‘Honey, I shrunk the…’

Published in The Hindu - Sunday Magazine on Aug 31, 2008

To combat rising inflation and expenses, many FMCG manufacturers have started dropping a few grams from their products.

If the rising cost of food grains and petrol isn’t enough to drill a hole in your pocket, here’s another reason for your blood pressure to creep up: Fast Moving Consumer Goods (FMCG) manufacturers have been quietly shrinking the size of t heir products. Or even better, launching new variants that deviate from the standard packaging size so that you are tempted to try the new variant without even noticing that you are getting much less for the same money.

That’s right, your weekly bag of groceries is getting lighter. To combat rising expenses and inflation, many manufacturers have started dropping a few grams from their packages without notice (of course, the fine print on the cover mentions the reduced quantity but who reads these things?)

Less for the same price

Products hit by what I like to call “Honey! I shrunk the groceries” phenomenon includes milk products, cereal, chips, ice cream, soaps, shampoos and more. Some products are shrinking by as much as 20 per cent. You’re left with paying the same price or even a little less, but getting “significantly” less. Looks like the geniuses in the marketing departments of these consumer giants have figured, “Geez! I am going to insulate my customers from price increase: Imagine how many loyalty points our company can earn if only we can give less of the product for the same price”. Yeah! Right! Surely an innovation befitting the Nobel.

An excellent case in point is a popular malt beverage company that introduced a variant for the “fairer” sex. My missus, as usual, picked the new product off the shelf and into her shopping cart without batting an eyelid (I have always wondered why she should not enrol herself as a bona fide product sampler — at least we would get paid for the experimentation). All I could remember next were her screams from the kitchen as she emptied the contents into the regular container. Yes, it barely filled more than half. She immediately summoned me to calculate the cost per gm of the new product versus the original one and God! I should say I am generally above average in mathematics but I needed a calculator to solve the mystery.

The next week when I went to the supermarket, I could suddenly notice a mushrooming of smaller packs across products. I immediately picked up the phone and called my friend in the retailing industry. Here is what the professional had to say: “Most FMCG companies pass on the cost inflation to consumers, via a judicious blend of price hikes, packaged size reduction and change in product mix. Our research shows that few consumers react by down-trading to cheaper products, when they are offered ‘Value packs’ that offer a smaller quantity instead”. Wow!

To heal myself from the aftershock of hearing the theory behind organised manipulation of us gentiles by smart marketers, I decided to treat the missus and self in our favourite Chinese restaurant (Yes, in return for getting her to promise that she will never buy the malt beverage again — ever). But as destiny would have it, any dreams of gastronomic induced healing had to be postponed. Instead of the usual copious serving portion of Vegetable Fried rice with a side dish that could easily satisfy two hungry Indians, what we got served on the table was a much smaller container with just enough quantity for one. Now it was my turn to scream! Here too, Brutus!

This reminds me about a recent policy where a particular State government has promised to offer raw materials to restaurants at “ration prices” in return for an agreement on “price” maintenance. May be they should now include “quantity” in the MOU.

Extensive applications

I have thought of some other ways this “Honey, I shrunk the food” idea could be leveraged for solutions to India’s financial problems:

We won’t have to pay Rs. 50 a litre for petrol, if the amount of fuel in a “litre” shrinks down to only 750 ml. It’s a minor 250 ml difference and would lower the cost to Rs. 37.5/ litre, which is even lesser than the previous prevailing price of Rs. 45/ litre. Wish our beloved PM had thought of this idea to appease the Left. Think of how happy the lower price could make everyone feel!

Worried about rising EMIs on your home loan? Why not just chop off the extra bedroom from your home? Maybe your bank will even reduce the EMI in return for the juicy offer.

On the plus side, the rising cost of consumables may just help us “Value size” ourselves by consuming less. The result could be better than what any fitness gym can offer.

To pre-pay or not…

Published in The Hindu - Sunday Magazine on Aug 17, 2008

It does not always make sense to pre-pay a home loan. Some tips to help you make the right decision…

Following are some tips to help you decide:

Interest rate

If you have taken a fixed rate loan, at less than 10 per cent interest, then you are in a fairly sweet situation with no urgency to repay — unless there is a “reset clause” in your loan documentation, i.e., the right of the lender to revise the rate in the event of significant increase in the prevailing interest rate environment, such as now! Many PSU banks and a few private banks are able to offer competitive rates because of the reset clause.

If your loan is not a pure fixed rate loan, i.e., either part fixed-part variable or fully variable, then again you are under the risk of rate increase and have a strong incentive to pre-pay.

Prepayment penalty

This is one of the most hypocritical schemes. If the banks want to raise the EMI in the middle of the loan, they don’t seem to have any problem in doing so; but God forbid — you want to voluntarily pay more than your EMI — then they act as if hell’s broken loose and slap a penalty!

Well, the good news is, you can negotiate. Prepayment penalties are not written in stone. Prepayment penalties can be reduced or even waived if you have a good credit history (and take a printed copy of this article to the bank manager)

Many banks also have prepayment limits, which lays down the maximum prepayment possible in a year without penalty. If your extra payments are within the limit, you can get away free. As a rule of thumb, if you are in a variable rate loan, it makes sense to consider pre-payment if the penalty is less than two per cent.

Other debt (loans)

If you have any unsecured debt (credit card or personal loan), pay it off at once. To my best understanding, home loans are the cheapest loans available in the market. So — as a prudent decision — it can wait until other debt is cleared off.

Margin of cushion

Before you prepay, keep some money in liquid instruments to meet unforeseen contingencies and any family commitments expected over the next three to four years. Remember that once you prepay a housing loan, that money cannot be borrowed back easily later on. You may take a second home mortgage loan/ line of credit by pledging the equity in your home, but such loans are usually more expensive than your first home loan.

Alternate investment avenue

In case your home loan interest rate is significantly lower than the going rate in the market today and you are sure that your interest rate is locked-in (fixed), then you can adopt the following strategy to earn higher returns, albeit at your own risk.

Since you have access to cheap capital through your fixed rate loan, you may think about keeping the loan going and invest any extra cash-flow in an alternate investment — which you believe will fetch higher returns than your cost of capital, i.e., your home loan interest rate multiplied by (1- tax rate).

I am tempted to suggest the equity market as an alternate investment avenue, given the current levels but you can choose any investment avenue as long as the expected returns exceed your cost of capital.

You may feel that you are losing out on your tax rebate if you prepay. But, as discussed in my previous columns, this is not true. Firstly, the principal repayment portion of your tax rebate can be availed of through other investment schemes. Secondly, the interest portion of the tax rebate merely reduces the cost of interest and does not shield you in any way from incurring the interest expense in the first place.

Timing

Some people think that it may be beneficial to prepay the home loan only early in its tenure and not after it has passed the mid-way mark. This is untrue (may I say even ridiculous) Even though it is a fact that the EMI in the early years of the loan consists of mainly the interest portion and the EMI in later years consists of mainly the principal portion, the effective cost of the loan remains the same. At any point of the loan, the interest is applied on the POS (principal outstanding). Any prepayment will reduce the principal outstanding and hence the interest expense, which is always good. Hence your decision to prepay should not change based on how much tenure of the loan has already elapsed.

Keep an eye on that interest rate

Published in The Hindu - Sunday Magazine on Aug 3, 2008

When availing of variable rate home loans, make sure you have enough breathing space.

In my previous column, I explained that your home (purchased with an 80 per cent home loan) should double in value at least every six years to make it a reasonable investment (and to match the opportunity cost of not taking a home loan and investing in mutual funds). In your case, the appreciation condition seems to be fulfilled, but I would request you to double check the hypothesis for the following reason:

Although real estate prices are based on supply and demand in the long term, in the medium term it is counter-cyclical to the interest rate regime i.e. home rates increase when interest rates are low and stagnate or dip when interest rates become high (current scenario).

If you are still convinced about the appreciation potential of your property choice, then the next step is to prepare for the demon of further interest rate increase.

Allow a confortable margin

Imagine you are studying for an exam thinking the cut-off for passing it is 40 per cent. But after you take the exam, the cut off is revised to 50 per cent. What would you do? The only way to protect yourself is to prepare for the exam by allowing a comfortable margin — say by targeting 60-70 per cent. This is similar to the situation with a variable rate loan that has an inbuilt risk of rate increase.

How do you ensure that you have enough breathing space in the event of a rate increase on your home loan? Here, you need to be more careful than the bank. Although banks are prudent in offering loans with EMI up to 50 per cent of Net Monthly income, this does not take into account the personal/ family commitments you may have during the loan tenure or more importantly, the increase in interest rates (for variable rate loans). Under the current inflationary scenario, it will not be surprising if home loan rates rise further by 3-4 per cent in the immediate future. So, if you are taking a 11 per cent loan, you need to be prepared to be able to pay the EMI even if the rate is increased to 15 per cent in the medium term.

To help you plan the impact of interest rate increase on the monthly EMI amount, please refer the table at right.

Tips for reading the table: If you want to know by how much your monthly EMI would increase if the interest rate is increased from 11 per cent to 13 per cent, when the POS of your loan is Rs. 30 Lakhs and remaining tenure is 20 years, then look for the intersection of 20 years in the row and 30 lakhs in the column; the intersection cell has the value Rs. 2067. This is the monthly EMI increase for one per cent increase in interest rate. For two per cent increase in interest rate, you need to multiply Rs. 2067 by 2 = Rs 4134 (approximately)