India Investment Options in US (Part 3)

This is Part 3 of the multipart series exploring investment options in India for people in US. You can check out the first two here and here.

Along with the Indian economy, Indian real estate has skyrocketed in the last 5 years. More and more people are shifting upwards from low-income to middle class, and where do you make a sensible investment for virtually guaranteed results over time? - real estate of course. Residential properties in Mumbai have reported real-estate appreciation of about 30-40% or more over the last 5 years, while cities like Bangalore and Hyderabad have reported an appreciation of whopping 60-80% as well. There have been many reports about the real-estate market being poised for a bubble burst, but if you are considering long-term prospects, real-estate still makes a lot of sense. A lot of bigger companies like Goldman Sachs have endorsed this view. Goldman Sachs recently increased its stake Indiabulls, a real estate development company in India, to 7%. The graph below summarizes the growing Foreign Direct Investment in India as percentage of the total Foreign Direct Investment, which has been 4.5% for year ending 2004, 10.6% for 2005 and 16% for the year ending 2006. Continuing at this rate, it is projected that for year ending 2007, foreign direct investment in real estate will be about 26.5% of the total USD 8 billion.

(Source: http://www.indianground.com/real_estate_fdi.aspx)

Direct investment:
Only Indian citizens, NRIs or people of Indian origin (whose parents or grandparents were Indian citizens at some point) can currently buy residential real estate in India, i.e. be sole owners. I will follow up with a post of steps involved of buying a house in India for NRIs later. Foreign investment is permitted in commercial and residential projects based on some stringent rules like:

• Minimum capital requirement of US $10 million if the company is involved by itself, or US $5 million in partnership with an Indian company
• Once the partnership or subsidiary is formed, capital must be brought into India within 6 months
• No repatriation before 3 years on initial investment, unless approved by the Foreign Investment Promotion Board.

Some more guidelines are here. So well, if you think you can follow all the above rules and then some, you are on your way to making a great investment!

Indirect investment:
Unlike US, there currently exist no REITs in India. For the unaware, REITs (Real Estate Investment Trusts) are like mutual funds, but the underlying asset is real estate as opposed to stocks or bonds. REITs in US are involved with buying, selling, operating and managing income producing real estate like apartment complexes, shopping centres, offices and warehouses. The advantages or REITs are many including more liquidity compared to actually owning real estate, and permits small investors to participate in the real estate boom. REITs were approved by the Securities and Exchange Board of India (SEBI) more than couple years back, but its taking a lot of time to put all the financials and accounting in place for the same. Some entities like HDFCICICI-Tishman Speyer, Ascendas India IT Park Fund, Kotak MahindraIDFC, and Edelweiss Capital have received approval to establish REITs (Real Estate Investment Trusts) or REMFs(Real Estate Mutual Funds). Once established, I believe REITs are the best way for small investors to invest in Indian real estate.

iPhone's guts and component manufacturers

After the long-awaited launch of the mysterious Apple's iPhone on June 29, 2007, there have been some attempts at tearing apart the phone to reveal its insides. Sramana Mitra, (I have been a loyal reader of her Strategy blog for the past few months) has done a great job at analyzing the various companies that provide these components. According to some reports, Apple's profit margin per iPhone sold is about 55%, which is greater than the profit margin her iPod sold, which is around 45-50%. Below I provide a brief summary and a link to each of these components as analyzed by Sramana. This probably serves as an initial entry point to further research for companies that serve iPhone components, and earn the reputation of being iPhone-providers. They are likely to win more business as Apple competitors plunge in to build iPhone-like phones.

• Samsung (London Stock Exchange: SMSN) : made the main processor of iPhone (ARM S5L8900) and flash memory chips (2 512 MB Mobile DDR SDRAM). Samsung is the biggest player in the iPhone guts - it accounts for about 30% of the total component cost, probably best positioned to gain if the iPhone becomes a huge success. Sramana's analysis here
  
• BroadCom (NASDAQ: BRCM): made the IO chip (BCM5973) used for video interface to the touch screen. According to Sramana, Broadcom makes about 1.15 per unit sold.
• Infineon (NYSE: IFX): provides the PMB8876 S-Gold 2 multimedia engine with EDGE functionality and the GSM RF receiver. Its a Germany based company, although not highly profitable at this point, it has earned the reputation of being an iPhone provider, and also provides chips to other mobile manufacturers. Sramana's analysis here.
  
• National Semiconductor (NYSE: NSM): provides the 24-bit RGB display interface serializer. Accounts for about $1.5 of iPhone's total component costs. Sramana analyzes it here.
  
• Texas Instruments (NYSE: TXN): most likely provides the power management device of iPhone, although this is still not confirmed. Another contender is National Semiconductor. Sramana's analysis here
• ST Micro (NYSE: STM): provides the accelerometer of the iPhone - in other words, the cool sensor that detects the orientation of the iPhone - horizontal or vertical. It accounts for 1.3% of iPhone's total component cost. Sramana's analysis here.
  
• Balda (Germany Stock Exchange: BLDA): makes the key feature of the iPhone - the highly touted multitouch screen. This touch screen is supposed to make up about 10% of the iPhone's component cost. More analysis by Sramana is here.
• Marvell (Nasdaq: MRVL): provides the Wi-Fi chip within iPhone, that lets it connect to any Wi-Fi hotspot. Sramana's analysis here.
  
• Intel(Nasdaq: INTC): provides the wireless flash and SRAM for code execution. Who doesnt know Intel and its processors ? Sramana's analysis here.
  
• Micron(NYSE: MU): provides the imaging chip for the iPhone 2 Megapixel camera. Micron stock has been rising since April '07 after couple of upgrades. Sramana's analysis here.
• Amperex Technology Limited: a Hong-Kong based company with offices in China, provides the iPhone battery.

Target Retirement Funds: A good blend of Active and Passive Investment

In this post I decided to highlight Target Retirement Funds which have become immensely popular over the last few years - thanks to T.Rowe Price, Vanguard and Fidelity.

Whats the idea behind Target Retirement Funds?
To let you pick the year of retirement and invest in a fund that has a name closest to that year, and forget about the hassles of investing in a variety of funds. A target retirement fund automatically adjusts the asset allocation for you as your retirement approaches. For example, say you are planning to retire in 2043, and you invest in T.Rowe Price Target Retirement 2045 fund, it will decrease the percentage of stock allocation and increase the percentage of bond allocation as retirement (2045) draws nearer. These funds invest in a variety of underlying funds and adjust the allocation mix to make it more conservative over time.

Who should invest in Target Retirement Funds?
As to most questions, the answer to this is - it depends. These are some situations that come to my mind for investing in Target Retirement Funds:
-Someone who wants the benefit of active and passive funds together. Active mutual funds are usually managed by a fund manager and impose higher fees on investors. Passive mutual funds include investment vehicles like index funds and ETFs, are managed by computer robots and the fees imposed on investors are much lower. A target retirement fund typically diversifies its assets among multiple funds (active and passive). Although it is managed by a human fund manager, it does not involve a lot of intervention from the fund manager, and hence results in lower fees.
-Someone who is starting out, and wants a ready-made diversified portfolio, till he can judge how he wants to actively spread his portfolio. An example would be a fresh graduate from college, who wants to start testing out the waters with a low risk exposure.
-Someone who wants target retirement funds as part of a broader portfolio (retirement or non-retirement).

Where can you buy Target Retirement Funds?
The 3 most prominent companies that provide target retirement funds are T.Rowe Price, Vanguard and Fidelity
T.Rowe Price: T.Rowe Price offers the most aggressive of all target retirement funds with a good underlying asset allocation between large cap, mid cap and international. It offers a broad range of target retirement funds ranging from Target Retirement 2005, 2010 to Target Retirement 2055. These are all no-load funds with an expense ratio of about 0.75%.
Vanguard: Vanguard remains the leader in low-cost funds with the expense-ratio of target retirement funds being around 0.21%. Underlying asset allocation is mostly devoted to index funds - mainly total stock market, total bond market index funds. Offers a broad range of retirement funds from Target Retirement 2005, 2010 to Target Retirement 2050.
Fidelity: Fidelity has its range of Freedom Funds ranging from Freedom 2000 to Freedom 2050. Fees range from 0.57 to 0.84%. Underlying asset allocation is distributed between all kinds of Fidelity Funds, with no underlying fund making up more than 10-12% of holdings.

Comparing asset allocation for 2040 funds:
T.Rowe Price: Cash 4.25%, Stocks 87.08%, Bonds 7.23%
Vanguard: Cash 1.16%, Stocks 88.48%, Bonds 9.93%
Fidelity: Cash 3.66, Stocks 83.43%, Bonds 11.53%

Performance:
Over the last 2 years (Source: yahoo finance):

As you can see, the performance of Vanguard 2040 and T.Rowe Price 2040 have pretty much mirrored each other over the last 2 years.
It looks like either T.Rowe Price or Vanguard might be a good place to start your target retirement, if I was looking for a more aggressive portfolio, I d go with TRP, if I was looking for lower fees, I would go for Vanguard.

Voluntary disclosure: I currently own T.Rowe Price Target Retirement 2040.