How Credit Card Companies make money !!

Sometime back I had written this post as to why I dont like Credit Card. I recently recevied the credit card statement from Citibank. I never bothered to look at the "terms and conditions", but this is what my statement looked like:









Now see the calculation of how the "interest" is calculate. I had outstanding balance of 5582 Rs in the previous month. Essentially this means I borrowed the 5582 Rs from citibank for one month. And on 25 Nov I again borrowed 6900 Rs for Item X. The due date of payement for 6900Rs is 14 Jan 07 and the due date for paying back Rs 5582 is 6th Dec. The cheque I issued against the previous due got cleared on 11 Dec, which means a delay of 5 days. So essentially they should charge interest for these 5 days.

With interest rate of 34.2% annually, the interest for 5 days should be 0.468%, but they have charged me interest for entire month (34.2/12 = 2.85%)... also they should charge interest only on Rs 5582 which should be Rs 159... but instead they charge intersest on the entire outstanding amount which is 2.85% of (5582 + 6900 Rs) = Rs 340 approx.

This is the way card companies make money. Imagine millions of customer paying such un-necessary amount. That is why credit card division is one of the most profitable business for any bank. This case is not exclusive to Citibank, but all card companies have more or less same terms. I have never shown much interest in knowing the terms and conditions, but now is the time I should look into it carefully.

Check out an interesting (although old, Nov 04) article by Robin Stein titled The Ascendancy of the Credit Card Industry.

Evil is the root of all money

I was reading this fantastic paper by Nobuhiro Kiyotaki ,London School of Economics and John Moore Edinburgh University and London School of Economics. Their theory tries to answer the question "Why we do have money?". The essence of the argument is that we need money simply because we do not trust each other. In an ideal world, I would say get the service of someone (e.g doctor) and promise him to pay back by something I do when he needs it. But the doctor does not trust me, so I pay him with rupee notes. A money note is essentially a promise by the central bank. So if I pay the doctor 100 Rs, the doctor essentially has got a promise that when he needs something he can trade this 100Rs to get the service/commodity. A central bank is more credible entity for a doctor than me. This argument applies to everyone. A pretty interesting read !!

Legal but unethical "rounding off"

I usually like the solutions posted by Sucheta Dalal on Money Life. Now check out this absolutely amazing and shocking trick used by Tempelton Mutual Fund (One of the most respected MF in India).

This article really shows that even a little maths can bring a huge difference. The essence of the article is that the Tempelton Fund is making money by just "rounding off" the percentage entry load (2.25%). This rounding-off is entirely legal since the offer document mentions it, but it really amounts to duping the investor. I do try to read the offer document, but never thought that such tiny clauses are used to make crores of rupees.

Check out this from the article

Masrani applied to its New Fund Offering - the 'Templeton India Equity Income Fund' paying Rs. 1,02,250.00 calculated as Rs. 1,00,000.00 for 10,000 units @ Rs. 10.00 per unit plus the entry load of Rs. 2,250.00 at the rate of 2.25%. He received the fund statement for May 18, 2006, which shows an allotment of 9,995.112 units instead of the 10,000 he had applied for - in effect five units less.
On studying the statement in detail he discovered that the units were priced at Rs 10.23 and NOT Rs 10.225 each, which was supposed to be the cost at 2.25 % entry load to the unit price of Rs 10. A call to the toll free number (1-800-424-4255) fetched a response from Ms. Dimple who clarified that the price had been rounded off to two decimal points and this was mentioned in the offer document.
Now consider this. Masrani has a letter from Franklin Templeton's President Vivek Kudva to unit holders which says that 390,000 investors responded to the Templeton India Equity Income Fund offer and it collected over Rs 2,000 Crore.
At Rs 10 a unit, this breaks down to 200 crore units allotted. Now add Rs 0.005, which was rounded off to the correct price of Rs. 10.225 and it adds up to a whopping difference of Rs. 1 crore.

Investing Fundas Revisited

I was just reading this article at seekingalpha website and found

Peter Lynch, former manager of the Fidelity Magellan Fund says in this article :
You’re already highly exposed to your job - after all, it’s your job that pays your salary and probably your retirement contributions and health insurance. The last thing you want to do is to increase your financial exposure to the industry you work in or its suppliers or customers.

I saw this clearly in my job as a research analyst covering the communications equipment sector during the boom and bust of 1998 to 2002. Many of my industry contacts were intelligent and sophisticated people who saw that demand for their firms' products was strong, and in some cases realized that their own company (or a competitor) was gaining market share. So they mistakenly bought stocks in their own sector. When the market for communications equipment subsequently collapsed to the surprise of most people in the industry, many of them lost not only their jobs, retirement contributions, health insurance and other benefits, but also took a severe hit to their investment portfolios.

So in theory, instead of buying stocks based on your work knowledge, what you actually want to do is to hedge your exposure to the industry you work in.

This echoes with what I wrote earlier.

Economic Times Releases a MF CD

I just looked at this advertisement in Economic Times. Will this CD offer something different? or will it be just the same old views about Mutual Funds in India. After reading so many blogs and so many magazines, I feel that most of them offer same old "ghisa-pita" suggestions.

Buying Gold

I recently read an article from Personalfn.com about not buying gold from banks. I liked the article, since I was too thinking about it. Gold has been a standard and safe investment option from many many years. But there are many problems involved in buying gold. As the article mentions about issues regarding buying gold from bank, but I am even wary of buying gold from anyone else. How much can I trust a "Branded Retailer" or "Jweller". This is ofcourse true that a jweller or a retailer can provide a handsome variation in cost while purchasing gold, but what about the quality. Ofcourse now-a-days most of the retailers does provide some kind of certification. But its again a question of what kind of certification.

Another problem I have in buying gold is where to keep it safe? Ofcousre it is unsafe to keep it in the house. So one will think about taking a locker in a bank. But getting a locker is no easy process. There are lot of forms to be filled and one needs a account with the bank. Also most banks want some deposit to be placed in the account before they can open a locker and the deposit is something like 10,000 Rs. Also if you shift from one place to other, you need to close the locker in a specific branch and reopen it (going through the same cumbersome procedure). It is a real pain. How about following changes ?

-- The banks should re-purchase the gold if kept in the same condition (e.g bars or coins)
-- This re-purchase should be valid across all the banks. So a gold coin purchased from one bank can easily be repurchased by any other bank.
-- A device (as small as say mobile) to quickly identify the purity of gold. It can be extremely useful while purchasing gold.
-- A concept of dematerialised gold (similar to dematerialised stocks). So I log on to the bank website, purchase gold say 500gm using direct debit from my saving account, and instantly my account shows (500 coins, 1 gm each). If I want to re-deem the dematerised-gold, i go to the bank and get the 500 gold coins which I can use to say make a jwellery.

I am back

After a long time, I am back again. The sensex has crossed 14000 mark. Everyone is euphoric and some are extremely cautious. I dont know what to expect next, a sensex touching 15000 or a huge slump. Whatever the sensex indicates, but the economy is going great guns, progressing at an amazing speed of abouve 9%. Shabash India !! Lets hope the dream run continues.



Just testing the "Performancing" add-on in Firefox. I love firefox, but the FF2 is giving me a lot of trouble, so I just shifted back to 1.5.