Monday, December 23, 2013

Aam Aadmi Party- Today is an important day in India's history

Politics in India takes an interesting turn today. Aam Aadmi Party, the new hope on the horizon, takes control of the Delhi Assembly. There is a lot of hope and expectations from many. No one gave AAP a chance. The coming of age of AAP is clearly an indication of the level of frustration of the public with the corruption and mis-governance of the existing parties.

The coming to power of AAP, without a clear majority is interesting. BJP, the party with the most number of seats, is a sore loser and will be in the usual role of opposition. The Congress, with a handful of seats supports the AAP!! Interestingly, AAP is quite vocal against both Congress and BJP.

An interesting strategy from the Congress. Maybe they want to show how 'responsible' they are and how they are willing to listen to the people. In all probability, the Congress support may last till the outcome of the general elections. And if they do badly and BJP does well, they may continue the support. If they do better than is commonly expected, they could pull out.

BJP has ended up as the biggest loser in the Delhi game. First they wanted power. Upset at AAP being the reason for their not getting a clear majority in Delhi, they now look at AAP as a bigger enemy than Congress!!

For citizens across the country, AAP brings forth new hopes.

AAP, however, is perhaps surprised by its own success. A few slogans against corruption and the involvement of citizenry has left them without a proper workable manifesto. The manifesto they now have is quite lame- slashing power bill etc. They need to articulate some economics quite soon. And realise that governance is more important than merely talking about governance.

Everyone will be keenly watching this experiment. And has given a new hope to hardened sceptics like me, that we could have a government that does not include the congress and the BJP. Both parties are virtually the same, though the BJP states that the Congress had a longer tenure to ruin the nation.

Unfortunately, in the last five years, BJP has done absolutely nothing. Just boycotted parliament. Nothing remedial has been suggested. The campaign speeches of their leaders, including Mr Modi, have merely been anti-Congress, anti-dynasty lectures. Nothing about what they intend to do has been spelt out. And the infighting at the top is not over at all.

I write this, presuming that Aam Aadmi Party is accepting the proposal to rule Delhi.

The way AAP has gone about consulting people at this stage, perhaps is an indication that they will do so when it comes to any big issue. That is welcome and refreshing.

2014- Some thoughts on preserving money


2014 does not look very exciting, from an investment perspective. The focus of the world seems to be more on what is referred to as ‘tapering’ and what the implications are. In India, the tempo will build up to the coming general elections in the middle of the year. The global economy looks as shaky as before, except for the surge in liquidity everywhere.

2013 is ending with our stock market indices at near all time highs. However, the indices hide the fact that the markets have become extremely polarised. High quality has become unaffordable from an investment perspective and poor quality stocks are now catching up. The mid caps are still way behind their highs. Banks are sitting on record levels of doubtful credit and ways will be found to change the label.

PSU stocks seem to have found more scepticism as the government seems to be helplessly torn between populism and inactivity on the economic reform front.

Politics has become very predictable. Irrespective of what happens at the centre, there is unlikely to be any big change in the economic outlook or policies. If the UPA goes and NDA comes, we can expect no better. Every reform measure has been opposed by the NDA in the current term and should they come to power, do not expect anything different. It is only the ‘expectation’ of change that could provide some altitude to the markets.

As 2013 draws to an end, the inflation linked bonds are being launched. A welcome initiative, but with a lot of ifs and buts about the tax implications a full throated endorsement to invest is not possible. It may be good for those in the non tax-paying bracket. The moot point is whether they have money enough to invest. A small asset allocation to the bonds would be useful, should there be an undesirable coalition that will push inflation through the roof. Should a third front take charge at the centre, expect mayhem on the financial markets.

I would keep my liquidity intact. I do not see many great investment opportunities in equities at the present juncture. I would keep my eyes peeled for any event based price action that could bring some good stocks to a buying level. The stock markets did not do much, if we measure point to point. However, the volatility threw up a lot of opportunities. If one had discipline to have a laundry list of stocks to buy, at prices that provided some safety, 2013 provided many opportunities in quality stocks and some select mid caps.

Gold had a terrible year, though Indian investors were cushioned to a large extent by one of the sharpest annual depreciation in the rupee.

2014 is going to be interesting. The Chinese New Year in 2014 will herald the beginning of the “Year of the Horse”. The stock markets clearly personify that. We all know that one horse will win, but no one knows at the start about which one it is going to be. If we look at corporate earnings, the first two quarters of 2013-14 have been the worst in over a decade. One way to look at it is that things can only get better from here.

Foreign exchange earners are going to be the preferred choice for 2014. IT for sure looks good. Avoid the trap of falling in to commodity exporters or rice, jewellery etc. Capital goods are best avoided, though there could be a selling opportunity once the new government comes in to power. I clearly do not see government finances being able to afford populism and development expenditure out of its budget. Our fiscal position is not all that great and the impact of government freebies is going to be severe in the years to come.

Look for companies with no debt, steady domestic market and reasonably clean management. Do not increase allocation to equities or re balance etc simply because the year is changing. Asset allocation should also be a function of relative price to value of assets. Do not spend time worrying about ‘tapering’. It is more important to see whether the company we choose will make more money or less money and with what level of certainty.

Tuesday, December 10, 2013


Investing in equities has always been a matter of considerable debate. We look at the indices and draw quick conclusions. For instance, we saw the BSE Sensex at 20,000 in 2008 and in 2013 we are still there. So we conclude that equities did not give us returns. This happens to us because this is a measure from one fixed point in time to another. It also assumes that we simply put money in to equities in one go and wait. This means that we are being subjected to the vagaries of market timing. If we were great at market timing, we would have bought at 8,000 index and sold at 20,000. Alas, we are not blessed with this as foresight. It is only in hindsight that we can draw these conclusions.

There are two methods of investing that I like. One is to keep target prices for buying my stocks and buy when the stock hits that price. It may happen or it may not. Also, it is possible that the stock may still seek lower levels.

Given that markets keep fluctuating, the much talked about SIP or “Systemic Investment Plan” is probably a good way to invest in to the markets. Let me take two of the oldest equity schemes that I think are well run and see. One is Franklin Blue Chip Fund and the other is the HDFC Top 200.

Let me give below some numbers;

.......................... 1 year ..... 3 years ...... 5 years ....... 10 years ..........

Point to point return

HDFC Top 200 3.01......... 0.88 ......... 21.30 ........ 20.76 ...........

Franklin Blue Chip 3.14......... 2.74 ......... 20.53 ........ 18.68 ............

BSE Sensex 7.51 ........ 2.12 ......... 17.97 -------- 15.20 ............

(These are annualised returns, in percentages. I have taken 1st December 2003 as start date)

It does look like the last three years, we have not got much return and that both the funds could not match the index returns in the last one year. So, can we say that mutual fund investing is pointless or equity investing is not all that hot?

Now for the same periods, let us look at what SIP (monthly on the 1st of each month, we invest equal amounts) would have delivered:

SIP Returns

For the latest ----------- 1year ....... 3yrs --------- 5yrs --------- 10yrs ............

HDFC Top 200 13.34 ------- 7.28 --------- 10.78 --------- 15.74 ............

Franklin Blue Chip 14.16 ------- 8.63 --------- 11.55 --------- 14.27 ............

NIFTY ETF(Benchmark) 17.57 ------- 9.42 --------- 10.03 --------- 11.30 ............

(Annualised percentage returns for equal amount SIPs starting December 1st )

Does this not change the perspective radically? The main problem has been our paying too much attention to the noise and trying to put money in to the market when everyone is buying? We tend to just put money once or twice when the noise is the highest and then suffer because our timing was wrong?

Whilst this strategy cannot deliver big returns, it also prevents big losses. The important thing is to have the discipline to keep on going at it. Treat the SIP amount as expenditure rather than a decision point each time. And I would urge long time frames- ten years or longer. As I keep saying often, investing in equities should be with money that you do not need in a hurry.

Whilst opting for an SIP, I would prefer to keep away from thematic funds or sector funds. I would rather focus on diversified equities. There is also an option to pick on the Exchange Traded Funds on the Nifty or the BSE Sensex. The advantage of the ETF is the fact that it is an automated process and does not have a fund manager bias in stock picking. Also, as the size of each fund grows larger and larger, beating the index gets harder.

The other obvious advantage of the mutual fund return is the tax break on the returns. So whilst comparing it with bank deposits or fixed income, keep this in mind.

One interesting data thrown out from the table above is that the ETF in the Nifty ( the only index based ETF with a ten year history) seems to have done better in the recent period, besting the mutual funds in the three years and lesser time frame. Whilst it is too early to conclude, it could be because in the earlier days, it was easier to beat the index with a smaller corpus and now with the two funds having grown very large, the impact of small winners is not high. So, going forward, maybe the passive ETFs on the broad indices may be the best option.

Thursday, November 28, 2013

Unbankable- The lure of banking business

The Tata Group finally seems to have got something right. They have withdrawn their application for a banking license. It is perhaps the induction of the new Chairman, who must have had a hardnosed look at it. Tatas had made a hash of Tata Finance with scandals galore. The problem was / is that at the Tata group, some professional managers used to treat companies and businesses like personal fiefs. Maybe the airline business investment is just to humour the outgoing Chairman. I cannot understand why a business house should get in to poor businesses using public money. Personal passions should be explored by using personal money.

What is driving 25 others to remain in the fray is simple regulatory arbitrage. Get a license, tell a story, sell stakes at a fancy price to someone stupid and have a ball. The other way is to inflate all capital costs (real estate to technology) and skim it off. There is no advantage a bank gives as opposed to a NBFC. If you own a bank, you cannot lend to your own group. So what is the lure? Obviously, dreams of a capital market play and/or a continuous siphoning off of money. Give loans, take a bribe. Everything is possible.

When we invest in stocks, we are betting on the premise that we will be able to sell it to someone else at a price. This is the liquidity that stock exchanges provide. We make many assumptions in arriving at what price we are willing to pay. All of these basically boil down to what money (earnings) the company will make from its business. The other big investor (the promoter) also theoretically gets the same benefits, apart from other non financial benefits that may come his way. I am not talking about any money he may make other than the legitimate dividends and the management compensation he gets. His wealth is represented by his share in the market capitalization of the company.

For the promoter, the company is a real asset and he is at full liberty to deal with the profits of the company. He can pay dividends, buy assets or simply keep cash. He can use funds from one company to promote another. In short, he is the absolute master of all the assets of the company. He has a high level of motivation in keeping the company as profitable as he can. The promoter also wants to own as much of the company as he can and he also has the freedom to take the company private by buying out all the shareholders.

Other investors have the confidence that whatever happens to the shares held by the owner, the same fate awaits them. The promoter, within the framework of law, is the absolute master of the company.

I wonder whether this premise can be applied to someone who sets up a commercial bank. A bank is not at all like other industries in respect of ownership. In fact, being an owner of a bank is very demanding and legally complex. Firstly, the Central Bank (RBI) puts a limit on the ownership in a Bank. The main promoter cannot have a clear majority. The day to day functioning, the deployment of the bank’s assets etc all are subjected to guidelines laid down by law. If the promoter has other industries, a bank owned by him cannot lend monies to it.

The profits that a bank makes cannot be disposed at will. Dividend payments have to be approved by the regulator. The regulations cover virtually every aspect, including the remuneration that a CEO can draw. The promoter cannot use the bank’s money to do any single act that is not permitted by the regulator. And there are not many things that are permitted. A bank cannot promote a company n another industry. A banker cannot promote a car manufacturing business.

Of course, instances abound of shady promoters who have bent the law to have higher ownership apart from diverting loans to friends and family. But these cannot be a goal on which one would like to buy shares in a bank as an investor. And of course, we have businessmen who have ‘used’ a bank to push business in other financial services like mutual funds, stock broking or wealth management. They have used banking clout to build and strengthen other businesses. However, in this, the bank shareholders may not be participants.

A bank takes money from various people and lends it to different people for a fixed return. There is no upside on what it lends. If it lends a rupee, it will not get back anything more than a rupee. The book value of the share of a bank represents the value of all its assets (loans) less its liabilities (deposits, borrowings etc). The only difference between a mutual fund and the bank is the fact that a bank has ‘capital’ that is provided by the shareholders is leveraged by some borrowings. The only way to look at a bank is how much does it add to its book value each year, after dividends etc.

The argument is that a bank’s profits grow. So does the NAV of a mutual fund (the debt part surely). A bank has to provide for assets that are stressed. A mutual fund NAV rises or dips as per the market prices. So, if we are paying three times or five times the book value of a share of a bank, is it solely on account of the incremental profits that we expect the bank to show? And these profits are not available for disposal, except in liquidation. No bank will voluntarily liquidate when the going is good. When it liquidates, it is generally because it has blown away all the money in poor lending.

An owner of any business can sell off the business to anyone at any point in time. A bank cannot do that. It can at best merge or sell itself to another bank. Again, we come to who can take the call. Typically, someone with no personal stake in the bank will take the call if it is ‘professionally’ managed or a PSU. Or someone who takes a decision would have reasons beyond the balance sheet to make the corporate event happen. All in all, buying or selling a bank is a cumbersome process and not very exciting.

Thus it does not make any economic sense to either promote a bank or invest in shares of one. What is keeping the happy circle going is a combination of reckless optimism, misguided valuation and benign regulators.

Saturday, November 9, 2013


Secularism. A word wrongly introduced in to our constitution that is breaking the nation today. Secularism according to Nehru and his descendants has become a tool to divide and remind people constantly through the tool of reservation.

I always believe that religion is a personal business and should not come out in to the open. Pray at home. Keep your gods at home. Break down temples, churches, mosques. Maybe make them in to public conveniences. If you believe in your gods, they should be all over. Why go to one place and pray? And why use loudspeakers in this modern era? Why have public festivals that are nuisances to those who give a damn for those dunkings and processions?

The word that should have enshrined in our constitution is "LAICITE" and not secular.This is a word used by the French to define secularity.IT DENOTES THE ABSENCE OF RELIGIOUS AFFAIRS IN GOVERNMENT BUSINESS AND ALSO THE ABSENCE OF GOVERNMENT INVOLVEMENT IN RELIGIOUS AFFAIRS. This would surely have been a far nobler goal to reach than the appeasement tools used by different parties to whip up sentiments.

In the west, progress happened only after the separation of the Church and the State.History is evidence.

It is high time that we ban ALL religious outfits. And this will make people focus on economy. A sad case where the head of a scientific outfit goes to a stone idol with a plastic model to seek divine assistance. How terrible.

Tuesday, November 5, 2013

Bank Stocks- which to buy- New incumbents or existing ones

Tough Going for New Banks? (This appears in the latest issue of Moneylife)

If you have to buy a banking stock, the odds are in favour of buying an existing one rather than a new one because banking is a tough business

There are as many as 26 aspirants for the business of banking and the Reserve Bank of India (RBI) is supposed to grant licences to seven of them? At least, that seems to be the message of the finance minister P Chidambaram to RBI. Why seven? Why not five or why not 12 or why not all 26, if they meet the criteria laid down by RBI? Well, one day, we will find out. Hopefully, the new governor will make it an ongoing process rather than an occasional one. I fail to understand why there should be some special time windows for selling or issuing these licences. The bureaucrats and the politicians conspire to keep things complex and mysterious. That is the way we work. Transparency is for speeches. There is no good governance practised by the government or the regulators.

Let us look at the few private licences that were issued the last time: Times Bank, Centurion Bank, Bank of Punjab, Global Trust Bank are four names that come to mind, which folded up and were sold. If they had done well, they would surely have been around. The ones that survived are HDFC Bank and Kotak Bank. Axis Bank is a strange animal, having been promoted by Unit Trust of India and was lucky to have been led by the hard-nosed Dr PJ Naik. ICICI and IDBI were forced transitions of elephantine institutions and not greenfield ventures. And Kotak is known more for its capital market business than for banking. In my book, it leaves HDFC Bank and Axis Bank as the sole winners in the banking space since financial liberalisation started in 1992.

Among the new applicants, there are a few who have had problems in running non-banking finance companies (NBFCs). Will they be excluded by the government? The mutual fund arm of one of the aspirants ran afoul of the Securities and Exchange Board of India (SEBI) in the past but SEBI has been very generous in giving it a new mutual fund licence after having shut down the old one. So regulators are very indulgent and, unless the Supreme Court intervenes, past conviction on offences is no bar to entering the business where, once upon a time, trust was the key word.

Whatever happens, there are some consequential investment decisions to be taken. Most of the promoters would be listed companies. And their main purpose for opting for a bank licence is to play the valuation game in the capital market and access to low-cost funds (as deposits) rather than any fascination for banking per se.

Banking does not give the promoter any control over the cash flow. It cannot lend to group companies, cannot declare dividend without RBI approval and cannot appoint a director without RBI approval. So, obviously, the licence is a play on valuation that the analysts will give for owning a bank. A well-run bank, like HDFC Bank, can fetch a fancy four times the book value; even if you do a bad job, it still could be twice the book value! And if it ends up with a fraud, some bank will be forced to take it over as allowing a bank to fail can have negative political repercussions. In any case, it will be a few years before a fraud comes to light.

These new banks will compete in the same main cities, I guess. Unless, of course, RBI turns very radical and says that they cannot open in metro cities until they have opened a minimum number of rural branches, in the name of financial inclusion. Operating rural branches in the private sector is an unviable and losing proposition and no one will do it by choice. If there is sufficient money in any town or village, you can be sure that banks will reach there. Many NBFCs are already out there and one can be sure the public sector banks are already have a presence.

And these new banks, if they are going to be in the metro cities, are all going to drive up rentals and salaries for the top and middle level bankers. Stock options for a lucky few will be large drivers. A director in a bank has to have his salary approved by someone sitting inside RBI who is on a government salary. There is one NBFC where the CEO earns more money in a year than he earned in his entire lifetime of service with the promoter company. Should the NBFC get its banking licence? Forget the obscene salary he is getting, he may not even get approval as a director for the bank.

It is going to be an interesting race. Should the licence go to one of the NBFCs that already have a few hundred to a thousand-odd branches, they will simply seek conversion of their branches into banks. They are clearly at an advantage. Even if one of the licensees were not to have any branch, it might be very tempting for it to acquire the branches of an NBFC that has been denied the licence. Most large NBFCs are keeping small branches alive only in the hope of getting a bank licence. If they are denied the licence, selling those branches to a new kid on the block should surely fetch them a good price. If this were to happen, it would be interesting to see what the mandarins at RBI would do.

Whilst a few new private banks would come up, there is also an old generation of private sector banks that seem to have forgotten to grow or are simply content with what they are. These include Lakshmi Vilas Bank, South Indian Bank, Karur Vysya Bank, etc, although some others, like Federal Bank, are trying to grow fast. In the meanwhile, two private sector banks that seemed to have run into rough patches are trying to put their house in order, namely, DCB and Dhanalakshmi Bank.

Against this backdrop, one wonders what any new entrant would do. I also recall that a couple of applicants had failed NBFC businesses. To be a relevant player, what these private sector banks will need to build is trust which a bank like HDFC has built up. Winning big business and staying profitable is not going to be an easy task. The new entrants are going to be faced with higher costs compared to those of the existing players.

Technology is going to be the single biggest investment these new banks will have to make and it is very expensive, especially if it is imported.

To be quick off the block, they will need experienced people. So, they will have to have a mix of senior retired people from the public sector to run their operations and snatch some stars to run their IT and credit. Sound lending holds the key and there is not much talent around to ensure a correct mix of risk and return. Bankers who mistake sound credit decision-making with fancy terms like ‘risk management’ are going to pay a price.

I would be betting more on banks promoted by industrial houses (if they are licensed) rather than standalone players. They would be the ones with ability to bring in large amounts of capital. The NBFCs that have applied for licences, to my mind, do not have what it takes to run a bank over the long term. They are perhaps more interested in starting and then make an exit by selling out to a foreign or a domestic player. The NBFCs that have applied are already leveraged and pumping meaningful sums of equity into banks is going to be tough.

For investors, picking and choosing is not going to be easy. Further, it is unlikely that anyone will offer equity at a fair or reasonable price like HDFC Bank did when it got listed. So if you have to buy a banking stock, the odds are in favour of buying an existing one rather than a new one.

Thursday, October 3, 2013

Banking Stocks- A parallax view- An old article revisited

BANKING STOCKS When we invest in stocks, we are betting on the premise that we will be able to sell it to someone else at a price. This is the liquidity that stock exchanges provide. We make many assumptions in arriving at what price we are willing to pay. All of these basically boil down to what money (earnings) the company will make from its business. The other big investor (the promoter) also theoretically gets the same benefits, apart from other non financial benefits that may come his way. I am not talking about any money he may make other than the legitimate dividends and the management compensation he gets. His wealth is represented by his share in the market capitalization of the company. For the promoter, the company is a real asset and he is at full liberty to deal with the profits of the company. He can pay dividends, buy assets or simply keep cash. He can use funds from one company to promote another. In short, he is the absolute master of all the assets of the company. He has a high level of motivation in keeping the company as profitable as he can. The promoter also wants to own as much of the company as he can and he also has the freedom to take the company private by buying out all the shareholders.

Other investors have the confidence that whatever happens to the shares held by the owner, the same fate awaits them. The promoter, within the framework of law, is the absolute master of the company. I wonder whether this premise can be applied to someone who sets up a commercial bank. A bank is not at all like other industries in respect of ownership. In fact, being an owner of a bank is very demanding and legally complex. Firstly, the Central Bank (RBI) puts a limit on the ownership in a Bank. The main promoter cannot have a clear majority. The day to day functioning, the deployment of the bank’s assets etc all are subjected to guidelines laid down by law. If the promoter has other industries, a bank owned by him cannot lend monies to it.

The profits that a bank makes cannot be disposed at will. Dividend payments have to be approved by the regulator. The regulations cover virtually every aspect, including the remuneration that a CEO can draw. The promoter cannot use the bank’s money to do any single act that is not permitted by the regulator. And there are not many things that are permitted. A bank cannot promote a company n another industry. A banker cannot promote a car manufacturing business. Of course, instances abound of shady promoters who have bent the law to have higher ownership apart from diverting loans to friends and family. But these cannot be a goal on which one would like to buy shares in a bank as an investor. And of course, we have businessmen who have ‘used’ a bank to push business in other financial services like mutual funds, stock broking or wealth management. They have used banking clout to build and strengthen other businesses. However, in this, the bank shareholders may not be participants.

To my mind, a bank is very much like a mutual fund. A mutual fund invests in shares and bonds of different companies and the unit value is computed every day. No one will ever pay a ‘premium’ to the NAV of a mutual fund. If I extend the same logic, a bank takes money from various people and lends it to different people for a fixed return. There is no upside on what it lends. If it lends a rupee, it will not get back anything more than a rupee. The book value of the share of a bank represents the value of all its assets (loans) less its liabilities (deposits, borrowings etc). The only difference between the mutual fund and the bank is the fact that a bank has ‘capital’ that is provided by the shareholders. In a mutual fund, there is no such thing.

The argument is that a bank’s profits grow. So does the NAV of a mutual fund (the debt part surely). A bank has to provide for assets that are stressed. A mutual fund NAV rises or dips as per the market prices. So, if we are paying three times or five times the book value of a share of a bank, is it solely on account of the incremental profits that we expect the bank to show? And these profits are not available for disposal, except in liquidation. No bank will voluntarily liquidate when the going is good. When it liquidates, it is generally because it has blown away all the money in poor lending.

An owner of any business can sell off the business to anyone at any point in time. A bank cannot do that. It can at best merge or sell itself to another bank. Again, we come to who can take the call. Typically, someone with no personal stake in the bank will take the call if it is ‘professionally’ managed or a PSU. Or someone who takes a decision would have reasons beyond the balance sheet to make the corporate event happen. All in all, buying or selling a bank is a cumbersome process and not very exciting.

So why do we buy bank shares? And why do we pay so much? Of course, one can argue that when it comes to PSU Banks, we are already paying close to or less than the book values. However, here we do not know the true book value since there is a debate on what the actual quantum of bad debts are and they have liabilities like employee pensions that have not been fully provided for. On the other hand, we seem to go to extremes, paying several times book value for stocks of private banks, expecting thirty percent plus growth in perpetuity.

However, the world believes in bank stocks. For markets like ours, the wise men tell me that banking will lead economic growth. So, much so that we have created structures like ETF for Banking Stocks, to bend the rules laid down by RBI about foreign ownership levels in banks. Not too long ago, we saw a ‘premium’ on foreign shareholding part of SBI!!

In a way, if we have to find out a basis for investing in bank stocks, I would recommend using what I would call as growth in book value. In essence it means paying attention to the profitability after all provisioning. The sad part is that banks continually need capital and each dividend they pay only compounds the problem. Dividends also go on to reduce the book value. The key would be to take a call on a price relative to its book value. That in turn would be dependent on its profitability (Return on Equity) and the expected rate of growth in the profits. It is not very complex to figure out. Of course, the interesting thing is when we start adding in the factor of belief or disbelief in the quality of the assets that a bank has. This is clearly the factor that is responsible for the very high valuations accorded to the private sector banks relative to the PSU Banks. If I go back in time and look at relative valuations of, say 2008 (after the Lehman crisis), the credibility gap seems to have widened even more, with private banks’ stocks being valued even more richly on the basis of reported numbers.

Going by the faith that the markets seem to repose in private banks, one small accident can derail the entire cart. PSU bank stocks have not been trusted too much so their valuations are unlikely to drop as steeply, should there be a crisis in the banking industry. Private sector bank stocks have to meet the very high expectations that investors are reposing in them. The stock prices of private sector banks have risen far more than the change in their book values. In case of PSU banks, the price rises have been far lower, implying a lack of confidence in the numbers. Whilst I do not advocate investing in stocks of PSU Banks, investing in private sector banks at this stage, is unlikely to fetch very high returns.

Tuesday, September 24, 2013


Deloitte has done the ultimate crime. They signed the accounts of Financial Technologies, more than a month ago and it has been mailed to shareholders.

Now, a day or two before the AGM, they “Withdraw’ their signature!! Clearly they have been spooked by post balance sheet events and are running scared of a class action suit.

Absolutely unprofessional and clearly shows that they do not know what they signed and are unwilling to stand by their audit.

One always knew that audit is an approximation, but this kind of drama is the limit. What is to stop them from withdrawing their signatures two years in to the future?

Wonder if ICAI will have anything to say about this unprofessional firm ? This leaves FT in a corner. No audited accounts. No dividend declaration!! And which self respecting auditor would take this client on? And when could the accounts be audited? The legal deadline expires on 30th September!! Wonder if the company comes and says that no one is willing to be an auditor, what happens??

Will the ICAI revoke the license of Deloitte?

And FT is now beyond redemption- As a shareholder, I read from the internet about this incident! The AGM is scheduled for Wednesday, 25th and as of 24th night, I have no idea that the accounts will not be adopted!!

The Financial Technologies audit fiasco is a good thing to set in motion a change about audit and auditors- It is too much to expect ICAI to do anything- It would have to be forced upon the audit industry

Sunday, September 22, 2013

The Falling Rupee- NRI investments in INR

There are a lot of NRIs out there who keep investing in India due to the higher interest rates available here. Till a few years ago, there was also the added motive to shelter some part of the income from American taxation. Now I understand that the US government is quite fussy about evasion of taxes by American Citizens.

The NRI also has the issue of having to support his dependents out here in India. Maybe it will be so for another generation, but when the NRI’s children cease to come back, that will also obviate the need to have any ties with India in terms of money or otherwise.

The first generation NRI is the one that is not quite sure. Most of them want to come back, so they build a house, keep money in FCNR or other NRI accounts and keep looking at FD’s, Bonds etc that yield higher rates out here. More often than not, they do not factor in the exchange rate damage that happens to their savings out here in Indian rupees. This damage becomes apparent only when there is a sharp fall like it happened recently. Logically, the rupee should decline by about five to seven percent per annum against the US dollar. However, it is not a gradual and calibrated decline because other flows in to the country (FII and FDI) do provide some temporary respite to the fundamentally weak rupee. Fundamentally weak because our imports always exceed exports and hence we are always in search of dollars. Also, our domestic finances are unlikely to ever be anything other than deficit, so this continuing deficit gives rise to inflation. Given the chronic nature of inflation and deficit of foreign currency, our only hope to keep the rupee from falling is to create an environment of legal and political comfort to foreign money that can get invested here.

The problem this year has been the near twenty percent decline in the value of the rupee in a short span. Whether the rate that is prevailing now is the right one or the wrong one, depends upon what time frame we are talking about and what annual rate of depreciation in the rupee one uses. For example, if I start with 1970, when the US $ was worth Rs.7.50 and assume a 6% annual decline, the dollar would be worth nearly Rs.92. If I assume a steady 6% rate, the table would show that the US$ would have been worth Rs.24.05 in 1990 and worth Rs.25.50! As against this actual rate was Rs.18.11 in 1990 and Rs.25.79 in 1991!!!And in 2002, the theoretical rate should have been 48.40 and the actual was 48.23!! It is only post 2003 that we attracted big FII/FDI flows which propped up the rupee. So, the fall in the value of the rupee is never an orderly one. It holds on its own for some time and then it cracks. So, one cannot say that the rupee is undervalued.

So, the investment of the NRI in India keeps deteriorating on an average by six percent each year. This is a simplistic assumption based on the difference between the average inflation rates in the US and India. So, as an NRI one must deduct around six percent returns AFTER TAX to merely compensate for the change in exchange rate. After this, if still attractive, by all means chase rupee investments. This is fine in theory, but if you have just started investing two years ago, you have seen around one fourth just knocked off your savings. There is no escaping the volatility. A tapered decline can happen only if the economic regime is stable and the legal framework conducive to attracting FDI and FII inflows. Our legal system is so capricious that serious foreign money for will hesitate. OF course the lure of such a large population will keep money coming in, even if the legal environment is weak, simply because the world businesses will take risks to keep growing.

And my hunch is that the rupee has a long way to fall. We have been lulled in to complacency since 2002 or thereabouts, on the basis of inflows of FII and FDI. It is important to keep it going, or else, to see US $ at eighty plus is not beyond the realm of possibilities. For NRIs who invest in India, do not forget to do your numbers. And those who can take rupees overseas legally, it is never too late.

Friday, September 6, 2013

Investor- Blame thyself- No one will help you

Talking to a spectrum of investors, I realise that what they seek is really a magic wand that picks up stocks that will keep doubling every day. They are unwilling to spend time on their money, saying it is beyond them. They keep looking for second hand knowledge. They will not blame themselves for the mess they are in.

They are willing to spend hours at a movie or watching inane shows on television. They are willing to spend a lot of time in choosing a toothbrush. But, they are unwilling to spend even an hour a week on learning some basics of finance and investing.

After all it is their money. No one can share their grief if they lose it. And apart from family members, money should perhaps be the only asset of value. Knowledge is all around. But no one is willing to ask or learn. Easy meat for the planners, brokers and bankers.

Tuesday, September 3, 2013

Could this have happened? A moneylending operation through a commodity exchange?

I approach a sugar factory owner. Offer him a loan of 50 crs. He gives me a certificate saying that goods are in his godown. My understanding is that he will pay me @ 21% p.a. and the tenure is three years. Armed with the warehouse receipt, I now offer ‘investors’ a 15% p.a. yield on sugar. I will keep rolling over the tenure on and on and on. This difference accrues to my NBFC which is an account holder with another body which has members and membership of a commodity exchange. This another body also belongs to me. In effect, I have used the mechanism of a commodity exchange to become a leveraged money lender. The commodity may or may not be there. I know that when I give the loan for three years. So, most of the turnover that happens is of my ability to create enough borrowers. It started with my trying to lend money out of the huge surplus lying in the balance sheet. The commodity exchange came in very handy as a tool to create more lenders and borrowers, with no risk to me. A six percent spread on a few thousand crores is easy money. And have got enough contacts to duck regulatory action.

Thursday, August 29, 2013

Jigger Pokery at the NSEL, Murder on the Orient Express etc

The NSEL scam is funny. No one seems to be interested in finding out where the money went. The promoter has drawn out a schedule of repayment which is like a pregnancy to delivery routine stretching over ten months. The brokers are busy pointing fingers at Jignesh Shah so that the investors conveniently forget their role of luring the victim. The brokers now hide the fact as to who did the KYC on the names that are borrowers. Or each one of them fronts for Jignesh Shah? No one wants to know or say.

The brokers & Jignesh Shah, in a bid to soften government response, pay off 'small' investors. And how? By Jignesh Shah, dipping in to the wallet of Financial Technologies WITHOUT legal sanction!! Jignesh Shah is a class act!! His contacts have ensured that the government still has not touched him, looks on to his charade of appointing 'independent' Officer on Special Duty, "Forensic Audit" and what not. But it seems to be working. Government has still kept him outside bars and the Economic Offences Wing still deliberating perhaps about whether there is a crime happened or not.

Wonderful example of corporate governance. Promoter picks pockets of one company clean. Then picks pockets of another company to give 'loan' to the other, which can NEVER be repaid. The other co shareholders don't even get a thank you letter from the promoter for this robbery by the promoter. And brokers, who took investors on a guaranteed return trip, now point fingers. Who gave the funny limits to NK Proteins? It seems that sons-in-law command the nation. The Chairman / directors of the NSEL just walk out, having partaken of whatever fees and other gains they could.

And no one is interested in tracing where the money went to. It should have been less than one working day's task to find out where the money went. Now Grant Thornton will do its 'forensic' audit. Who will foot the bill?

The brokers, the directors and the government all look like characters out of Agatha Christie's "Murder on the Orient Express". A murder has happened. A body is there. And all the killers get away scot free.

Monday, August 12, 2013

A Disciplined Approach to equities

An earlier piece that has appeared in Moneylife EQUITIES – A DISCIPLINED APPROACH When it comes to equities, each of us has a different experience, though we are perhaps all in the same “market”. Dig deeper and you will find that each of our journeys are separate, originate at different times, we take different vehicles and yet all of us seem unhappy with the “market”. Is there some safe way to be in the market with the objective of creating long term wealth? More often than not, the disillusionment is solely on account of a lack of thought behind the reasons for being in the market. Yes, all of us want to double our money each day. But do we sit back and think about the probabilities or possibilities? Take a look at the data below: Jan1-2012 to date- Sensex 20%, midcap 14%, small cap 0 2013 to date- Sensex -4%, midcap -18%, small cap -25% The above table is interesting. You can go back in time and check for whatever periods. The takeaway is that smaller stocks need a tougher skill set. One other thing has happened, which has not been documented. If one were to form a bucket of stocks with high ROE, businesses that are solid and have been around for a few decades, a different story comes through. Since the panic of 2008, when the broad markets fell, there has been a rush in to these stocks (for example, HUL, ITC, Nestle, Asian Paints, etc). Even in a falling market these stocks have trended higher. At the same time, some of the mid cap stocks are below what they were quoting when the Sensex was below 10,000. Thus, there is a huge difference in one’s experience of the stock markets even in same time frames. We all know that timing makes a difference. Yes, stock selection also matters. But this safe haven story seems to be a development of the last five years. This also means that these great stocks are priced to perfection and leave no room for disappointments. Yes, the street may tolerate one weak quarter, but a perceived slowdown or drop in expected profitability will lead to a severe de-rating of these stocks. The levels at which they are priced, limits the upside potential. Yes, they are great stocks to have in one’s portfolio, but the risk one runs is of prices stagnating in that portfolio. Let me tell you what a basket of five high quality stocks have delivered over the last ten years: Time Cummins HUL HDFC ITC Nestle Total Sensex Bank RD 1 year (7) 17 9 14 5 8 6 4 2 yrs (2) 38 15 34 9 19 11 9 3 yrs (4) 62 19 53 19 30 9 13 4 yrs 14 78 29 82 39 49 12 18 5 yrs 49 91 51 116 76 77 25 23 10 yrs 177 157 207 321 312 233 91 53 ( Absolute return in percentage terms, NOT COMPOUNDED) start date is June 2003/ In the above table, I have assumed that each month, on the first business day, we put up to a maximum of Rs.5,000 in each stock. Actual amounts would be slightly below 5,000/- to avoid buying fractions. Thus, maximum commitment of Rs.25,000 per day. Against each stock, the time wise returns are indicated. “Total” refers to the total returns from all the five stocks together. 1% brokerage on stocks is considered. In effect I am doing a SIP of 5,000 per month in five stocks, 25,000 per month in the index and a like amount in a bank recurring deposit, monthly compounded at 8% p.a. The above basket is a matter of choice and returns will vary widely based on what stocks one chooses. Clearly, the start and end period would make a difference. To make a basket of your own, just pause and think about which five or ten businesses you would like to own. That can help you prepare a list. Financial analysis can come later. I am using this table for a limited illustration. My point is that a basket of good quality stocks will beat the sensex returns comfortably. The risk of choosing just one stock is high, and hence I have chosen a bundle of five stocks. To me, it is also a function of discipline in investing. What is also evident from the table above is that if we look at the ten year window, the latest five have not provided great returns. And whilst a bundle of handpicked stocks have beaten the index in each year, the index has even lagged the bank recurring deposit investment over the latest three and four year periods. Of the stocks chosen above, I would have had difficulty in ranking one over the other even five or ten years ago. Same would be the predicament if I were to look five or ten years in to the future. My reasonable expectation is that in the next five or ten years, these companies would still be around and the businesses would continue to be great. This basket need not be the ‘perfect’ basket and five is not the only number. This kind of a basket may not give you great returns or multi baggers, but can provide you with a healthy equity portfolio that goes to create wealth. Mutual funds in India have so far done a decent job in equities. Nearly half of them have beaten the index. However, as the size of the funds increase, this will become more and more difficult, given the illiquid nature of our market. There are hardly 200 stocks with a market capitalisation of more than Rs.5000 crores. In essence, our entire market is a mid cap or micro cap market. So, any large fund will tend to mimic the bigger indices more and more. At best they will be overweight or underweight on a few stocks. So, investing in mid caps pays off when the size is small. A fund like HDFC Top 200 is a great example. Its great performance in the early days made money pour in. Today it has bloated to nearly Rs.12,000 crore! Finding 200 stocks to deploy the money is not easy. Now the performance is slipping badly. The fund should have closed out at around 2000 crores or so to sustain performance. So as the mutual fund industry grows in size, it would find it harder and harder to match indices. It would be a good exercise to go back to all your equity investment decisions and analyse them. Often, disappointment is the result of inadequate time and thought given at that point. I firmly believe that equities are a valuable investment vehicle. So, think hard. Equity investment is not a short cut to multiplying your money. First try and create a corpus through a long term plan. Then, take what risks you want, with money that is really surplus and where the loss is not going to hurt you. The chance for big rewards will always be with big risks. You may buy ten penny stocks and maybe if you are lucky one will become a big winner. The key to success in equities is your ability and willingness to acknowledge and accept the risks attached to it.

Sunday, August 11, 2013

The Financial Planner- Get to Know one- Do your homework in advance

We do not shy away from paying our doctor (where we do not even worry or wonder about the fee he is going to charge, whether the medicines he has prescribed are the best or if there are other alternative medicines at a lower or higher cost and efficacy available) when it comes to a health issue. However, when it comes to our wealth issue, our attitudes are very different. Same is the case for many of the services we use, whether it is a plumber or an electrician or the mobile repair fellow. However, when it comes to our wealth, we do not think about engaging a professional. Maybe, we have suffered losses on our investments as we thoughtlessly bought products without asking all the questions and tried to fit a square peg in a round hole. As a result, we have developed a generic mistrust of financial advisors. Of course some of the advisors are also to blame, as they pushed products that gave them the highest commission, without considering its suitability for you. To my mind, most of us lack in financial literacy. We simply get carried away by anecdotal evidence or advice which we do not question. To me, a financial planner or an advisor has a key role to play in assisting us with our money. However, the important thing to note is that his task should be confined to taking our present financial condition and explaining the risk in each of the product he advises us of. It should start with an assessment of where we are currently. Often, I have seen people reluctant to share financial information with advisors. This is akin to not telling a doctor about your medical history. The first requirement is that before you go to a financial advisor write down everything about what you have and what you owe. This has to be the starting point. The next step is obviously to write down what you make every month and how much you could put aside every month for the future. Also try and visualise what big expenditures (college admission, marriage, car, house or whatever you think are going to be big and non routine expenditures that you can anticipate). Now you are ready to talk to a financial planner. Now you have two sets of planned expenditure- those that are unavoidable and those that depend on how much you can save. In life, often our large expenditures have to be tailored to meet what we have. We may desire a three bedroom apartment, but what we could afford could be smaller. Once you decide to go to a financial planner, the first approach should be to evaluate what is clearly possible with your savings. This would obviously vary. If you already own a loan free home, a vehicle and other comforts, your only concern could be your children and your retirement needs. So each problem is unique. The first answer I would seek from a financial planner is to ask him: i) If I take zero risk with my money, what would be the outcome with my savings? After five years, ten years or twenty years? Obviously, the instruments available would include things like my provident fund, PPF, bank deposits etc. This would be my first line of defence.; ii) How much of my money can be spared to invest in riskier assets like shares, real estate etc? iii) What instruments are available for me? iv) For each instrument, I want to know the risk – Who is going to repay? When? and what are the price risks? Can I liquidate when I want and if so, what are the consequences? Do not be shy of asking as many questions as you can. Once I get these basics, then it is up to me to choose an appropriate mix of risk. If I already have all the basics paid for (house, car, children’s education etc) then I can take higher risk. If not, I have to opt for a lower risk. The important thing is to understand that you should NOT push the financial advisor saying that this is what I need at different points in my life and give me a plan to get there, with what I can spare. If your needs are more than what your savings can provide, then he will be pushed in to a corner and give you instruments that are highly risky and you will end up in a mess. It is best to fit needs to what we have. That is the only way to peaceful sleep.

Saturday, August 10, 2013

If you are so profitable, where is the cash?

(This appears in the latest issue of Moneylife, the personal finance magazine) KICKING THE TYRES- LOOKING AT EARNINGS QUALITY Stock picking theories are many. Right from ratio analyses, industry analyses we have technical analyses and astrology. The average investor survives only because of luck. He has generally no clue about what he is buying or selling. His long term investments or holdings are often an outcome of a short term trade he initiated. He simply hates to sell below the price at which he bought. Well, let us keep all the analysts to one side. To me, the quality of management is perhaps the single most important factor after a cursory financials and business analysis. Ultimately, when we buy a share, we are becoming a part owner of the business that is run by someone. We are dependent on him to deliver a bang for our buck. However good a business or industry be, it cannot be better than the man at the helm. Often, I come across some incredible set of headline numbers and everyone talking great things about the company. Often, it happens in businesses that are fundamentally weak. The first disconnect for me is when a company stands out in a weak business. That is the first red flag. Then we start going deep in to the numbers and basic analyses throws out a con game. Of course, no one is immune to a structured fraud (like Satyam was), but most inconsistencies show themselves early- Bartronics Ltd, Opto Circuits, KS Oils, etc. So what do I look for in terms of numbers or inconsistencies? I will try and list out a few pointers and hope that some of the readers may benefit by it. The first test is to see whether a company has got any ‘free’ cash flow. For example, there is Profits After Tax. To this one can add depreciation. That is the first level of free cash flow generated by a business. However, this is only the surface. To reach this level of profits, I also like to see what happened to the working capital needs over two balance sheets. For example, the level of debtors has increased. This means cash is locked up there. Similarly, inventory could have gone up. And cash flow gets a boost by getting some credit on purchases. So, to the Cash Flow after taxes but before depreciation, we have to add or subtract the changes in working capital. Hopefully, this number is still positive. From this, I also like to knock off things like increase in loans and advances and a normal level of capital expenditure that is required. Let us assume that the depreciation is probably the amount needed to be reinvested in to maintaining its fixed assets. In such case, the FCF is really PAT +/- Changes in working capital +/- changes in loans and advances. This FCF is available to pay dividends. Now, in many companies, you will find that for years on end, FCF is negative. Obviously a Ponzi is on. In a case like Opto, the FCF was also diluted or negated by the buyout of new businesses on a continuous basis. In 15 years, the company bought 35 businesses!!. Obviously it needed cash. Already, the FCF was negative. So, it frequently raised capital. In one sense, dividends were paid out of fresh capital raised!! There are many other pointers- Does the company have too many subsidiaries in which a lot of money has been lent or invested? If so, do these associate or subsidiary companies pay market rates of interest? Why does the company have associates (businesses where others have a stake) ? To me, the presence of many associates and subsidiaries is a big red flag. Then I have to sit down with the subsidiary accounts (which mean writing to the company and then getting them) and see where the cash is going. I try and see ‘transactions with related parties’. The higher the value, the more suspect the numbers. I also like to see companies with no debt. When they have debt and it keeps increasing, I worry. I have seen companies where the borrowings increase by more than the sales numbers. Surely a great sign of trouble. Taxation is a great give away. If a company pays less than marginal tax, there is a very high probability that the profits are inflated. Similarly, depreciation is something I like to see. When depreciation rates are very low, I worry. I also like to see addition of vehicles etc. Just to get a feel of how much of personal expenditures get dumped on the company. Of course, a corporate jet is a big sign of a rip off and I try and stay far away from such managements who do not like other mortal means of transport. I also like to do some back of the envelope checks. Often I find companies understate their borrowings. For this have a look at cash and bank balances. When a company has borrowings as well as huge cash, something is wrong. Also check the interest outgo and try to relate it to the borrowings. One thing I like to do is to compare ratios and numbers with competition. If the numbers are way off either way, then I smell trouble. One company I was analysing was in to technologically advanced products. In one place they boasted about the total number of employees. Taking that and relating it to the total wage bill, I found that the average annual pay was under Rs.10,000 per month for those highly skilled persons. Each line in the accounts tells a story. Ideally one should look at ten to fifteen years of numbers if possible. Of course, there are things like Board of directors etc, which I ignore. In reality, there are no independent directors. Most are cronies of promoters and simply there to enjoy the perks of holiday homes and the commissions they get. So the Board tells us nothing. Board compensation also does not matter much, except a few of the directors now seem to be blatant about pocketing a few crores per year as compensation for self, spouse and children. Dividend payout is something I pay attention to. The higher the dividend payout, the greater is my belief on the cash flows. A low dividend payout is a flag. After Satyam, one is not sure even about balances in banks and mutual funds as reported in the balance sheets. I also tend to ignore asset values of land and property. Often, I have seen that the gains of these rarely accrue to the minority shareholder. Best to buy a predictable business where one is comfortable with the past. I am also sceptical about companies where the inventory and receivables keep going up disproportionately. Often, they are indicators of companies trying to show higher level of sales and profits than what is. Whilst investing, it pays to be cautious and sceptical. At worst we may miss an opportunity. But at least it will help us stay away from rotten apples.

Wednesday, July 31, 2013

Telengana - Andhra- Dividing People- Advantage Congress- Disadvantage People

So many issues- Doubt whether the Telengana people are going to be happy. Or the other half. Things that cannot be shared would include Tirupati temple, Hyderabad, water, food etc. People from Telengana who have properties and businesses in the other half would be targeted. Realignment in property prices is one small thing. Everything from State Transport, Infra, Police personnel will have to be divided. And a monetary payout from the Centre would have to come to the new state. One more High Court. One more Sales Tax regime. The list is endless. Positive possibility? Telengana with its own CM can develop better. If they can find the resources, which all seem to be with the other side. Till the dust settles down, expect riots and uneasy peace (if army steps in). Not a happy development at all. But suppose the Congress had to use this easy and divisive thing to get a few MPs in to its fold.

Tuesday, July 30, 2013

The Hindu Rate of Growth Is Back

The RBI did not do anything. A quiet 'state of the nation' address. Not surprising, given that it has the unpleasant task of having been told to keep the rupee below sixty to a dollar. The only answer was to squeeze the liquidity so tight that in the short run, forget dollar, the demand for everything calmed down. Will the rupee stay around or below sixty for some time? Unlikely, given that we continue to import beyond our ability to pay. We are paying for imports with borrowed currencies. How long can this go on? Fundamentally when we are revenue deficit in foreign exchange terms on a permanent basis, we have to either reduce imports, hike exports or attract long term capital that will find a home in India. Obviously that cannot be through the portfolio route. It has to be by letting foreigners engage in business in India. For that, we need infrastructure. Even that is not a big thing if our policies were stable and friendly. The number of permits and permissions, the number of bureaucrats to meet and then the capricious policies et al do not exactly welcome foreign business to set up base here. The other reason why manufacturing cannot move to India is because of the poor work ethic and the absence of a speedy and effective legal redress system. We have some laws, but apart from overhaul, they also need to be timely. With this situation, the economic growth also takes a hit. Capital expenditure in India is not happening. Demand is booming at the consumer end thanks to easy loans and a high wage services sector. With supply refusing to go up, the outcome is a combination of stagflation and higher current account deficits. The thing is that we are also seeing a slowdown in job creation. The situation now is not good at all. Maybe even consumer spending will be throttled by runaway prices. Once that happens, we will be back to five and four percent growth. But no, let us hope that the politicians do not screw it up so badly. But the last four to five years are putting spokes in every wheel of our growth story. Let us wait for interest rates to cool off. In the meanwhile, let us watch the Direct Cash Transfers. In all this economic problems, if Telengana happens, there is going to be more mess. Truly, Darkness At Noon

Monday, July 15, 2013


(Insurance companies con you with 'child' insurance etc. The premise behind their con is that should your child die before he or she grows up, you need a payout in money terms. Are you dependant on your child for your daily living? Or is it that you want to provide for the child's need in future?) Most of the adult fraternity goes numb in the mind when it comes to the future of their children. We often become easy meat for the insurance company that sells ‘Children’s Plans”. Sentiment and emotions overcome reason and we get taken for a ride. Someone hawks a plan that says that it will provide for education of your children, marriage etc and also provide an insurance cover for them. Pause. Think. What do you need for your children? Obviously, you need enough money to provide for their education and maybe for their marriage also. Can you quantify it now? How can one quantify needs that are twenty years or ten years in to the future? Do your children need insurance on their lives now? Why pay for it now? Let us say the unspoken happens, is it a financial disaster for you? So, why waste money on insuring their lives? What we need is a savings plan. And savings plans cannot be provided efficiently by any insurance company. The insurance company invests your money in bonds or stocks or some such combination. From this they will deduct their costs and selling commissions (which are way higher than in any other instrument) and give you the balance. And if you are suckered for insurance, that money will also be lost to you. So why go for that? Simply for an emotional pull that was utterly irrational? If you put the same amount in to a recurring deposit with a bank, you will have a higher corpus. Even a liquid fund will give you a better post tax return. And you do NOT have to spend on your children’s life insurance now. So get smart. Children’s Plans being hawked are simply inefficient and result in a poor return for your money. Instead start an investment plan. And since you want to be sure about having the money without any loss of principal at the time it is needed, you have to eschew equity. If you are planning to save for your child’s college fees or something, the best way is to go about putting money aside either in a liquid fund or in a recurring deposit with a bank in the child’s name. Yes, you will get a return that would be seven or eight percent. Putting money in to bonds may not be good as there would be interest payouts and no increase in maturity value. Shares are ruled out because you cannot predict either the price or the market conditions when you need the money. Yes, the next question is how much to save? The unknown here is the amount needed for education. Education expenses are a matter of luck, the marks your child gets and the kind of college one gets in to. The amounts can vary from a meagre amount of under a lakh of rupees a year for college to a few lakhs a year. In addition there could be capitation fees if you are unlucky. The only thing predictable and possible is for you to decide on an amount that you can spare regularly to be put aside for this purpose. Of course if you are well off and earning well, you are not bothered too much about it. One mistake to be avoided is to try and stretch returns on your investments simply because your calculator tells you that there is a gap between what your savings will amount to and the amount you need at the hour of need. Someone will then tell you- Over the long run, equities will give fifteen percent, so why not put some money there? Wait a moment.. What if the market is bad at that time? I might even lose some principal. Take a piece of paper and write down the needs and the means over the time frame you have in mind. The only way out is to keep your dreams and needs within your means. If you forget this, then you will take so much risk with your money that you will find it difficult even to make ends meet. It is possible that some aspirations may have to be toned down. Get smart with your money. Do not be outsmarted by insurance salesmen and dream sellers. R. Balakrishnan

Sunday, June 30, 2013

Stock Markets are not for everyone- Small boys have to stay away

Keeping one’s faith in equities as an asset class is perhaps very tough. With the markets virtually panicking and not going anywhere except down, people seem to be deserting equities. The investor who has started investing within the last decade, has made money in real estate and gold and not done very well in equities. Equity returns are a function of three things- Patience, effort and a bit of luck. Patience is important because equity returns tend to be extremely volatile in the short term. Over longer term, I can expect share prices to reflect the underlying company performance. Effort is required in identifying the share/s. Here it is important to distinguish between a range of characteristics that include longevity of the business, the profitability, the promoters and the nature of the business. In India we clearly see that given the growing aspirations, those companies that make and supply consumer products (especially the FMCG) are best positioned. There are services sector that grow, but are subject to intense competition as well as regulatory issues. The manufacturing and infrastructure sectors are reflective of the state of the economy and are characterised by hope and despair. So when constructing a portfolio, it is important to understand what we are buying and what kind of volatility are we going to be subjected to solely on account of company performance. We may not be able to protect ourselves against market forces but surely we can try our best to protect ourselves against the quality we pick. This effort is something people shy away from. Assuming that we are not comfortable with numbers and its analyses, surely we can spend some time in understanding the business of the company? So maybe we end up with a handful of companies we understand in terms of their longevity. Once we reach that stage, our next effort is to protect ourselves against market forces. This is best done by adopting a SIP route for the individual stock that we like. We keep buying a few shares every month for ten to twenty years. Where we all err is in buying in bulk simply because we see others making quick money. No one tells you about the losses. Investing in equities is successful only when you buy what you like at a price that you think is right. There should be no compulsion for an individual to be fully invested. Then we become like the fund manager who says that he will be fully invested even if he knows that the markets are expensive. An individual investor has an edge, if he does his homework. Luck is a factor that we cannot ignore. If we started our investment habit in 1995 or 1996, we have made money. If we started in 2000 or 2008 we have lost money. Timing does make a difference, if we are not a regular investor through an SIP route. We also need luck to make sure that the company we choose is not hit by fraud. We try and minimise it by knowing about the promoters, but there are no guarantees on that. We see a range of mutual funds with similar objectives, but the returns vary very widely. Again, we should be lucky to choose the winner because historical records seldom sustain. Warren Buffet famously states that he likes to ‘own’ businesses that are first class and will do well over time, feeding on growing needs of the consumer. He also wants the business to be easy to understand. He also says that if it is not possible to buy entire businesses, he would like to be part of that by owning shares. That is what we are doing when we buy shares. We are letting our money ride on someone’s ability to manage a business well. The fly in the ointment is that the price of the share is subject to so many market forces. As an investor, we have two options to get in. One is by adopting the SIP route for a period of ten to fifteen years. The other is to be number savvy and wait for timing when the share price is really attractive or below what an analyst would call as ‘fair value’. Essentially what it means is that at this point you expect the reward (of higher prices) to outweigh the risk (of fall in prices). The worst is to time investments with market sentiments. That way, only losses accrue to you. R. Balakrishnan ( 24th June 2013

Wednesday, June 26, 2013

Of Alternate Assets and Other Investment Exotica

INVESTMENT EXOTICA Today, Gold and real estate have become virtual essentials in every man’s asset creation. So much so, that these two asset classes could perhaps turn out to be the biggest bubbles over time. We all presume that we will be the smart fellow, and will bail out before the others. However, mass following, inflation and the action of governments (constant bail outs and subsidies by printing more money) ensures that these assets keep inflating in value. It is very likely that lack of faith in sovereign, inflationary pressures and crowd behaviour could keep these asset classes on the high for times to come. Let us take gold. A metal, with no intrinsic use or value, has become a synonym for wealth due to purely emotional or sentimental reasons. And in the frenzy of speculative hoarding, it has virtually become a self fulfilling prophecy. If we take the pure extraction cost, it is well under US $ 800 per ounce. However, it has become a store of value and is driven by factors like the strength of the dollar, the degree of likelihood of an alternative to the dollar as a ‘safe haven’, Indian and Chinese household fetish for the yellow metal and the speculative forces of hedge funds and commodity funds. The other thing that draws Indians to gold is history and tradition. Apart from Gold and real estate, there are various asset classes which get clubbed under ‘alternative’ assets. These include commodities, currencies, ‘art’, ‘antiques’ and every other exotic item that the world collects. Most of them derive value only because more than one person has a fascination for it. Take for instance, stamp or coin collecting. Since this is a passion with quite a few people, there is some value because someone is willing to pay a price for acquiring it. The one thing to note is that these ‘alternate’ assets do not follow any predictive valuation model. It is perception and a function of demand, supply and hype. Typically, in good years, when there is a lot of money flowing around, the demand for ‘exotic’ assets goes up. In poor years, there is a likelihood of some holders wanting to exit. You cannot value these assets except look for references and prices at auctions of similar items. These asset classes are for the ‘rich’. People who have so much money, that they already own considerable quantum of traditional assets like property, shares etc., It would be foolish if someone were to directly get in to this asset class without having put money in to the safer and liquid asset classes. When good times roll, many of the exotics will be packaged together under the umbrella of “Portfolio Management Schemes”. There was an ‘Art” fund that was launched in 2006, which collected more than Rs.100 crores. It was supposed be a fund focused on buying, holding and selling paintings (of the art kind). It had a three year lock in period. Alas, most of the people who went in lost money. The problem is that art is a dicey investment. A new artist will command value only after twenty plus years! Established artists or old masters command fancy prices. So, unless you are passionate about it, investing in art makes absolutely no sense. Exotic investments are for those people who cannot complete a total count of their wealth at any given point of time! The key factor is that allocation in to these exotic assets should be in consonance with your total wealth as well as the appetite for risk. If one is worried about prices and liquidity of what lies in the wealth basket, obviously these asset classes are not for you. Exotic assets may fetch returns over long holding periods. Often, they give returns only when handed over from one generation to the next. That is the patience one should have, if you want to enter. Liquidity comes from a limited circle of investors with similar appetite. Another thing to note in these exotic asset classes is that if one wants to buy, happy times are not the best ones. In an environment where everyone is prosperous, these asset classes tend to show a lot of demand and prices remain high. In a weak economic environment, if one has the money, these asset classes can be picked up at lower prices. With bankers struggling to find new ideas for packaging and selling to the rich, we will see more and more investment ‘packages’ on offer. Understand the risk in the asset. And understand yourself. Are you willing to bear the risk? Is there liquidity? Who can I sell it to? Ask as many questions as possible and then take the plunge.

Investment Fables- The Hare and the Tortoise

THE HARE AND THE TORTOISE There is a delightful movie named “Katha” that was directed by Ms Sai Paranjpe and released in 1983. It is a modern day retelling of the old fable of the Hare and the Tortoise. In the movie, the Hare wins. The tortoise keeps going at a steady pace and the hare has its fun and games and still manages to win the race. It is like retelling the story of the Ant and the Grasshopper and the Ant coming out second best. What relevance does it have to us as an investor? I often wonder, looking at fortunes that have been made and lost, as to if the person really followed a well articulated strategy or was he simply lucky in terms of what he picked, where he was and market timing etc. Often, I find that a systematic approach has given modest to below average results. More often than not, most investors who have had brilliant success were also the beneficiaries of being in the right place at the right time. However, the key to consistently being lucky was the ability to understand risks and at all times get a sense of circumstances. If we take properties, you may perhaps understand what timing is all about. Often, we see property prices going up manifold in a short span of a couple of years and then stagnating for five to ten years. So, the like or dislike of property stems from when you got in and when you got out. In some cases it is also a case of did you get out at all? And we have seen properties behaving very disparately. In Chennai, I know of people whose property prices have gone up six fold in less than ten years and some whose property is not saleable even at the price that they bought, ten years ago. Was one cleverer than the other? Similarly, for every success story of multi-baggers in mid cap stock investing, there must be at least nine stories where someone’s investment became as close to zero or gave negative returns over time. However, only the success stories go round and the failures are never talked about. And each one of us have our own stories of what opportunities we missed, that in hindsight make us look like fools. At the time a company like Infosys was listed, for every believer there were more than ten who did not. Or it was a question of being in the right place at the right time. Those who got shares of a Colgate or a SKF at the time of FERA dilution (1974) and holding on to the shares, have seen their wealth multiply thousands of times. The same stocks, if one bought much later, did not give much returns. PSU stocks are equally hated and liked. If you were lucky to have bought the shares when the shares were just listed and languishing in the mid nineties to early 2000s, you made a lot of money. Many PSU Bank shares were at close to or below their ‘par’ value. However, if you got in the last few years, you probably lost money or just managed to keep your principal intact. For every investment, whether you used a SIP or a direct investment route, the judgement of timing and some luck are essential ingredients. I always feel that whilst one can use skills to choose what to buy when it comes to stock, no one has a fail safe method that will help choose the time and price. There are charts and technical analyses, but I believe that they are as chancy as a toss of a coin. That is what keeps the industry going. No perfect answers. If you were a fan of the dot com bubble, you would either have made a fortune or lost one, depending on where you placed your bets and when you walked out of the casino after encashment. Similarly, in mid caps where I did theme based buying (land bank of old mills etc), a couple of them gave me big returns and the rest just bombed or vanished. At the point of analyses, all of them were equally bad and the bets were uniformly placed. Just a matter of luck that the greater fool theory worked in two and failed in eight instances. Someone who tracked me and happened to pick one of the two winners made very big money, many who picked up one or two of the eight, lost all and on the average, I made it fine. Better than the market, but not spectacular. I know if I pick up high quality stocks where the companies will continue to do well with reasonable profits over the next ten years or so, my downside is limited. However, if these stocks are well discovered and talked about, the prices are bound to be high at the entry point and my returns will be nothing to write home about. Yes, I will sleep peacefully, with perhaps a minimal risk of loss of capital, but nothing spectacular to look forward to. For that, I have to get in on the ground floor before someone else does and place my bets. Gold is a classic case of luck and timing. If we did some rational analysis, we will not consider investing in gold at all. I would rather invest in copper or aluminium since these metals have some use and value. Gold is purely for jewellery and value is based on fear and the strength of the rupee against the dollar. The last twelve years saw an unprecedented bull run in gold. Your experience depends on when you got in and got out. Skill and knowledge would have kept you out of gold altogether. If you want to beat the market, you have to be either lucky with direct equities or brilliant at timing. If you are in mutual funds, you will average out. If you are in theme funds, your luck of timing would decide the returns. If you take an index ETF you will be in line with the market. Some diversified funds have comfortably beaten the market so again your choices expand. In choosing a mutual fund, you are forced to fall back on past performance, which is a pointless exercise. Rather choose a good high quality fund house and expect average to above average returns as compared to its peers. In our search to preserve capital and create wealth, our search for avenues that will help us to beat inflation demands a lot of thought and effort. Simply believing in homilies like “equities beat inflation” or saying about land that “they don’t make more land” etc is pointless. We have to spend time understanding what each asset class can do. How do prices behave and what in general impact prices of asset classes. We can never perfect it the level of predicting or forecasting individual stock or land prices, but we will go in with our eyes open. This means having to spend time and effort in studying the assets that our money will buy into. Whilst it is not possible for most of us to go in to finer details, it will be a good starting point to ask “what can go wrong with the investment?”. Once we understand all (or at least most of them) the risks, then we are better equipped to handle our money. Yes, sometimes we could get lucky like the ‘hare’ in Katha. Generally, the tortoise lives longer and wins the big races. We will make better investors if we focus more on understanding where we stand to lose rather than pick winners in 100 meter races every day. The harder one works at it, there is more likelihood of getting luckier. The key to spotting opportunities lies in understanding risks. Without understanding risks, we come down to a throw of the dice.

Sunday, May 26, 2013

Fixed Deposits could get stuck forever- Some Pointers if You have to

People losing money through Fixed Deposits keep happening at an alarming rate. So thought it would be useful to bring home some pointers.' Fixed Deposits with companies have always been an avenue for savers. It is essentially an instrument of ‘trust’. You place your money for periods ranging from six months to five years. Interest is paid quarterly, half yearly, annually or compounded and paid with principal, at maturity. I have also seen people splitting their deposits in to chunks of Rs.45,000/- and put it in to many companies, to escape the TDS net. In doing so, they end up putting money in to high risk areas and the need to follow up with many companies for interest, repayment etc. Most often, we do not do any homework about which company we give it to. We either go by broker recommendation or by our perception of the company or on the basis of interest rate offered. Fixed Deposits with companies are one of the riskiest investments. There are hundreds of companies where people lost money due to default. Leasing companies in the eighties were amongst the biggest to default. Unlike any other borrowing by a company, Fixed Deposits are not regulated or vouched for by anyone. The law simply allows every public limited company to raise money from the public. This is as good as permitting them to carry on banking. There is no security or any guarantee provided by anyone. In the event the company goes in to liquidation, the Fixed Deposit holder is the last in queue. However, FDs do offer the highest rate of interest as compared to other forms of investments. Perhaps they offer the only returns that help you to battle inflation. If inflation is at ten percent, a bank fixed deposit that gives you eight percent or nine percent means that you actually erode your purchasing power. The risk that we assume is that in a company FD, we may lose the amount invested if we choose without thought and homework. Just pause to think. Why is a company raising money through this route? Surely it must be due to reasons of poor credit standing or bankers’ reluctance to lend them more money. There is one class of companies that raise FDs on a regular basis from the public. They are NBFCs and Housing Finance Companies. Here the key issue is that whilst you put in your money for one to three years, they may be lending for longer tenures. In essence, unless they keep finding new investors on a regular basis, they will have problems of finding money to repay. If the Fixed Deposit tap were to be suddenly turned off, the NBFCs and Housing Finance Companies with less than high reputation or credit standing will be hard put to repay. That is what happened to the leasing companies in the eighties. Only a handful survived. If you have to invest in Fixed Deposits, look at the following: i) A credit rating that is at least of AA (Double AA) level, signifying “High Credit”quality. And ideally they must have this rating from a minimum of two well known rating agencies. ii) Keep the duration to one year ideally, ask for repayment and then reinvest. If the credit rating is the highest (AAA or Triple A) from two agencies, then you could consider a longer duration. iii) Stick to companies that can service your investments in the city you live in. That makes it easier to follow up in case of need. iv) Do not get tempted by higher returns or incentives that may be offered. If someone is offering a high rate of interest, surely the risk is very high. v) If there is a choice between ‘listed’ debentures and fixed deposits, opt for the debentures. Presently, on listed debentures, there is no TDS. Listed debentures can be bought through a broker. vi) Never go in for automatic renewal of deposits. Take the repayment and then re-invest, if required. This will ensure that you check the repayment systems also. vii) Be very sure that you can afford to wait for the maturity period. Whilst some companies may offer premature withdrawals, it is better to be safe than sorry. viii) Avoid new companies or small sized companies. Go for companies with ten to fifteen years of standing and reputation in the industry. ix) Check on the internet for any news about the company that may warn you for any signs of trouble. Google is a fantastic resource for checking news. x) Avoid unlisted or private limited companies or industries that do not have regular cash flows (engineering, real estate, infrastructure, capital goods etc).

Tuesday, May 7, 2013

MANAGING GREED- Chit Funds and other pickpocketing schemes

The latest financial scam where people lost money (the Saradha Chit fund of West Bengal) proves just two points: i) There is still a lot of financial illiteracy; and ii) Those who are literate find it difficult to curb greed. We can assume that some of the investors had no idea about anything other than bank deposits and were simply lured by high profile selling tactics of the neighbourhood agent and lost their moneys. Surely, there will also be a large bunch, who were lured in to it by what they thought was “easy money “. Today, there are thousands of schemes floating out there that will leave you poorer. Whether it is a gold deposit scheme or a booking scheme in some real estate project or a MLM scheme or a fixed deposit scheme with fancy returns, each one of them is fraught with risks of the unknown. Almost all of them have exhausted their legitimate ways of raising money and are banking on the gullible Indian to lend them money. It is possible that a few of them may not have bad intentions. They may genuinely believe in their project which may be dependent on too many things going right and exactly as per their expectations. Let us do some logical thinking. If a bank deposit can give us, say, nine percent per annum for a three year period, some else can give us nor more than two or three percentage points more than that. If they are willing to offer you, say, eighteen percent per annum, it means that after all expenses; they should be able to earn more than that. There are very few businesses that earn this kind of money and those businesses are unlikely to need or borrow money. This has to be your starting point. Find out what are they going to do with the money they take from you. Often, you will get stories of your money getting invested in land or property. This is the biggest risk and there are no guarantees that the price will rise and one can sell it in time to repay any money. The other thing you will notice is that none of these borrowers and fund raisers will tell you how many legal and illegal entities they run, what are the financials, who are the directors etc. It generally means that the only business of the borrower is to raise money and keep on doing it till the whole thing collapses. And most of them will never give you a full picture of who the promoter is, what his background is, what success he has achieved in any domain of business etc. There are salesmen who push these schemes at you. They get very high commission rates. They may be called agents or some such designations. Apparently this is the only income that person may be having. If someone comes, ask him directly about what commission he gets. You will never hear the truth and get some evasive answers. Real estate bookings are another area for you to lose money. The company, again, will not show you any balance sheet. One plot of land in a far away location, perhaps one model house and no government permissions in place but asking you for money is another sure road to losing money. Most likely, you will end up with a piece of land that will never be saleable at any price. Similarly, booking apartments is another high risk game. I had personally booked an apartment in a property called “Estancia” by a builder called Arun Excello near Chennai. The handing over is delayed by five years and what appreciation I hoped for is a mirage. The best of builders cannot withstand a slow down or a delay. So if you are investing in property, go for ready property in prime location. I would urge people to make a checklist of a few questions they should ask before they invest money: i) Who are the promoters? Any track record? ; ii) Their latest accounts are a must; iii) What are group companies? Any record of success? iv) What business is it that earns more money than the interest it promises to pay you? v) Why can it not get money from a bank and is approaching you? vi) Is there a way to know how much money they have raised? Will raise? vii) What is the entity that is borrowing? If it is not a listed company, the chances of losing are so much higher. Not because listing gives any guarantee but because there are some regulators and there is disclosure. viii) Do not lend or invest money in proprietary, partnership, cooperative or private limited entities. ix) Never invest money in a scheme where the name of the borrowing entity is not disclosed; x) If they accept cash, stay away. You will lose your money for sure. xi) Invest only if it is a scheme like a FD or Debenture that has a credit rating in the public domain xii) Be sceptical about everything and everyone when it comes to money. Ideally, one should keep away from all these schemes designed to transfer wealth from your pockets to someone else’s.

Saturday, April 20, 2013

An appeal to give for education- Someone needs your financial help

A request to GIVE. I do not know this charity, but somewhere a feeling that the person is doing a good thing. All of us wish to do something, but do not have the time. Many of us can give some money but not time. Here is a person who is taking the effort to do something and so I think we could help him with money. Not too much. His current project for a primary school in a village seems to be 250K. If I send a thousand rupees, it is perhaps not too much. A dinner with friends sets me back more. So an appeal. I have no clue about the bonafides. But I am going ahead in my small way. I hope the mission succeeds. Nothing like supporting the cause of basic education. Here is the mail I got: Contribute to set up a Primary School in village Mahabadia Ahambhumika is aiming to set up a Primary School in village Mahabadia,distt.Bhopal.We have been wrking in this village since last 3 years.The people of the village work as daily wage labourer in brick kilns,construction sites and stone quarries.This village don’t have any school therefore,the children don’t go to school except few ones.We have an informal literacy centre namely Mehak ( Fragrance) in this village where we impart basic edcution of Hindi,Mathematics and English ( recently started ) to 52 girl children daily ( except on Monday) for 2 hours.We have realised that 2 hours duration is enough time to educate the children properly.Besides that there are many more children in the village who needs to be edcuated.In view of above we have decided to start a Primary school for the children of this village. The school we are aiming at will provide education to all the children of the village.There are more than 150 children in this village. Our plan is to start the Primary School from the month of July 2013 and we need to raise Rs.2.50 lacs for this purpose by the end of May 2013. In past you have supported us whole heartedly therefore, I am requesting you without any hesitation to contribute for setting up a primary school.Please feel free to contribue any amount as per your convenience.Please drop a mail once you decide the amount you will be contributing, mentioning the time by when you will be contributing.( Please try to contribute before the month of June 2013).Drop a mail to us once you transfer the amount with transcation number. You may further help us by spreading words to the people you know who may help us for this cause. Below is the banking profile of Ahambhumika. *Online Bank Transfer: AHAM BHUMIKA SWAYAM SEVI SANSTHA, SAVINGS ACCOUNT NO. 2073101015874, IFSC Code- CNRB0002073, CANARA BANK, Branch - MAHARANA PRATAP NAGAR, BHOPAL Important: If you're doing a online transfer to our account, please send us an email with your name, address and donation amount, so that we can send you the receipt. **Account payable Cheques/ DDs in favor of – AHAM BHUMIKA SWAYAM SEVI SANSTHA, Payable at BHOPAL (M.P.) and send it by post to *Postal address to which you may send cheque for the project : Subrat Goswami Ahambhumika C/o Archaeology 3rd Floor,B-Block, G.T.B.Complex,T.T.Nagar, Bhopal-462003 (M.P.) -- With regards (Subrat ) Founder Ahambhumika (M) 98264 72718

Tuesday, April 16, 2013


(FOR the first part go to : Having started off on our ‘savings’ plan, let us understand what kind of savings instruments one can use and for what purpose, duration etc. i) Savings accounts in banks- Keep enough to tackle a month’s outgo and some emergency needs depending on your situation. You can always keep a ‘sweep’ account that ensures highest return: ii) Liquid funds are good if you need money in two to three years time; iii) Fixed deposits and bonds are good if you need the money after three to five years; iv) FMPs of mutual funds are a better option than fixed deposits from safety as well as tax impact is concerned; v) Savings instruments will never be subject to market risks. Yes the can have risk of default, so better not to chase high returns and sacrifice on risk. vi) Savings has to be in a form that you completely understand. Cannot be an insurance policy or ULIP. I have a different take on financial planning. I ask each of you to write down what you earn now and what can be spared for savings and investments. From there, one can take a call on what is achievable and what is not. There is no point first saying that this is what I need and then go about finding the money. It may click once in a way, but more often, you will end up taking risks that you can ill afford to. For example, if I can spare, say, five thousand rupees a month for two years, it could accumulate to around Rs.1.40 lakh at approximately eight percent per annum. So, I can plan to spend around 1.40 lakh at that point in time. However, if I decide first that I want to spend around Rs.2 lakh at the end of two years and cannot spare more than 5K each month it would need a return of more than 15% p.a.! So I would have to search for something with that kind of potential. Alas, there will be only uncertain avenues that risk losing principal also. In short, first decide what you can spare and fix your aspirations in the realm of possible. Do not get carried away by the crazy advertisements that drive you to aspire for the moon and then choose a road that will destroy your wealth and health. All other schemes are ‘investments’. Returns would be unpredictable and will have risks attached to them, with the potential of higher returns. It is common to say that equities deliver fifteen percent compound returns. However, in the last five years, it has delivered zero. You cannot plan to meet a certain financial outlay with any ‘investment’- whether it be equities, land or gold or anything else. They are subject to factors beyond your control. After the savings plan, I would surely look at ‘spending’ money on some medical insurance. Life insurance is something that you need so long as you have commitments or financial dependents. Once you cross that hurdle, stop the policy. Today, a term policy with payout only on death, costs less than medical insurance. Do not fall in to the trap of thinking that there has to be a ‘return’ from a life insurance payout. There are better investment options available. Investments are financial outlays, where the final result is not predictable in terms of value. It is subject to market forces and business cycles. The outlays could be on equities, real estate, precious metals or commodities or currencies. These do not trade at predictable prices and there is no guaranteed return. Once these are covered, you might like to start ‘investing’. For equities, mutual funds (go for either large cap diversified or an index fund) are a good option. To get the best out of equities, it is important to keep investing regularly and not just in one go. Of course, that strategy can work, if you are capable of picking stocks at their lows or are able to time the markets. If you cannot, then the SIP route is the best. One more thing to invest could be a second house or a plot of land, depending on each one’s appetite. I have covered this in one of my earlier pieces. Investments are financial outlays that over time can give you a chance to change your lifestyle or leave behind an inheritance. Investments over time can give you a new goal or a desire to be fulfilled. Investments go to build wealth. A second home, a plot of land, stocks, gold etc. are not things you buy to meet some future goals, but to create your portfolio of wealth. Once you get here, your concerns are more towards preservation of wealth than rapid appreciation. Do not be in a hurry to acquire assets for wealth creation. Savings simply takes care of your normal needs over your lifespan. So, savings are the first step. Savings will take you to a goal with reasonable degree of certainty. Investments will change your state of well being.