Friday, December 30, 2011

My 2011 predictions revisited and where to invest in 2012

In retrospect 2011 was a tough year to predict – in Jan 2011, we were still talking of “green shoots” – now that’s a forgotten phrase. As of Jan 2011, the Europe crisis was in Portugal, Ireland, Greece and Spain – and it was largely under control. No one could have predicted the natural disasters in Japan and Thailand and no one, absolutely no one, could have foreseen the what happened in Tunisia, Egypt and Libya. The Anna Hazare phenomenon in India, the Occupy wall street protests in US, anti Putin protests in Moscow, anti economic policy protests Israel, Spain and London are all pointing to a global restlessness amongst the youth – there is an anger against governments and most governments are today less popular than they were in Jan 2011. All these were not foreseen 12 months back.

Having said that, my 2011 predictions were fairly correct –

  • I had predicted a GDP growth slowing down – that happened.
  • My prediction on rising interest rates through 2011 was fairly bang on target.
  • I had wrongly predicted the markets to give positive returns – in reality, the Indian equity markets have given a minus 25% returns in 2011– so here I was wrong (as an excuse, I must say that almost every equity analyst from Citigroup to Credit Suisse to Morgan Stanley had predicted that equities would do reasonably well on 2011).
  • I had predicted Gold to do well and I had recommended it all through the year – here I was correct – 2011 was, in fact, a “Golden year” – Gold gave a 30% return over the year.
  • Real estate was another area where I had predicted that there will be not too much returns in 2011 -  but I had recommended it with a three year time frame- actual numbers are difficult to get – but NHB does a survey that you can see at - the data here needs to be studied on the basis on the last four columns and you can see that there has been good appreciation (above 10%) in residential real estate prices in  Faridabad, Chennai, Pune, Bhopal, Mumbai & Delhi  and there has been low appreciation (below 10%) in residential real estate prices in Hyderabad, Patna, Ahmedabad, Jaipur, Lucknow, Surat, Kochi, Kolkata & Bangalore. So I believe here too I was fairly correct in my predictions.

So what will be the key themes for investing in 2012 for us in India?

I believe 2012 will be a tough year – the big picture is as follows:

  • Indian economy will slow down a bit –reforms are the way out and our government will need to push through a few reforms if we need to be anywhere near an 8% growth
  • Europe problems are expected  to dampen the markets for the first few months –I am optimistic that it will not result in a Lehman like crash – the Europeans will find a way out (even though a few countries like Greece and Italy will be bruised badly)
  • The US economy will limp through a 1-2% growth in 2o12 (just like in 2011) – but in the absence of other alternatives, the US markets will be deemed as the safest place to be and US Dollar will be strong and the US Bond rates will be low
  • Chinese economy too will slow down in 2012 ( it already has) –  and the challenge there would be growing their domestic consumption as currently 65% of Chinese GDP is export based.  
  • And then are there are elections in US, France, Russia and a party leadership change in China in 2012 -so these will impact the government actions in the coming year.

So where do we invest?

If your investment is for one year timeframe –I am afraid, you do not have too many options – but if you are looking at three years and above, 2012 will offer you lots of opportunities - in fact there are great opportunities available right now.

The four big options that anyone has are – Investment in Debt, Equity, Commodities and Real estate.

Debt based investments in 2012 will be popular –low risk and inability to understand equity markets will drive people towards debt markets – Interest rates in India will go down gradually – starting Q2, I expect RBI to slowly reduce the interest rates – so you will find long term debt based funds which have debt issued in 2011 (when the rates were high) giving higher returns in 2012 as the interest rates go down. So here is the first opportunity for anyone who has a one or two year investment timeframe – invest now in Long term debt funds which have portfolio of 2011 debt –you can expect about 12% returns on these  – you can see some of the details of these funds at - as you can see, they have not been giving good returns till now as the interest rates have been going up – now I expect them to give better returns as the interest rates start to go down in 2012.

Equities will present long term opportunities in Q1 and Q2 of 2012– In fact even now, there are many equities that are priced attractively in the market – I have been investing in equities selectively since Q4 2011 and I recommend the same to anyone who has a 3 year plus time frame –as we all know, the value of a stock globally is determined by it’s earnings growth ( EPS growth) – but the price of the stock in India depends on the mood of FII’s  - right now the FII’s are net sellers in Indian markets and hence there are stocks that are good long term buys that are going cheap. I have listed out a few stocks in my blog in October and I will list out a few more stocks in my next note in Jan – but needless to say, these are opportunities with a three year time frame – so for those who are ready to invest for three years, you will get a 20% plus return per year by investing in these stocks.

When it comes to commodities – I do not track anything except Gold–so even though Indian markets for other commodities ( like grains) did perform well in 2011, I cannot comment on them. I believe Gold will not give more than 15% returns in 2012 in Indian rupees – It will beat Inflation in India – so it not unsafe – but there are better investment options in 2012 – so if you are investing now, Gold is not the place to invest –but if you have invested in Gold in 2011 or before – you can chose to rebalance your portfolio or chose to stay in Gold – you will not lose money.

Real estate will start showing signs of appreciation – but remember that  real estate is for those who have an investment time frame for 3 years plus– Investment in urban (not rural) areas is recommended – if you can buy a house or flat or urban land anywhere in India ( with a caveat that the location has to be an upcoming location and it has to be a legally clean asset) – you will make 15-20% asset return per annum. Real estate in fact is the safest bet as of now – as it is much easier to identify a good real estate opportunity than to identify a good equity opportunity and India’s urbanization story is still going strong even though the India growth story has dipped a bit.

So for 2012, I recommend

  • for short term investors – Debt funds and
  • for long term investors – Select equity and Urban real estate.

Saturday, December 10, 2011

How to save tax (under section 80C)

This particular blog is for students who passed out of college in 2011 and are working for the first time – here, I would like to share the various tax saving options that you have and my recommendations as to how you can minimize your tax outflow.

You can invest up to Rs 1 lac and save on taxes under section 80C of the Income tax act. The amount invested under section 80c is directly deductible from your gross annual income for tax calculation purposes – what this means is that if your gross annual income is Rs 5 lacs and you invest Rs 1 lac under section 80c, your taxable salary goes down to Rs 4 lacs (on which you will need to pay the tax).

Now what are the various avenues for investment under section 80c?

The first avenue is Provident fund (PF). You already would be investing in PF through statutory deductions from your salary – your contribution to PF is tax deductible section 80c. Beyond this statutory PF deduction, you can also invest additional amounts in PF through voluntary PF (VPF) by instructing your payroll team to deduct additional amounts every month - this too is tax deductible under section 80c.  Currently PF investment gives you a return of  8.5% per annum. As you may know, PF accumulates throughout the working life and you get a lump sum once you retire. As you move from one company to another company, you move your PF money as well.

The second option that you have is the Public Provident fund (PPF) –for this you will need to open a PPF account in a bank (most banks offer PPF facility) – PPF currently gives you returns of 8.6% and this is tax free- the minimum you need to put is Rs 500 and the maximum amount you can invest is Rs 70,000 per annum. The PPF account has a term of 15 years and you need to invest for 15 years before you can close it and take the money out (there are ways to take money as loan before).

The third option that you have is Life insurance premiums and ULIP’s.  You can go through not just LIC - but any private insurer for this. I have always recommended that the only Life insurance that you must take is pure term insurance – any other life insurance policy (like endowments, ULIP’s, annuity /pension plans etc) are sub optimal investments with returns of around 6-7% over a long period.  I believe that insurance is mis-sold as an investment / tax saving avenue in India and we must only look at insurance as a risk mitigation tool. So insurance is not recommended for tax saving .

The fourth option that you have is Equity linked savings schemes ( ELSS) offered by mutual fund companies – these schemes have a lock in of three years. Data in tells me that the top ELSS schemes in India as per Crisil rating are Franklin India tax shield, Religare tax plan and Fidelity tax advantage – these schemes have given a return of appx minus 10% to -14% for one year, +4 to 5% annualized returns for two years and +25 to 27% annualized returns for three years. As equity investments are to be looked at for 3 years and above, these schemes have given good returns in that time frame. But as we all know, good past performance does not ensure good future performance.

The fifth option is five year bank or post office deposits – these are also covered under section 80c. The returns here are 7.5% to 8%.
Then there are rural electrification bonds and infrastructure bonds where you have a 3-5 year lock in –the interest earned in these schemes is appx 5-6% ( post tax).
There are other ways of investing under section 80c, that may not make sense to my students – for example, if you have a housing loan, then you can repay the principle and that would be deductible from taxable income under section 80c. Also, payment of tuition fees for upto two children in any Indian school, college or University would be deductible from taxable income under section 80c.

Having seen the most common options available,  for someone below 30 years of age and earning about 4-10 lacs  – I would recommend ELSS schemes or PPF beyond the PF that you are already investing.

The last issue that I want to address is the timing of these investments – we are now in December and we are deciding on these investments for the year 2011-12. This timing is sub optimal. We all know that the earlier we invest, the earlier the returns start accumulating and hence, I would recommend that for next year ( 2012-13) - you decide and invest as early as possible –  in April or May - or surely by June.

Friday, December 2, 2011

Investing in uncertain times

What does the future look like right now? Where do we invest? Where are the markets heading?
In Europe, US and in China, the governments are dithering from taking hard decisions – though for different reasons. These three regions combined represent 50% of the global GDP – and there are risks that Europe will simply implode or the US will sink back into a recession or China will have a hard landing. Decision makers in these countries have delayed the disaster so far by kicking the can down the road – but lately the can is getting bigger and heavier and the kicks are getting feebler – the risks of one of these regions stumbling is increasing by the day.

Europe has the biggest and most urgent problems. By getting new governments in Greece and Italy last month, the EU had once again kicked the can and delayed the D-day by a few weeks – but these were first baby steps towards solving problems that have been created over 2/3 decades of profligate spending -these are right steps but these are not the solutions to the problems they face. You cannot have the rich and the indebted EU nations under the same umbrella without the rich funding the indebted - It is like two brothers, one much richer than the other, staying in the same house - but being financially independent of each other- eventually the arrangement will unravel. In the last few days things have reached such a stage that you can’t kick the can any further. There are two scenarios possible –
  • the Germans will change their minds and let the ECB print Euros at will and to underwrite sovereign debt; or
  • the Eurozone will breakup
Till recently, I did not believe that the Eurozone will break up– but now I see that the scenario of Euro zone breaking up cannot be wished away - If that happens, how the markets will react cannot be judged –normally in such panic, equities could fall to levels like in 2008.

In US there are problems of slow growth and high fiscal deficit – the stimulus provided since 2008 in the form of bailing out of large financial institutions, keeping the interest rates low and the two rounds of quantitative easing have not revived the US economy. The US economy depends on consumer spending (70% of it’s GDP is consumer spending) and with high unemployment and households burdened with debt, the consumer spending is not expected to revive any time soon. As there is US presidential elections next year – one cannot expect any substantial economic measures till 2013 and hence the situation of uncertainty and slow growth will continue in the US at least till 2013.

China is a state managed capitalistic economy - of the 42 top Chinese companies in Forbes 500, 39 are state owned companies. It’s growth is dependent on keeping it’s exchange rate low and continue exporting to US, EU and Japan ( 2/3rdof their GDP is exports). The challenge there is to grow the domestic consumption. Increased government spending since 2008 in infrastructure has helped China pull itself out of slowdown till now – also they have enough cash and foreign reserves to postpone any crisis –however years of unbridled high growth seems to be catching up and there are signs of slowing down, higher inflation and financial stress in the system. Slowing down in china surely will have an effect globally, including India.

So the question that each one of us must answer is what should we do? I believe that equities will continue to be volatile for some more time – based on your own needs and ability to take risks, and the belief that India will be (compared to US and EU) a growth economy in the next decade
  • If you are investing for 0-1 year - look at liquid funds - these give post tax returns of 7-8% and the liquid funds are almost as good as a savings bank account when it comes to liquidity - you can encash in 24 hours.
  • If you are investing for 1-3 years- look at FMP's -these are better than FD's and will give you post tax returns of about 9%
  • If you are investing for the long term (3 years and above) -look at fundamentally good stocks at the right prices is what you must aim for - I have suggested a few in my last blog - I will suggest a few more mid of December; and
  • If you are investing for 5 years and above - look at urban real estate – every city in India has good locations/ properties where you will get good returns - the long term phenomenon of urbanisation will continue and urban real estate will go up in value –however as we all know, you need to have larger amounts for real estate and the investments are low on liquidity.

Wednesday, October 5, 2011

A millionaire’s portfolio - part 1

For the past 6-8 months I have been working on short-listing about 100 – 150 good companies – that have a great past and should have a great future. I now have 5 companies that I recommend that you can invest at the current levels. These stocks are expected to give 300% returns in 5 years – over time, I intend to amass about 20 such stocks and I intend to share my recommendations  to you through this blog.

These are companies that have:
  1. an identifiable durable advantage
  2. products or services that will not get obsolete in the next 2 decades
  3. investment focus solely on it’s core business and does not look beyond into unrelated diversifications
  4. a good EPS growth rate, a high return on Equity and a good return on capital employed in the past 10 years
  5. produced more cash than it used in the past 10 years  -is cash rich and low on debt (preferably zero debt)
  6. the ability to increase the prices of it’s products/service without losing market share

More details of the logic used can be seen in detail in my blog dated 29th Sept 2010 called “Investing in equities  - part -2”.
Needless to say that this is what I teach in my Wealth management course in MBA and this is what I personally use for investing.

As we all know, the stock prices in India are dependent on the mood of FII’s – when the FII’s invest in our markets – the stock prices go up (beyond the normal PE multiples) – when they exit, the stock prices go down (below the normal PE multiples).

As of now, due to the global fears of a crash emanating from Europe, the markets are down (and I expect the markets to dip further). Due this, some of these stocks are at values that I believe are worth buying.

I have bought all these stocks recently and I intend to buy more of these stocks in the coming 4-6 weeks. So here are my recommendations and the current prices where I recommend that you enter:

1.       SBI – there has been bad news emanating from SBI ever since the new chairman took over a few months back – the stock has gone down as well – however, this bank is solid and has a great market reach in India and will surely perform well - At current market price of Rs. 1720 – this is surely a BUY recommendation – even if the price goes up to Rs. 1825 – this is a good buy.

2.       BHEL – again this is a great stock – the stock has not been performing well lately – but India’s power sector will grow tremendously and BHEL will be there supplying in the years to come – at the current price of Rs. 313 – this is a good buy.

3.       Bajaj Auto – when you look at the India’s motor bike market – Hero Motors is doing very well and is over priced. TVS is a laggard and is under priced. Bajaj has a good story, is doing well in India and has a good story in exports and is expected to grow faster than others – At the current prices of Rs. 1500, I believe it is starting to go above my buying price – I have been buying this lately and I still recommended it at this price.

4.       ESAB industries is a market leader in it’s field and has a very good past and a better future – this is a company that many will not notice – but I surely recommend that you invest in this stock – at the current price of Rs 515.

5.       Maharashtra seamless is another company not many people will notice – again a market leader in it’s market and has a very good story. I recommend that you invest in this stock at the current price of around Rs 345.

A few words of caution here –

·         Spread your investments across these stocks -do not invest in just one stock.

·         I do not know what will happen in the next 6 months to these stocks – but I am very confident that in 5 years these will give good returns – I expect 300%. These recommendations are for those who want to invest for 5 years or more -these are not for those who want to invest for periods less than 5 years.

·         You are investing - the reward is yours – the risk is also yours. But remember that I am also putting my money before I recommend it  - I am putting a minimum of 50K in each stock.

As and when other opportunities arise – I will share them – I do believe there will be opportunities in the next few months.

Sunday, September 4, 2011

2011 predictions revisited – expect a rough ride in September 2011

If you thought August was tumultuous and volatile -get ready for September – it’s going to be a rough ride globally.

Nouriel Roubini, the economist who predicted the 2008 crash correctly, has said this week that "we are in a worse situation than we were in 2008” – He thinks that there is a 60% chance of a second recession (

World Bank President Robert Zoellick said on 3rd Sept that “the world economy is stepping into a new danger zone" (’

Europe’s sovereign debt crisis will test the waters again in Sept. Greece is due for another round of International aid around 15th of Sept. But before that aid is cleared, they will have to work with IMF/EU /ECB to show that they are implementing fiscal austerity measures agreed upon and they have only 10 days to do that.

Italy is also on the edge – they had promised to get their public finances in order and balance their budget by 2013 and now they are struggling politically to implement their promises. As the Italian politicians debate the austerity measures - there is a growing alarm in Europe over the credibility of the Italian govt’s ability to keep its promises.

US is also staring at a long period of low growth – US economy has slowed down last quarter - last week’s employment report which showed that US economy has not added any jobs in August –all this has increased investor fears that US may be headed for another recession.

President Obama is going to unveil proposals on Sept 8th to create new jobs – but with political bickering between Democrats and Republicans -there is little hope for anything substantial in the short run.

There is a G7 Finance ministers and central banker’s meeting in France on Sept 15th – they are supposed to discuss ways to reinvigorate global effort to support growth, jobs and financial stability – I do not believe it will have much impact in the short term.

There is a US Fed meeting scheduled for Sept 20-21st  - it is expected to further discuss measures to support the US economy – but they too are not expected to announce another round of quantitative easing (QE3).

As these events unfold, I see investors being nervous –  FII's will pull out money from Indian markets –  sensex will be very volatile and may go below the 15750 levels it touched in August. This can open up opportunities for investing in equities if one looks at a 2 year plus horizon. Gold is expected to go further up due to this global nervousness – I am not recommending that one invests in Gold at these levels –But if you have already invested – you can look at further growth in your returns from Gold.
Overall just tighten your seatbelts and watch the events unfold.

Tuesday, August 23, 2011

Brand Anna - a case study on branding

Today I am going to give my views on why the Brand Anna has seen such a meteoric rise. I have tried to relate this meteoric rise to branding theories that we study in marketing classes in MBA.

To me Brand Anna is a brand extension of Brand Mahatma Gandhi – The physical similarities between the two (the topi, the white dress, the physical features etc), the similarities in their core promises (a better future based on value systems), the similarities in their approach (fasting indefinitely, non violence, superior and unconquerable value systems etc)  - all these have made us relate at a personal level to the core meaning of Brand Anna, trust the value proposition of Brand Anna and associate with it in ways that reminds us of the stories of freedom struggle that Mahatma Gandhi lead.

 A brand should strive to own a word in the mind of the consumer”. If you want to build a brand you must focus your branding efforts on owning a word in the prospect’s mind -there are many examples - RIN, NIRMA, FEVICOL, INFOSYS all own a word that connotes something to us as consumers. In this case “Anna” is the word that has got etched into our mind.  Even though Anna means elder brother in India– today, the word Anna does not get the image of elder brother in our minds –it is the image of Anna Hazare that comes to us when we hear the word Anna. And we relate to brand Anna based on our interpretation of what he stands for.

The crucial ingredient in the success of any brand is its claim to authenticity” – If Anna Hazare had not been there and we had the same core team except him (i.e. Kiran Bedi, Prashant Bhushan, Arvind Kejriwal,  Santosh Hegde etc)  and the same Lokpal bill– this movement would have gone nowhere. There is something in Anna Hazare that has made this movement what it is today.  Anna Hazare’s credentials as a Gandhian and his past record are his claim to authenticity that the consumers of this brand trust.

The birth of a brand is achieved with publicity, not advertising” – this is a golden rule for creating a brand. What the Anna team has achieved without spending any amount in terms of publicity is something that can clearly be a benchmark for any marketing campaign anywhere in the world. Now beyond media, the brand is being disseminated by the brand followers through events like marches all across India, and using “branded” items like the Gandhian topis with “I am Anna”slogan.

The essence of branding is finding a compelling value proposition, something that differentiates it from the rest” –Team Anna has caught the imagination of people as they have been able to create a compelling product (the Lokpal Bill) that meets a latent need (freedom from corruption) of the common man. This latent need of “freedom from corruption” has been there for long – but has been ignored by the political class – and this is the gap that Team Anna has filled with the Lokpal bill. This emotional connect with the brand followers has been so strong that any smear campaign against it (like Anna’s arrest) would only bounce back.

A brand becomes stronger when you narrow its focus” –India may have many issues that needs to be resolved – but this campaign is completely focussed on one issue - anti-corruption  - if they had fought on a broader platform  – then we as consumers may not be able to relate as clearly to it.

Needless to say that Brand Anna is every politician’s dream. All politicians try to create a brand around themselves (think Rahul Gandhi) –but they lack credibility as their promise is not supported by performance (as I write this blog – I understand that Rahul Gandhi is hiding in rural Maharashtra). They differentiate themselves through physical aspects like white cotton dress, security guards, long chain of powerful cars, lots of people welcoming them with garlands etc – but over time these differentiators need to be backed by a core product (in this case delivery of something good for the people) - as they do not deliver, over time, the market understands the hollowness of these political brands. Due to this non performance, there is currently a commoditization of political brands in India and only few people (like Manmohan Singh, Narendra Modi) are able to rise above the clutter.
Brand Anna has connected so well at an emotional level (instead of physical level) that it’s followers are willing to bear extreme physical inconvenience just to connect and contribute.

Saturday, August 13, 2011

2011 predictions revisited - trying to make sense of the market

My last blog on the economy written on June 3rd started with lines - “Just like the sea which seems calm at the surface but has massive amount of energy boiling inside it, I am seeing business as usual on the outside but large amount of chaos beneath this calmness.” As I wrote those lines, I was sensing trouble ahead – but I did not expect that it will erupt so soon.  Last fortnight - the chaos finally surfaced – just like a volcano erupting, all over the globe, the markets turned extremely volatile.

Even as this was happening – I see experts in CNBC calling the situation “temporary” and urging people to invest in mutual funds and equity as the Indian markets are attractively priced at around 17000.  

I do not believe this is a temporary situation. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and former chief economist at the IMF,  has presented a very apt analogy – he says, “for instance, if you have pneumonia but you only think it's a very severe cold - you go on a completely wrong medication which instead of curing your disease further alleviates your woes.  In a nutshell, this is exactly what happened with the developed world. They misjudged the real problem. Governments and central banks used the wrong medicines. They tried to treat a debt-problem with more debt. No wonder the health of the economy became bad to worse.”

 The current Fed decision to keep the interest rates in US to near zero levels till 2013 is a similar decision. This is aimed at encouraging people to leverage up, with the knowledge that their borrowing costs will likely be very low for a long period of time. Fed expects the people to take risks by investing in equity, business etc and this will hopefully keep the US economy growing.

In the past two decades, the developed economies have gone through a massive credit expansionary phase. People were living off credit (future income), assuming that the future will be brighter than the present – appreciation in real estate fuelled this feeling of wellness – however, the rise of China and India and the resulting slowing of western economies changed the situation –the future today does not look brighter than the present for the western economies (in India and China the future looks brighter than the present) – those who borrowed and leveraged highly could not repay – and from individuals the virus has spread to countries – today we have countries like Greece, Portugal, Ireland etc which cannot pay their debts – and that is bringing down the Euro zone. 

I believe that the recent downgrade of the US debt is just a starting point - and there is more to come – may not be in the form of downgrades by rating firms – it may be in the form of wild swings in the bond market, series of defaults, financial repression measures and not to mention, inflation. I expect much more severe turmoil in the months ahead.  The world economy is likely to experience an extended period of contraction and deleveraging.

India is not safe too and we are one of the countries identified by economists where there is a risk of rating downgrade.

In these times of uncertainty, I believe there will be opportunities to invest – I suppose Warren Buffet is investing heavily right now - however, for ordinary people, these are times when one must be careful – it is better to be safe than sorry.

In these times, I advocate investing in Gold ETF’s –I have been advocating this for the past one year now and I stick to my recommendations. Gold has given a 30% return in the last 12 months and there is more to come – so even if the prices of gold looks high  - enter in dips (there are dips every fortnight) and wait patiently – I expect 15-20% returns in the next 12 months.

Monday, July 25, 2011

India’s half finished revolution

Germany had that one single dramatic day – on 9th of Nov, 1989 – the day that marked the fall of Berlin wall and events that led to the reunification of Germany.

USSR had a similar dramatic moment on 19th Aug, 1991 - when Yeltsin stood on top of a tank and addressed people in Moscow – that lead to Yeltsin taking over USSR and eventually the breaking up of USSR into 14 new countries.

India’s economic revolution in 1991 did not have any such dramatic event– But if one has to look back and find one such single day when it all happened – it was 24th of July 1991 – exactly 20 years back. That was the day India dismantled the license raj – the mesh of government controls, through licenses and tariffs, used to control all industrial activities in the country in the name of centralized planning.

That was the day, when Manmohan Singh told the Parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more.” He ended by paraphrasing Victor Hugo: “No power on earth can stop an idea whose time has come.”

The opening up of Indian economy in 1991 has had far reaching changes in our society – in 20 years, we have become richer ( or less poorer as some put it) - our GDP per person (in 2010 prices) has gone up from $503 to $1265. The official poverty rate in India has gone down from 45.3% to 32.3%. Our GDP has grown almost four times from $433 B to $ 1538 B and our forex reserves has shot up from $1 billion in 1991 to about $300 B now. Foreign investment also rose from $150 million in 1991 to $23.5 B in 2010.  The markets have expanded, consumption levels have gone up and companies in virtually all industries have expanded. Adult literacy has improved from 48% to 68% and today we have 49 Billionaires in the Forbes list as compared to 1 in 1990.

What they achieved in that “Summer of 1991” was admirable – to dismantle 45 years of established system in 6 months would not have been easy – one has to note that all these reformers were part of the system all their lives - to fight such a well entrenched system, with people who have been part of the system for years must have been difficult.

Unfortunately for India, this was the reason why the reforms only went half way - what was absolutely required, was done. What was not urgent, was left for the future and was never followed up. I believe that these reformers were opportunistic - they were not 100% reformers at heart – they left it half way.

Today the license raj is gone – but the inspector raj is thriving –especially in the excise and customs duty area. 

The size of Government has gone up since 1991.

93% of working-age Indians, estimated now at 500 million, continue to work informally—outside of the organized sector and without proper labour contracts - India’s labour laws makes it very difficult to hire and fire labour in India –it protects existing workers – but have kept new workers out of job.

Private companies even if they are bankrupt cannot be closed easily in India.

India has still not opened up Agriculture sector and is subsidising this sector very heavily.

India has still not reformed Education and Healthcare.

Infrastructure and retail is being opened up very slowly.

Despite all this, I believe, India’s time has come – we have reached the tipping point beyond which there is no return  – increasing aspirations of Indians to improve their lives and the presence of democratic institutions in India will ensure that the politicians will, over time, improve their governance – our increasing consumption will grow the domestic economy - and our population demographics will ensure that we have lots of youth which will keep the labour costs low and companies technologically savvy and make us globally competitive in industries where manpower is a key cost component.

So I would Iike to remember that day 20 years back as a great step forward and I am grateful that I am living in these exciting times in India.

Saturday, June 4, 2011

2011 predictions revisited again

Just like the sea which seems calm at the surface but has massive amount of energy boiling inside it, I am seeing business as usual on the outside but large amount of chaos beneath this calmness. All across the world there is news that is screaming for attention – but one has to connect the dots —we see rioting in ME, increasing fuel prices and spontaneous uprising against corruption and bad governance in India, sovereign debt downgrades in EU and volatility in all the stock markets of the world. The most unusual news that caught my attention is that one state in the US, Utah, has legalised Gold and Silver as currency –are we going back to the Middle Ages? There is fair amount of unusual news around us - but if you look at the business news papers – there is calmness and near normality. No one seems to be connecting the dots, not at-least in public.

In the first big economic pillar - the US,  the public mood is sombre – by June end, there would be no more Quantitative easing ( QE2) – the Fed has pumped $600 B in the last six months and has helped grow the stock markets and commodity markets globally – but QE2 has added just about 700,000 full time jobs in the US – the unemployment stays stubbornly high at around 9% - after all why would any company invest in the US when Chinese and Koreans and Indians can do it far more efficiently. Japan has gone through two decades of slow growth and stagflation. Now it is US’s turns to go through a long period of slow growth.

The other big economic pillar is the EU, where there is a good chance of a crisis that will over time integrate the economies more with more stringent rules – a Greece or Italy or Ireland or even Spain will not create the downfall of EU – it is like saying that a bankrupt West Bengal govt can create a down fall of Indian economy – it will not happen. However, there will be a period of uncertainty for a few more quarters before they are able to reign in the countries having large deficits and get better financial controls in place.

That gets me to Indian markets and the situation here – as I had predicted six months back, there has been volatility in the stock markets – BSE sensex is still hovering around 17,500 to 20,000 – the markets will be range bound for this year – however, I expect the markets to be at the bottom of this range from June mid till about July end – the end of QE2 in the US will suck out the money from Indian markets and there will be opportunities for the smart to buy good stocks at a lower price.

Inflation will be high in India – and to rein it, RBI will still increase the interest rates – this will impact the GDP growth, which will be around 8%. Loans will get costlier. Increasing interest rates will also pull down the stock markets. In all this turmoil – Gold will be the place where investors will run to – we have seen gold giving a returns of 1.5% per month between Jan 1st and May 31st –I believe that Gold ETF’s will be the safest liquid bet even though the prices are high at any time if you enter.

I also believe that real estate is still an attractive option for those who have the money and can spot a good deal –However, real estate investments are very local in nature  and one cannot generalise – the price and the location are important and if done right, can give upwards of 20% per annum returns. If anyone wants to invest in Bangalore – I would be more than happy to help out.

Friday, May 6, 2011

Where does one start

While I am aware that half of my readers are professionals in India and abroad who have been working for at least 5 years - this note is mainly for my MBA students who have just joined their jobs in the past one month.
In this note, I am addressing those who are starting their careers in India and what is it that you need to do to start your investment journey.
As you go through your career – you must remember that while it is important to focus on your earnings and your career growth – it is more important to focus on how you invest your savings. In about twenty years, those who did well in their investments would be far ahead financially than those who just did well in career /earnings.
One of my friends has two decades of successful career behind him but has hardly any financial assets – he has about 30 lacs in savings – but that 30 lacs is kept in savings bank accounts –earning 3.5% interest where as the inflation is currently hovering around 9%. He focussed on earnings and career growth – but did not focus on investing his savings. If he had focussed on investing his savings well, over twenty years, he would have had assets worth more than Rs 5 crores (USD 1 million).
So my advice is to spend some time learning about the various investment options. Two hours a week is all that you need to spend.
If you are an MBA, you will have a monthly take home salary of about 35K and a monthly savings of about 15-20K. If you are an engineer, you will have a monthly take home salary of about 25K and a monthly savings of about 10-15K. If you are a graduate, you will have a monthly take home salary of about 10-15K and a monthly savings of about 5-10K.
The point is that in each case, you will be saving some money every month. So the key focus is to invest your savings at as high a rate of return as possible.
So where do you start?
You start with a Demat account. Just as you all have a passport, a driving licence and a PAN card (Income tax card in India) – please open a Demat account in the bank where you have your salary account.
Once you have a Demat account, start with investing through Mutual funds through Systematic Investment plans (SIP), where you commit to invest a specific amount every month in specific mutual funds (something like a recurring deposit). Due to Indian economy’s 8% growth that is expected to continue for the next few years, investing in mutual funds that are focussed on large cap equities are expected to give about 12-15% returns per annum over a 3-5 year time horizon – by investing every month, you are averaging the market movements that happen over shorter periods of time.
The key question is how to choose the specific mutual funds where you will put your monthly investments – The broad approach to that is as follows:
¢  Compare the performance between the same types of funds –in this case large cap equity focused Mutual funds
¢  Risk assessment  - Look at the ratings from  Value research ratings and Money’s  -their ratings are fairly comprehensive
¢  Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus
¢  Management  - look at the fund manager’s record and go with fund managers who have a good past performance record

The basic ground rules of investing are:
¢  Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s
¢  Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years
¢   Spend time in educating yourself in investment areas
¢  Ignore hot tips, hot stocks etc
¢  Start early
¢  Invest regularly –look at Systematic investment plans offered by Mutual funds
¢  Buy and hold your investments and do not get into short term day trading.

Over a period of 3-4 years, you will see your net asset value fairly large as your returns would be around 12-15% per annum and tax free ( if it is equities) and you will have a reasonable sum ( along with a loan) to move into real estate where the returns can be higher than 15%.

Sunday, April 24, 2011

Do you see what I am seeing lately?

  1. I see that Gold and silver are touching new highs globally – Gold has appreciated 5% in April alone.
  2. I also see that even though crisis in  Japan and Middle east has overshadowed the Euro area debt crisis – it is far from over - and now it is the turn of Portugal to seek help from IMF and EU. I also see that Greece is close to defaulting on it’s debt obligations and it could end up in Greece  exiting the European Union. (
  3.  I also S&P downgrading the US credit rating from stable to negative – Credit rating agencies had till now been unwilling to downgrade the US – but as we all know, the US Fed has been doling out US dollars through stimulus packages and that has put a massive strain on the Government finances and the fiscal deficit has gone up eventually resulting in this downgrade.  (
  4. This week Obama has openly said that US finances are unsustainable (
  5. I also see Indian markets going up and down every fortnight –BSE Sensex was 20450  on Jan 1st, went down to  17500 on 9th Feb,  went up to 18200 on 18th Feb,  dropped to 17500 on 23rd feb,  again went up to 18200 on 3rd March,  again dropped to 17850 on 18th March, then went up to 19380 on 1st April,  and down to 19071 on 18th April and currently hovering at 19171 as of 20th April – It looks kind of limp – low on energy –kind of directionless.
  6. I also see inflation remaining high in India ( and I see RBI having increased the interest three times in the last four months.
  7. I see the Crude price fairly steady at $120 plus - at this level it is dangerously high for Indian economy and I do not see the unrest in Libya, Yemen and Syria is not going to be resolved in a hurry. (
  8. I also see that India’s GDP growth slightly downgraded due to concerns about Inflation (
So where does one invest in these uncertain times?
There are predictions that Gold will go up and up as the US economy is in fairly fragile state and the solutions being tried by US Fed is not in the right direction. Also it will take a long time for the US economy to get back in positive territory. Due to this, the investors are flocking towards commodities and hence Gold and Silver prices are going up and up – will it go up further is the question?
I believe that the Gold /Silver prices will further go up as there is limited supply and increasing demand from investors globally – till the economy in US and EU stabilise (and that is some time away) – the demand and price for Gold and Silver will keep going up.
So where do you think we should park our money as of now?

Monday, April 11, 2011

Here is one idea for investment

I have a friend who worked in the US for a few years and came back to Bangalore in 2003. He had a fair amount of savings then and realised soon enough that the real estate scene in Bangalore was hot. Sure enough he invested his entire savings by buying a few plots of land in different parts of Bangalore – between 2004 and 2008, things looked good with the real estate prices giving him 20% return per annum – it was not cash at hand – but he knew, if he needed cash, he could sell the plots within a few months. He also focussed on doing well in career and he was rewarded with two promotions in that period. His lifestyle kept pace with his improving financial condition - he bought a higher end car, took loan and bought a big flat, put his kids to good schools, went on international holidays - everything looked fine till the 2008 crash – early in 2009, his company started downsizing and he lost his job in mid 2009 – unfortunately he still had to pay the EMI's for house and car , he still had the school fees to pay for –and his cash inflow was zero. He had a few FD’s that he cancelled and used the money -   he tried selling his land – but could not as there were no buyers – and then he came to me for advice –what can one do if situation is already out of control?

What would you do differently if you were in his shoes?

This brings me to the concept of Passive Income streams - passive income is the one where the cash flow comes in, irrespective of whether you are working or not - we all must work towards increasing passive income streams. A good example of passive income is rental income – dividend payout, interests from FD’s are also examples of passive income. You dont have to be in a great job to have passive income streams - I know a few taxi drivers and auto drivers in Bangalore, who own a few taxis /autos and have given it on rent and earn a rental income –these are passive income streams.

We must not just aim at increasing our wealth and income during our career - our aim in the first fifteen years of our careers should also be to build  passive income streams to support 100% of our expenses. What it means is that by the time you are 35 years old, you must be completely financially free and you should not depend on your work /salary for a living.

Looks impossible? Haven’t seen anyone doing it? – Well, It is eminently doable –and quite a few people have done it. Only you have to observe and you will see people in your neighbourhood who have achieved this. These are not opulent people – they have simple (but not stingy) lives – they still work and they are good in their jobs – but they have assets that work harder than them and these assets give them passive income streams.

So here is an idea that will give you a better than average passive income stream.

Rental income is one of the most commonly found passive income streams. Many people invest in residential properties and give it on rent –  in India, we get an annual rent of about 3-5% of the market value of the flat /house. So if you had a house worth Rs 50 lacs, you will get an annual rent for about 1.5 to 2.5 lacs. However, commercial properties give higher rentals –  in India, we get an annual rent of about 7-10% of the market value of the commercial property.
Here is an example of a commercial property that is currently available this week in Bangalore:

Property Address
Sigma Soft Tech Park, Varthur
Area offered
1000 Sft
Price per sft
Rs 5250/- per sft
Car park
1 No
Rent per month
Rs 38/- per sft – ROI of 8.0 -8.7%
10 Months
Lease term
3 +3 + 3 Years
Lock in Period
3 Years
Commencement of Lease
Aug 2007
10% every 2 Year
Will not be disclosed in this blog
Power & Back up
1 Kva per 100sft with 100% Back-Up
Other charges
Registration @7.2%

This is a well known IT park – it has tenants already and the builder wants to sell part of this property - If you invest Rs 50 lacs in this property, you would get about Rs. 4 lacs per annum rent from the start.

And there are many more such opportunities. In India commercial property gives double the rentals of residential property and the asset appreciation is around 15% in both cases - hence a commercial property has higher ROI when compared to a residential property by about 3-5% per annum.

So if you want to get financially independent soon –investing in a good office space is one of the smarter ways to do that.

More ideas in my coming blogs.