💎 Age, Customer Reviews & Uber Ads (30th October, 2022)

Here's what we are covering this week

Our Expert Take section talks about:

1. Biden’s statement, "legitimate for the voters to consider him turning 80 years old"

2. BIS’s proposal on authentic customer reviews

3. Uber venturing into the advertisement business

Also, in our Investment Insights section, we talk about how in long-duration debt mutual funds you can lose your capital due to rising interest rates.

Expert Take

EXPERT TAKE #1 - 45 sec read :stopwatch:

Legitimate for the voters to consider the age of the candidate

Last week, we had age alongwith Biden and Rishi Sunak making the headlines. Biden urged voters to take into consideration him turning 80 during 2024 elections. And on the other hand, Rishi Sunak became the youngest Prime minister of the UK.

Makes us wonder if age is a function of a person’s ability to preside over and take the best decision for the country.

The Indian picture

The average age of India's cabinet is 58 years. Only 12% of members of the current Lok Sabha are under 40 – this is in a country where 65% of the population is below 35.

And to compare it with the global standards, the average age of parliamentarians globally is 53.

How does it matter?

• Well like Biden correctly pointed out, the voters should assess his efficiency and decision-making ability to see if it's getting impacted with time.

• An important democratic saying is "nothing about us, without us". With such massive underrepresentation of the youth, relevant issues like unemployment or poverty might not be voiced out well in the parliament.

Our take:memo:

While we as a democracy can always weigh in the efficiency of the leaders and then exercise our votes, the limitation here could be the choice of young leaders available.

One thing that the existing leaders can do is to run leadership programs to identify and groom potential young leaders, as Serbia does. And another way can be to have a fair representation of youth in the teams of ministries and give their voices enough weightage before taking decisions.

EXPERT TAKE #2 - 40 sec read :stopwatch:

BIS’s ask for more authentic Customer Reviews

Do you also rely on online reviews before making a buying decision? But has it ever occurred to you that what if these are reviews incentivized by rewards? In 2014, Airbnb offered a $25 coupon in exchange for reviews and saw a 7% increase in review rates.

Anyway, The Bureau of International Standards (BIS) heard your concerns, and here's a solution proposed to e-commerce sites: distinguishing between authentic reviews and promoted ones. And also counting on only the authentic reviews to come to a star rating of the product.

Why are reviews critical?

• The almighty Google searches: Reviews account for about 15% of the method Google uses to rank local businesses.

• Purchase decisions: As per a survey, 95% of customers read reviews before making a purchase and 72% won’t take any buying actions until they’ve read reviews.*

• Revenues for business: For every one-star increase that a business gets on Yelp, they see a 5-9% increase in revenue.**

Some good practices

Many brands in the past have taken certain decisions around review structuring to keep them authentic. Say, who can review and whose review to highlight?

Amazon displays an icon when a review is from a verified purchaser of the product, which can help consumers screen for potentially fraudulent reviews. Expedia allows only guests who have booked through its platform to leave a review there.

Our take:memo:

In 2014, Airbnb offered a $25 coupon in exchange for reviews and saw a 7% increase in review rates. a set of more than 14.5 million customer product reviews on Amazon.com from 2004 through 2015, there was evidence that consumer opinions contain information for the fundamentals of the company and hence its stock returns in the future.

With a polished framework by BIS, it should be easier for the investors to know what the real customers think about the product and whether is it worth their money.

EXPERT TAKE #3 - 50 sec read :stopwatch:

Uber venturing into advertisement business

Uber recently launched its global advertising unit with the target of creating a $1bn business within the next 2 years. How? By displaying promotions within its apps, on top of cars, and on the back of seats. And not only during the journey, rather brands will also be able to have emails sent to Uber’s 122mn active users.

Why the move?

• Uber already has user insights on customer lifetime travel behaviors to let the advertisers leverage.

• And it's not just Uber, with high inflation and waning subscriptions, streaming companies like Netflix are getting into ads too to increase revenues.

• Maybe it makes sense too, for companies like Netflix and Uber to control their customer data especially when Google and Apple face restrictions on ad-tracking mechanisms.

What's in it for you?

Until now, only the fare from riders have been the source of income for Uber and drivers. And so rise in oil prices, and shortage of drivers, all of it had to be borne by the riders.

Now, with advertising coming into the picture, it will be shared between the advertisers and the riders, hence might bring down the price of the rides.

Our take:memo:

The business idea makes sense for investors because advertisement has high margins and therefore improves the profitability.

But what about the customers? Even if they get the benefit to pay lower for the rides but only after trading off their personal data that Uber has saved. And mind it, if in the long run, customers feel annoyed with the ads, it might hurt the main cab aggregator business for Uber, making investors worse off.

Investment Insights

INVESTMENT INSIGHTS - 60 sec read :stopwatch:

Debt Funds and Interest Rates

We keep hearing that the RBI increased interest rates to bring down inflation. But not many of us know how this affects our debt mutual fund portfolio. Today, let’s see the relation between them.

First, how do Debt Funds work?

When you invest in a debt mutual fund, the fund manager deploys your money in different kinds of investment products like bonds, FDs, government securities, etc. Now, bonds typically offer an interest known as coupon. So the returns from debt funds are actually in two parts - one from the interest that you get from the underlying bonds/FD, and the second from the appreciation in prices of the bonds.

But how does a bond’s price change?

The Inverse relationship

Well, RBI keeps revising the interest rate periodically. Known as the repo rate, this is nothing but the rate at which banks borrow from RBI (yes, banks borrow from RBI too!). And since this borrowing cost affects banks, it trickles down to a lot of products, including the coupon offered by bonds.

Let’s take an example:

• RBI increases Repo rate - borrowing cost for banks increases

• This means that any company that wants to borrow will have a higher cost

• When companies borrow via bonds, they’ll pay a higher coupon

• New bonds become more lucrative for fund managers thanks to higher coupon

• Existing bonds become cheaper (basic demand-supply theory)

• NAV of debt mutual funds that have invested in existing bonds will fall

What you should look at while investing?

As we saw, typically whenever interest rates increase, bond prices fall, which may in turn lead to a fall in your debt fund’s NAV. Naturally, the higher the maturity period of your bond, the higher the chances of interest rates changing during that period, and the higher will be the volatility for your debt fund.

So while Gilt Funds are assumed to be safe since they’re investing primarily in government securities, longer-term Gilt Funds do have an “Interest rate risk” associated with them.

Our Take

While investing in debt funds, it’s a good practice to keep your investment horizon equal to the maturity period of the underlying bonds. This shields you from the intermittent volatility due to interest rate changes during your investment period, because when the underlying bonds mature at the end of your horizon, you can be sure that they’ll be priced at face value.

Next week, we’ll look at another aspect of debt funds known as “Credit Risk”. Watch out this space to know more!