syria is not going to be resolved in a hurry. (http://www.oilnergy.com/1cashpet.htm#brent)
8. I also see that India’s GDP growth slightly downgraded due to concerns about Inflation (http://www.indianexpress.com/news/montek-spikes-indias-growth-at-under-9/776700/).

So where does one invest in these uncertain times?

There are predictions that Gold will go up and up as the US economy is in fairly fragile state and the solutions being tried by US Fed is not in the right direction. Also it will take a long time for the US economy to get back in positive territory. Due to this, the investors are flocking towards commodities and hence Gold and Silver prices are going up and up – will it go up further is the question?

I believe that the Gold /Silver prices will further go up as there is limited supply and increasing demand from investors globally – till the economy in US and EU stabilise (and that is some time away) – the demand and price for Gold and Silver will keep going up.

So where do you think we should park our money as of now?

Here is one idea for investment

I have a friend who worked in the US for a few years and came back to Bangalore in 2003. He had a fair amount of savings then and realised soon enough that the real estate scene in Bangalore was hot. Sure enough he invested his entire savings by buying a few plots of land in different parts of Bangalore – between 2004 and 2008, things looked good with the real estate prices giving him 20% return per annum – it was not cash at hand – but he knew, if he needed cash, he could sell the plots within a few months. He also focussed on doing well in career and he was rewarded with two promotions in that period. His lifestyle kept pace with his improving financial condition - he bought a higher end car, took loan and bought a big flat, put his kids to good schools, went on international holidays - everything looked fine till the 2008 crash – early in 2009, his company started downsizing and he lost his job in mid 2009 – unfortunately he still had to pay the EMI's for house and car , he still had the school fees to pay for –and his cash inflow was zero. He had a few FD’s that he cancelled and used the money -   he tried selling his land – but could not as there were no buyers – and then he came to me for advice –what can one do if situation is already out of control?

What would you do differently if you were in his shoes?

This brings me to the concept of Passive Income streams - passive income is the one where the cash flow comes in, irrespective of whether you are working or not - we all must work towards increasing passive income streams. A good example of passive income is rental income – dividend payout, interests from FD’s are also examples of passive income. You dont have to be in a great job to have passive income streams - I know a few taxi drivers and auto drivers in Bangalore, who own a few taxis /autos and have given it on rent and earn a rental income –these are passive income streams.

We must not just aim at increasing our wealth and income during our career - our aim in the first fifteen years of our careers should also be to build  passive income streams to support 100% of our expenses. What it means is that by the time you are 35 years old, you must be completely financially free and you should not depend on your work /salary for a living.

Looks impossible? Haven’t seen anyone doing it? – Well, It is eminently doable –and quite a few people have done it. Only you have to observe and you will see people in your neighbourhood who have achieved this. These are not opulent people – they have simple (but not stingy) lives – they still work and they are good in their jobs – but they have assets that work harder than them and these assets give them passive income streams.

So here is an idea that will give you a better than average passive income stream.

Rental income is one of the most commonly found passive income streams. Many people invest in residential properties and give it on rent –  in India, we get an annual rent of about 3-5% of the market value of the flat /house. So if you had a house worth Rs 50 lacs, you will get an annual rent for about 1.5 to 2.5 lacs. However, commercial properties give higher rentals –  in India, we get an annual rent of about 7-10% of the market value of the commercial property.

Here is an example of a commercial property that is currently available this week in Bangalore:

Property Address	:	Sigma Soft Tech Park, Varthur
Area offered	:	1000 Sft
Price per sft	:	Rs 5250/- per sft
Car park	:	1 No
Rent per month	:	Rs 38/- per sft – ROI of 8.0 -8.7%
Deposit	:	10 Months
Lease term	:	3 +3 + 3 Years
Lock in Period	:	3 Years
Commencement of Lease	:	Aug 2007
Escalation	:	10% every 2 Year
Tenant	:	Will not be disclosed in this blog
Power & Back up	:	1 Kva per 100sft with 100% Back-Up
Other charges	:	Registration @7.2%

This is a well known IT park – it has tenants already and the builder wants to sell part of this property - If you invest Rs 50 lacs in this property, you would get about Rs. 4 lacs per annum rent from the start.

And there are many more such opportunities. In India commercial property gives double the rentals of residential property and the asset appreciation is around 15% in both cases - hence a commercial property has higher ROI when compared to a residential property by about 3-5% per annum.

So if you want to get financially independent soon –investing in a good office space is one of the smarter ways to do that.

More ideas in my coming blogs.

My 2011 predictions revisited

Who would have predicted the events of Q1 - As I sat and tried to predict the year ahead in early Jan 2011 – could I have predicted the blow out in Middle East? Could I have predicted the devastation caused in Japan? I am humbled by the fact that we can only predict so much – there are forces beyond us – however, it also means that we must constantly revisit our predictions and fine tune our strategy constantly.  Also as a risk mitigation strategy, we must be prepared for the worst and have an action plan for the worst case scenario.  

Having said that, when I see my predictions made for 2011 – I am not sure if I will change anything.

I truly did not predict the Indian stock market performance of Q1. I did expect a slowing down from the high PE levels of 2010 - but the markets went down faster than my estimates - it is now slowly inching up  - but I do believe that this year we will not see much gains in Indian stock markets.

Inflation is a major threat to all developing economies, including India and we will see a subdued GDP growth of around 8% due to rising input costs.  We have already had two rate hikes in Q1 and I am sure that the interest rates will keep going up as long as the inflation persists.

Further the US and European economies are not out of the woods yet – the US markets are being propped up by cheap money unleashed by Fed in the form of QE2 – Europe has it’s own problems in Portugal and Spain beside Ireland and Greece. 

In these circumstances, I do believe that Gold and Silver are safe investments at this point of time and will give a return of around 15% this year.

Real estate in India is also going through a small correction due to the 2G and LIC HFL scams -  the credit lines for real estate companies from the banks have almost dried up – further all the major real estate companies had announced many new projects last year and this drying up of credit has created cash flow problems for them – this would mean that the prices of projects may not rise as the companies would like to sell it and get cash flowing from customers – hence it is a good time to invest in real estate if you were planning for one in 2011 – look at premium projects and negotiate hard – there is a good chance you will get a reasonably good deal. In India, HNI’s have around 45-50% of their asset allocation in real estate and this is an area where I would recommend that we have at least 50% asset allocation. Last year Bangalore had witnessed around 15% appreciation in property prices and I believe that this year too we will see similar appreciation despite this credit crunch in India.

So as I write, I believe that real estate and Gold are the better avenues – each giving around 15% plus and beating the inflation by about 7-8% - Gold is more liquid but capital gains will be taxed – Real estate is less liquid and needs larger amounts. But as of now, I have moved most of my investments in these two areas.

In my next blog, I will share a real estate investment option where you can get about 20% returns per annum after having stayed invested for 3 years.