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 control.com’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

All this data is available in http://www.moneycontrol.com/mutualfundindia/ or on http://www.valueresearchonline.com/

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%.

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. (http://www.telegraph.co.uk/finance/economics/gilts/8461745/Greece-forced-to-pay-sky-high-rates-to-borrow.html)
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.  (http://www.bloomberg.com/news/2011-04-21/u-s-tried-to-dissuade-s-p-from-outlook-change-wash-post-says.html)
4. This week Obama has openly said that US finances are unsustainable (http://www.bloomberg.com/news/2011-04-20/obama-tells-facebook-audience-that-nation-s-finances-are-unsustainable-.html?cmpid=)
5. I also see Indian markets going up and down every fortnight –BSE Sensex was 20450  on Jan 1^st, went down to  17500 on 9^th Feb,  went up to 18200 on 18^th Feb,  dropped to 17500 on 23^rd feb,  again went up to 18200 on 3^rd March,  again dropped to 17850 on 18^th March, then went up to 19380 on 1^st April,  and down to 19071 on 18^th April and currently hovering at 19171 as of 20^th April – It looks kind of limp – low on energy –kind of directionless.
6. I also see inflation remaining high in India (http://www.livemint.com/2011/04/21115535/Food-inflation-rises-to-874.html?h=A1) 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. (http://www.oilnergy.com/1cashpet.htm#brent)
8. I also see that India’s GDP growth slightly downgraded due to concerns about Inflation (http://www.indianexpress.com/news/montek-spikes-indias-growth-at-under-9/776700/).

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?

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%
Deposit	:	10 Months
Lease term	:	3 +3 + 3 Years
Lock in Period	:	3 Years
Commencement of Lease	:	Aug 2007
Escalation	:	10% every 2 Year
Tenant	:	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.

My 2011 predictions revisited

Who would have predicted the events of Q1 - As I sat and tried to predict the year ahead in early Jan 2011 – could I have predicted the blow out in Middle East? Could I have predicted the devastation caused in Japan? I am humbled by the fact that we can only predict so much – there are forces beyond us – however, it also means that we must constantly revisit our predictions and fine tune our strategy constantly.  Also as a risk mitigation strategy, we must be prepared for the worst and have an action plan for the worst case scenario.  

Having said that, when I see my predictions made for 2011 – I am not sure if I will change anything.

I truly did not predict the Indian stock market performance of Q1. I did expect a slowing down from the high PE levels of 2010 - but the markets went down faster than my estimates - it is now slowly inching up  - but I do believe that this year we will not see much gains in Indian stock markets.

Inflation is a major threat to all developing economies, including India and we will see a subdued GDP growth of around 8% due to rising input costs.  We have already had two rate hikes in Q1 and I am sure that the interest rates will keep going up as long as the inflation persists.

Further the US and European economies are not out of the woods yet – the US markets are being propped up by cheap money unleashed by Fed in the form of QE2 – Europe has it’s own problems in Portugal and Spain beside Ireland and Greece. 

In these circumstances, I do believe that Gold and Silver are safe investments at this point of time and will give a return of around 15% this year.

Real estate in India is also going through a small correction due to the 2G and LIC HFL scams -  the credit lines for real estate companies from the banks have almost dried up – further all the major real estate companies had announced many new projects last year and this drying up of credit has created cash flow problems for them – this would mean that the prices of projects may not rise as the companies would like to sell it and get cash flowing from customers – hence it is a good time to invest in real estate if you were planning for one in 2011 – look at premium projects and negotiate hard – there is a good chance you will get a reasonably good deal. In India, HNI’s have around 45-50% of their asset allocation in real estate and this is an area where I would recommend that we have at least 50% asset allocation. Last year Bangalore had witnessed around 15% appreciation in property prices and I believe that this year too we will see similar appreciation despite this credit crunch in India.

So as I write, I believe that real estate and Gold are the better avenues – each giving around 15% plus and beating the inflation by about 7-8% - Gold is more liquid but capital gains will be taxed – Real estate is less liquid and needs larger amounts. But as of now, I have moved most of my investments in these two areas.

In my next blog, I will share a real estate investment option where you can get about 20% returns per annum after having stayed invested for 3 years.

What to expect in 2011

As the New Year dawns all of us in India are optimistic – the mood is good, the future looks brighter –the MBA placements are doing well – the Engineering placements look still better –companies are hiring and there is a flurry of activity in almost every sphere of economy as we enter 2011.

Like any investor, my investments in 2011 would be based on my predictions and I thought I must share this with others – with a view to help and guide as many people as possible. I tend to be on the conservative side – hence if we do better than these predictions – I am happy. I am going to keep updating on these as we go through the year – and as all of us know, things can change.

So here are my predictions:

·      GDP growth would be slightly lower in 2011 than in 2010, and it would be around 8% - well known pundits are predicting 8.5-9% for India. However, I would base my decisions on a conservative 8% growth.

·      Interest rates in India are expected to rise in 2011 – Inflationary pressures in the economy due to demand pull and supply demand mismatch, increasing rise in commodity prices globally, increasingly competitive devaluations by developed countries through loose monetary policies will force RBI to hike interest rates and control liquidity in 2011. Hence if you are looking at Fixed Deposits to park your money – the rates should go up as the year progresses. If you are planning to take loans -that too will become dearer as the year progresses especially if it is a large loan like a home loan.

·      Indian stock markets –this is a difficult prediction – I believe that this year sensex will not show spectacular returns – in 2010, the sensex rose 17% (from 17460 to 20500) –I think we will not see a better performance in 2011. It could be lower than 17% growth in 2011. Our markets have a trailing PE multiple of around 23 and if it goes beyond this, I believe we are surely in bubble zone. If you want to invest in equities – look hard and look long term –do fundamental research  – look at industries like FMCG,  healthcare, infrastructure where India’s growth story will reside and in those industries, look at well managed companies and enter only when there is a reasonably low price. If you cannot do fundamental research – look at regular investments through SIP’s in MF’s investing in large caps or the above mentioned sectors.

·      Commodities – as per IMF, the world GDP grew at 4.8% last year and it is expected to grow at 4.2% in 2011. The commodity prices of crude, metals, gold are all expected to increase due to increasing consumption in growth economies like India, China, Indonesia and Brazil and due to increased investor appetite to counter weakening of currencies. In India, investment in Gold would not provide very great results due to strengthening of INR w.r.t USD – but it surely would be a good hedge against inflation. You may not get rich by investing in gold this year – but you will surely not get poorer –you will beat inflation by investing in gold. So I recommend that Gold be a part of your portfolio (about 20%) either through the SIP route in Gold ETF’s or through small purchases when the prices are going down.

·      Insurance – As my friends and colleagues know, I am not a fan of using insurance as an investment vehicle. However, I do believe in life cover and healthcare cover. With IRDA moving in and proactively regulating more and more, expect the cost of a term loan or a healthcare cover to go up in the years to come. However, I believe that there will be better customer service and better schemes in the years ahead.

·      Your savings bank – as of now, your bank gives you 3.5% interest on your money lying idle in the SB account – it is better than before – but it is much below inflation  -hence  keep as less money as possible in your SB account. Ideally, you must keep about one month’s cash requirement in the SB account – not more.

·         Real estate - with real estate markets picking up in 2010, there is currently an oversupply situation in property market in all major urban areas in the country. Hence this sector may not see massive appreciation in 2011 – however, the real estate sector, is a long term investment sector and in this sector, a three year timeline is considered short term – if you have investible surplus with a three year or more timeframe – this is still a good sector to invest – the appreciation can be at least 15% per annum as the India growth story and the massive urbanisation that we are witnessing in India will always push the prices up. However proper due diligence is a must.

Overall, I think 2011 will be an interesting year.

If you want advice on managing your wealth - I would be more than happy to help you out - and this service is absolutly free as I would like to share my learnings with as many people as possible.

Does financial literacy make you wealthy?

Not always. There are factors beyond just financial literacy. Let me explain.

There was a recent report of a study done at University of Pennsylvania that shows that there is a big downside in getting financially intelligent – as per this study, “financial intelligence increases the confidence levels of the investor and it leads to him making worse investing decisions.” In a 2005 survey, 65% Americans believed they were 'very' or 'highly' knowledgeable about personal finance, although they performed abysmally on objective questions about the subject.

I see the same attitude in India as well – most people think that they are financially literate. They confuse between savings and investment – they take investment decisions based on gut feel, optimism and unconfirmed data. They take risks that they are not aware of. With Indian economy growing at 8% for the past 10 years, these  people have had some successful investments – they attribute these successes to their financial intelligence – not knowing that when the times are good, you do not need too much expertise to make money. Warren Buffet opines that you do not need above average intelligence to be a successful investor – however one needs the right temperament – to control the urges that get people into trouble.  A good investor offcourse has financial intelligence – but beyond that, he has the right temperament to wait patiently for the right opportunity and not take undue risks.

As I said in my last blog (and this was popular with my MBA students) – “In the search for good investment opportunities, we must adopt the same attitude one might find appropriate looking for a spouse - it pays to be active, interested and open minded - but it does not pay to be in a hurry.”

When the student is ready, the teacher will appear

The content given here was was part of the last class that we had – where in I shared my views that Wealth is not really something physical – it is a way of life - a way of thinking – if you can understand this and then work towards thinking and operating the way the wealthy operate – in time, you will also become wealthy - as wealth will come to you.

People who have wealth use their time to create three things –

1.       A  network of acquaintances

2.       Financial fitness; and

3.       Clarity of their long term goals

As you can see, these three things can be created without having any wealth to start with. Hence anyone of us can become wealthy over time by following these three things – constantly build a network of acquaintances whom you can help grow, prosper; build a mindset wherein over time you end up collecting assets ( anything that increases you cash inflow) and not liabilities (anything that increases you cash outflow); and getting clarity through self education and introspection on your long term goals in each of the role that you play daily ( e.g. role of student, friend, classmate, son/ daughter, brother/ sister etc). As we get better and better in these three areas – we will see wealth coming to us.

Similarly, if one was wealthy and suddenly loses all their wealth due to reasons beyond his/her control, they would bounce back in life and become wealthy again as they still would have their acquaintances, financial fitness and goals.

Over time, I have collected quite a few quotes on wealth management that I shared with the class – I hope that you too enjoy reading these – please read it slowly and think about the message embedded in each quote:

1.       You can’t make a good deal with a bad person.

2.       It is easier to stay out of trouble than to get out of trouble –Warren Buffet

3.       It takes twenty years to build a reputation – and five minutes to lose it.
If you think about that – you will do things differently.

4.       Someone is sitting in the shade today because someone planted a tree a long time ago.

5.       You only have to do a very few things right in your life so long as you do not do too many things wrong.

6.       If you let yourself to be undisciplined on the small things, you will probably be undisciplined on the large things as well.

7.       In the search for good investment opportunities, we must adopt the same attitude one might find appropriate looking for a spouse - it pays to be active, interested and open minded - but it does not pay to be in a hurry.

8.       The most important thing to do if you find yourself in a hole is to stop digging.

9.       If at first you do succeed - quit trying.

10.   What we learn from history is that people do not learn from history.

11.   Saving is not investing

12.   Your work is to discover your work and then with all your heart to give yourself to it

13.   Wealth is far more about focus than talent.

14.   If it feels like hard work, you are already doing the wrong thing.

15.   The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets –Robert Kiyosaki

16.   It is what you do with your money after you earn it that makes you rich or poor

17.   Success is not in what you have, but who you are

18.   Money won’t make you happy… but everybody wants to find out for themselves –Zig Ziglar

I have finished this course with this session.  However, I believe that wealth management is not a 30 hour course – it is a lifelong lesson and one needs to learn all the time –hence I intend to add to this blog regularly.