Jun 8, 2010

Why Equity Investments in India will do well in the long run - The Interest Rate angle.

Hi Friend,

The equation of Net Profit or Savings = Income – Expenses

For profit / savings to be maximum, Income should be as high as possible and expenses should be as low as possible. 

If expenses increase drastically without a commensurate increase in income, a business or an individual runs the risk of going bankrupt. 

For companies / businesses, “Interest” is one of the biggest expenses. 

As the interest rates increases, their profitability decreases. As profitability decreases less number of businesses will be set up, this in turn results in fewer jobs.

When there are fewer jobs, there are more number of people who are unhappy. Increasing population compounds this problem further. 

In a democracy, when people are unhappy politicians run the risk of losing their jobs. As we all know, no politician worth his salt would like to lose power.

So, it becomes a necessity for politicians in a country with low employment rate and more than a billion people, to reduce the interest rates and keep them as low as possible ( Have you ever wondered why interest rates have come down so drastically from more than 15 % some ten years ago, when a fixed deposit in SBI used to double in 5 years, to around 8% now a days?)

As the population increases the interest rates will go down further. If you have a doubt in my argument, please check the interest rates in the USA where it is almost zero, due to the low employment rate prevailing in that country.

Lower interest rates mean higher profits for companies. 

A person can grow his money by being in two different categories. 
  • One is that which lends money( people who invest in Fixed deposits, PPFs, Bonds, Money Back policies etc., where returns are getting dwindled with each passing year for the above reason and are not even compensating loss due to inflation) and 
  • The second one is that category which takes the loans and invests i.e. the entrepreneurial category. 

It is needless to say that given the high growth trajectory and low interest rate regime that India is traversing through, It will be profitable to be on the loan takers’ side i.e. on Indian Business owners' side.

Invest in Indian businesses through equity based mutual funds. Be wise. This is not an option but a necessity if you want to preserve the purchasing power of your hard earned money in the long run.

Happy investing.

May 22, 2010

Why Equity Investments in India will do well in the long run - The Nano Reason


Hi Friend,

As I write this article, we are passing through a correction in Equity Markets all over the world.

There is a shade of negative sentiment akin to what we saw towards the end of 2008.

People are worried / stopped investing / waiting for the right time to invest (?) and some people are even contemplating redemption of their equity based investments.

I believe these are the times to increase your investments in India, not stopping them. 

I am sure you will agree with me after going through the following observation.

Observation: 
  • Indian Population is estimated to be around 120 crores now.
  • I assume here that Indian Government does not allow this population to grow for the next 25 years, i.e. the number of people in India is simply locked for the next 25 years.
  • I am confident that not many of you will differ with me if I say that an ordinary middle class Indian would aspire to have the following material things - a House, a car, a Television / computer , a fridge etc., 
  • I will take the case of car( Nano ) for the sake of simplicity in my calculation.
  • Here I assume that only 10% of these 120 crore people i.e. 12 crore people will be able to buy only a Nano car over the next 25 years (nothing priced higher than that as “Indians are poor”). The minimum price of Nano as we all know is Rs.1,00,000/-
  • That is a business volume of Rs.12 lakh crore. 
  • Here I am assuming a net profit margin of 7% (Manufacturing business margins will be around this figure). 
  • Resulting in a profit of 84,000/- crore rupees, which in turn implies an average profit of Rs.3360/-crore (84,000/25=3360) per year for the next 25 years. 
  • The current net profit of Tata Motors, which manufacturres Nano, is around 1500 crore only.

However, there are certain fundamental flaws in my assumptions.

Flaw No.1: 
  • 'Indian population is not going to grow'- in reality it simply is not possible. There are going to be higher number people, meaning much higher business and even higher profits to be made.

Flaw No.2:
  • 'Indians will buy only a Nano car because they are poor'- in reality the average cost of a Car purchased by an ordinary middle class Indian now a days is around Rs.3 lakh.

Flaw No.3: 
  • 'Only 10 % of the above 120 crore i.e. 12 crore people will buy the car in the next 25 years' - One estimate is that 70% of current Indian population is below the age of 35 years.
  • These are people with growing purchasing power and it is highly likely that many of these people will buy a car in their life span not just 10%. 
  • In the USA almost all the people do have a car and we are about 25-30 years behind the USA.

If it is the growth in profit from just Rs.1 lakh car, imagine the kind of profit to be made from a Rs.30 lakh house / apartments, roads, bridges, dams, power plants worth thousands of crores of rupees that are being built.

No matter what the doomsayers say and no matter what our fears are, India is going to grow and probably more than any other country. Our population is our strength. 

We will survive come what may and we will try to fulfil our aspirations and therein lies the great business opportunity that India has never seen until now.

It is a great time to be in India and Invest in India and grow with India. 

Jai Hind. Happy Investing.

May 10, 2010

The Rule of 72 : Time required to Double your Money

Hi Friend,

Here is an interesting and Very useful tool,'The Rule of 72'.

Years to double = 72 / Interest Rate

One can do almost all the important financial calculations one need to do, in an easy way, using this formula.

You can know approximately in how many years your money gets doubled at a given rate of return, what will be your expenses like after say 15 years and many more things using this formula.

It is simple but effective in knowing where you will be financially and is greatly useful in fine tuning your Financial Planning.

It also helps you figure out deceiving projections while buying Financial Products.

Please check the following link to know more about it. 


Thank You.

Apr 20, 2010

How to become a millionaire using Tax Savings?

Hi Friend,

If I ask someone on How to become a millionaire, he / she may be tempted to say it needs great intellect, shrewdness, luck etc., etc.,

And if one say that observation, commonsense, knowledge of basic math (that you learnt until your 10th standard) and a bit of discipline is all that you need to become a millionaire, one may be surprised. 

Here are some of my observations on how these make you a millionaire.

Observation 1:

Almost all of us do tax savings. My observation tells me that most of us do these savings towards the end of a financial year for various reasons like,
  • Money will be stuck up with the tax instruments, so I should invest it as late as possible in a financial year, and use the funds to meet some other needs in the mean time.
  • Markets are quite high in the beginning of a financial year, so I will wait towards the end of it.
  • All my colleagues are doing it at the end of the year. As majority of them are doing that way, they might be right and I shall follow them etc.,
Let us be clear about tax savings instruments. Government is giving us tax benefits as it wants to induce us to do some savings, which will be useful to us when we can not earn / stop earning.

The reasoning is simple; it cannot provide social security to all of us. So, it is tempting us to take care of ourselves. How effectively we make use of this temptation is up to us.

Small improvisations in how we invest in tax saving instruments will save us a few more millions. Let us check how.

  • Instead of doing tax savings at the end of a financial year (that is from January to March), if we do it in the beginning of a financial year (that is in the month of April) we will be, effectively, letting our investments grow for one more year.
  • The impact that it has, in the long run, can be gauged using basic mathematics i.e. by making use of the compound interest formula.
  • No problem even if you don’t remember it. Just make use of the following link. 
  • http://www.moneycontrol.com/planning_desk/magic.php#
  • I presume that you invest Rs.1,00,000/- in tax based mutual funds (As these are the best, the most transparent and efficient tax saving instruments available in India for the long term wealth creation ).
  • Assume that you leave the above investment for your retirement that is until after 30 years. At 12% compounding the 1 lakh becomes Rs.29,95,992/-.
  • Now if you do the same investment in march i.e. one year lost, it becomes Rs.26,74,993/- at the same rate. That is approx a loss of more than 3 lakh.
  • If it is the case for 1 lakh invested, imagine what we are going to lose in our entire tax saving career. And imagine what will be the loss if the rate of return is 18% instead of 12%. One will be loosing millions. 
  • The above makes it clear that doing tax savings at the beginning of a financial year is beneficial.
  • I have a statistic to tell you here. One might be tempted to ask that the 12% return that I am using for calculations is not guaranteed. Yes it is not guaranteed. 
  • But, for the last 30 odd years the SENSEX has given a compounded return of more than 16% and good equity based mutual funds have given a return that is 40-80% in excess of the SENSEX return for the last 14 odd years.
  • I am saying 14 as it is only 14 odd years since private funds are allowed.
Observation 2:
  • If one invests Rs.5000/- every month, in a good equity based mutual fund, for 30 years and do not withdraw from it, @12% the amount becomes Rs.1,52,60,066/- , Which is substantial and should be useful to take care of the retirement needs of a Middle class person.
  • I am sure that you might have made similar observations in your investment career. 
  • I request you to share them with me, so that I can in turn share them with my other friends.

Thank you.

Jan 1, 2010

Whether to Invest in Equity based Mutual Funds after such a Sharp Rise/Fall?

Hi Friend,

Many of us have this dilemma now. I am sure almost all of us had the same dilemma even when the SENSEX was at 8000 level. I am also sure that we will have this dilemma in the future as well.

The reason for this dilemma is, most of us (if not all) want certainty in the outcome of our actions (investment in this case). The "outcome" is a future event and future can never be predicted with certainty.

If you don't agree with me, take our own case. All of us passed exams to reach where we are now.

If I ask that how many of us were sure of getting "pass marks" in our university exams, probably most of us were. 

If I ask that how many of us were sure of getting 60% marks in the exams, probably majority of us were. 

And if I ask that how many of us were sure of getting 85% marks in the exams, probably a very small percentage.
 
And finally if I ask how any of us were sure of getting 100%  marks in our exams, I am sure none of us. 

"One can never succeed all the time", and we tend to forget this simple but important fact when it comes to Investment.

Because we ignore this fact, we tend to react in an extreme manner when the results were not to our expectations (100 %!). 

We go to the extremes either by saying investing in equity is gambling / pure luck or we go for the safety (perceived but not actual, inflation eats into your investments and you will never know of it) of fixed income instruments like Fixed Deposits, PPF, GPF and Money back policies!

Problem is in our mind not in Equity investments:
  • This is what I mean when I say that Discipline is the most important thing in Investment, “Discipline to control our emotions and our thought process and to do things which need to be done (they may not be comfortable psychologically) like keep investing even when the market are crashing".
  • Had you or any of your Friends have a SIP that is running since January 2008 or earlier, till now, in a good equity based diversified mutual Fund, in spite of all the market turmoil, you can observe that the investment would have been in positive zone, and in some cases done pretty well(this is particularly true in cases where investments were increased as the market kept falling)
  • Let us not try to Outguess / Predict market and waste our time, the probability of success in doing so on a continuous basis is Nil.
  • The effort that one puts in guessing and psychological stress that one may undergo are better spent in one's profession. And the time one saves can be better spent with friends and family.
  • If you don't agree with me then check with any one of the "nervous wrecks" whom you get to see around your cubicle with an online trading portal open on his/her desktop.
  • Check their track record for the past 4 or 5 years in whole and it won't take much time to figure out that a good diversified equity based mutual fund has outperformed them with good margin in majority of the cases (if not all). Most of them are doing it to satisfy their ego/to satisfy their gambling tendencies etc.
  • If you want to invest (not gamble) then what becomes important is how regularly you do, how much you do and for how long would you do. The longer the better.

I am attaching an article from CRISIL which says that Mutual Funds which stay invested in markets rather than having high cash component in portfolio (the same applies to us) will outperform in the long run.

I am also attaching an Interview of a senior Fund Manager from Business Standard on what to expect from 2010.

Happy investing.