It was refreshing to meet some old friends outside a popular sandwich joint; especially after being home confined for almost 7 months. An unsaid ritual of sorts, I was asked for a “stock tip”. This time, I shared that ‘Gold’ seems attractive for the next few years.

On expected lines, one of them quickly retorted “Markets are on steroids, so many stocks are flying up 5% & 10% daily. Of all the stocks in the world, you want us to buy gold, which is already at Rs. 50,000!”. Surely, a lot of people would have resonated with my friend’s impatience – that there is an eleven course buffet meal going on and we are suggesting to eat some mundane “dal-chawal”.

Well, the boring advice comes from our assessment that the stock market party is surely not in its early stages. A large part of economic recovery which may happen in 2021 has already been celebrated by the stock markets. Hence, at this stage the risk-reward for a new investor may not be extremely rosy. Read below on why we think that gold offers good risk reward:

Possibilities that can reward gold

1) Inflation can raise its head soon: Prices of oil, gas, metals and other materials have been extremely subdued since out-break of Covid. Prices may start going up as economies across the globe start opening up. Many ‘suppliers’ of these commodities have gone bust in the difficult post-Covid world. As such, there could be a situation that supplies don’t keep up pace with the demand. Gold typically does well when inflation in high.

2) Central Banks can slowly start withdrawing the stimulus: In order to save the global economy, trillions of dollars of monetary & fiscal stimulus have been given by central banks across the world. That has resulted in near zero interest rates across developed economies and low interest rates in India as well. While, this easy monetary policy can continue for next 12-24 months, some day the central banks will have to start reversing it.

3) Indian currency may depreciate to 80+ levels vs USD: India is a big importer of oil, gas and few more commodities. As demand goes up within India too, we will have import more and that too at higher prices. This coupled with central banks starting to withdraw the COVID stimulus could become the perfect backdrop for currency to weaken. We have seen what happened in 2013, when the US FED started to taper the stimulus given during Lehman crisis. (Rupee depreciated from 63 to 70 in a few months). All this bodes well for gold.

4) De-globalization & reducing dependency on China: Over last 20 years, China’s ever expanding low cost manufacturing kept global inflation under control. In the post Covid world, a lot of countries have expressed desire to reduce the dependence on China. This can add to long term global inflation.

Long term observations on gold

Preserves purchasing power: Relative to all other forms of currency, Gold has preserved purchasing power over long periods of time. Below is a simple example of AMUL butter that will help you understand the concept of purchasing power:

• Rupee lost 98% of its relative value in 50 years: One rupee could buy 100 gms AMUL butter in 1970s. Today, you can hardly buy 2 gms of butter for that amount.
• US$ lost 75% of its relative value in 50 years: Contrast this to the mighty US$, one dollar could buy 600 gms AMUL butter in 1970s. Today, it can fetch you only 150 gms.
• Gold has gained in relative value in 50 years: Contrast this with gold, 1 gm could buy 1.5 kg of AMUL butter in 1970s. Today, you can buy 11 kgs of AMUL butter with just 1 gm gold.

Hedge against madness: Over your lifespan, you would witness madness of various kinds. Those who had kept money in US bank deposits in 1930s, lot of that money could have evaporated as more than 300 banks collapsed in the Great Depression. More recently, those who were living in Zimbabwe and had savings in local currency, their entire worth would have reduced to a “loaf of bread” due to hyperinflation. Gold has preserved value through all kinds of human inflicted madness like wars, government failures, economic mismanagement, pandemic, etc.

Survivor for more than 2000 years: Gold has been in use as currency & store of value for more than 2000 years. Over time, many “alternatives” have tried to compete with gold. Each time there has been a beautiful narrative around the alternatives too. Some examples below:
• Silver & platinum were once touted as alternatives
• Oil was once called black gold
• US$ is a sort of reserve currency since last 100 years,
• Data is often touted as the new gold
• Crypto currencies are recently being compared to gold

However, let us not forget that time erodes the importance of most of these alternatives. Even the mighty US$ has been the reserve currency since the last 60 years only. Gold has a recorded history of more than 2000 years!

The advent of digital gold
The last few years have witnessed emergence of some credible digital options. Government gold bonds, gold MFs and gold ETFs are some of those instruments. Govt gold bonds offer 3-5% discount to open market buyers and also the prospect of 2.5% annual interest. It’s probably the best mode of owning gold – you get discount, annual interest and the capital gains! More sophisticated investors can invest in gold mining funds or companies that benefit from rising gold prices. You can write back to [email protected] to explore more.

Disclaimer: The above article is for educational & informational purpose only and should not be construed as an investment advice. We may have totally different time horizon and perception of risk & reward compared to you. Hence, it’s best for you to consult an investment advisor.

Exasperated of being confined to home since Covid-19 outbreak, Mr. Kapoor & family finally decided to take a break and drive down from Mumbai to Khandala, a popular weekend getaway. While driving through Mumbai, his eyes fell on the glittering office buildings, first at the Bandra Kurla Complex (BKC) and later at Airoli/Ghansoli. A simple thought crossed his mind:

“This work from home (WFH) trend would have reduced the property prices here too. Once Covid is over, these offices will once again beam with employees and property owners will enjoy regular rental incomes & some price appreciation too. And surely, investing in these best-in-class office properties is safer than investing in plots in some unheard location. How I wish that a middle class person like me, with only Rs. 10-20 lacs to invest, could have bought a small office in one of these swanky buildings!”

Soon, Mr. Kapoor’s car entered the express way and his mind returned to his current reality that “I don’t have crores to invest, hence its best to forget those glass palaces”

Introducing REITs!

Mr. Kapoor has made peace with his thoughts, but what if someone told you that for as little as Rs. 100,000, you could own a small chunk of the swanky Express Towers (Nariman Point) or FIFC (BKC) or Gigaplex (Airoli) or Golf Links (Bangalore) or Raheja Tech Park (Hyderabad)? And that this investment of yours will sit in your demat account and you can earn 4-7% rental income annually and some property appreciation over the long term! Welcome to the world of Real Estate Investment Trust (REITs)!

How do REITs work?

REIT is a legal structure (regulated by SEBI) that allows you to own demat units of a large property or a group of properties. As a minority owner, you are entitled to a share of the rental income and the capital appreciation. However, you do not have any say in deciding “whom to lease the property” or “what rentals to charge” and that is typically managed by a professional management company. The builders of such large commercial properties (Rajeha, Embassy, Blackstone, Brookfield, etc) usually finance such projects through a combination of debt and equity. By allowing thousands of investors like you & me to purchase a stake, they can release a part of their money from the project and use it to fund other such projects.

• Benefits for you:

o You can have a stake in best of the properties for as little as Rs. 100,000;
o You can easily enter or exit your investment through your trading account;
o You do not carry any onus of the legalities, upkeep & leasing of the property;
o You earn 4-7% rental every year and also benefit as the property prices go up;
o Tax on rentals is ~15-20% depending on the REIT structure)

Risks in REIT investing

Although REITs have existed in US and other developed markets since early 2000s, it is a relatively new concept for the Indian markets. The key risks that one should be aware about are:

• Rental risk: Rental yields of 4-7% should not be treated as fixed as they can be impacted by certain forces. If the work from home concept continues for a long time, it is likely that some tenants may vacate a part of their occupied offices. For example, if a company like Accenture decides to vacate its Hyderabad Tech Park office, it will take a long time to find such a large tenant to fill the same occupancy.

• Property price risk: Prices of offices in India have corrected by 10-20% since the outbreak of Covid. As such, the existing investors of REITs have lost 10-20% on their investments. It will recoup only if the property prices rebound.

• Sponsor risk: The sponsors (Rahejas, Embassy, Blackstone, etc) of the REITs have the power to buy new properties & sell existing properties of the REIT. From the history of REITs in the US, we know that sometimes, the sponsors do not act in the best interest of their minority holders.

Overall View – Balanced benefits for the risks

Overall, REITs offer a range of conveniences to small investors like us – flexible tickets size, easy buy & sell, no legalities & up-keep hassle, stable income and long term appreciation. There are only two REITs listed in India and both of them boast of high quality sponsors, high grade properties and high grade tenants.

Like many Indians, Sonali prefers to park most of her savings in bank fixed deposits (FDs). She is well aware that due to the safe nature of FDs, the returns on them are low. Yet, she was in for a surprise when she had to renew one of her maturing FD, and could hardly believe that long term FDs were just yielding ~5.0%, the lowest in her lifetime.

What’s happening today has happened before!

Most of us do know that post-Covid, Central Bank action has resulted in a gush of liquidity, which in turn has led to sharp fall in interest rates. Also, it is human tendency to extrapolate the current trend i.e. interest rates will continue to fall. Let’s see if history can offer a different insight:

The above is 17 year history of SBI’s fixed deposit rate which we have analysed in light of the important economic events that have transpired over this period. Few things stand out:

• FD rates decline after major economic events i.e. Global Financial Crisis (2009), Rupee Crisis & Demonetization (2013-16) and Covid response (2020). This can be attributed to Central Bank’s intervention after every crisis, to keep the financial system in good health.

• But once the crisis period was over and economy started to recover, the demand for money as well as interest rates went up (2004-07, 2009-12, 2017-18). Thus, interest rates are never static, they keep fluctuating. Extended period of decline is followed by period of rise and vice-versa.

As we see from the chart, interest rates have steadily declined since 2012, as a result of strong global liquidity and declining economic activity in India. The current backdrop is very similar i.e. there is a lot of systemic liquidity and economic growth too is tepid. However, this wouldn’t be a permanent state of affairs. Economic activity is projected to rebound in 2021-22 and that will increase the demand for money and interest rates could well start inching up.

We can never be sure if the FD rates will go back to good old days of 8-9%, but one thing is reasonably clear – that there isn’t much room for the rates to go down further. Interest rates in USA are already close to 0%; Retail inflation in India has crossed 6%, and it’s only a matter of time that industrial activity picks up. All this should result in rates rising again.

But I need to invest today, what shall I do?

Coming back to Sonali’s problem – one of her long term Bank FD has matured and she is looking to reinvest it back. She wonders if she should opt for long term FD tenure despite the low rates? Our suggestion to Sonali is to park the money in a short term FD (6 to 9 months) even thought they offer lower rates. This will give her the chance to re-invest this money in longer term instruments later in 2021, when rates become better.

Also let us not forget that just a few months before the Covid pandemic hit us, many long term government bonds were yielding 7.5%, AAA rated corporate bonds were yielding 9.0% and tax-free bonds were yielding 6.0%. This opportunity may come up again in the coming quarters, so let’s not lock all our liquidity in long term low yielding instruments at this juncture.

Feel free to reach out in case you need help with your Fixed Income investments.

PS – Name has been changed to protect the identity of the individual.

But clearly, we are better prepared and slightly wiser too – we know that social distancing works, recovery rates are very high, medical infrastructure is getting better, governments have been supportive of the economy, and that our real household expenses are a fraction of pre-Covid days. If we all pledge to curtail the consumption of news & non-stop information bombardment, the next 100 days look more hopeful.

Economy & Markets – Mixture of hope & confusion

The sharp fall in global stock markets in March was due to uncertainty around human life and the sharp rebound in the subsequent 100 days is to celebrate the fact that most of us will be alive and even return to normalcy in near future. Another factor that has come to market’s aid is the large liquidity intervention by central banks around the world. Hence, the rise in stock markets should not be confused with the country’s economic performance. The pain in the economy is hidden for now, thanks to the moratoriums on debt payments and can manifest in coming quarters.

As an illustration, take the example of Jaideep, a pilot with a reputed airline and subjected to 50% reduction in salary. He cancelled the booking of his 3 BHK apartment with a Pune based developer. Since there are many more Jaideeps across India, the developer may be staring at a large number of cancellations. The developer in turn has slowed down the construction work, delayed payments to its construction contractor and is negotiating with the bank for elongated repayment terms. Thus, the suffering of airlines industry is passed on to sectors like real estate, banking, cement, construction, interiors, etc.

Thus, two things become clear – the economy will take a year or more to absorb the shock and bounce back. But the Governments & Central banks will continue to support the financial system so that there will be no systemic shocks. This can provide a floor to markets and investors can adopt a stock specific approach.

Your investments – some areas of clarity

Too early to jump into new trends: We are always excited by new trends & recent happenings. The recent excitement is around which companies will benefit due to work from home theme (technology or real estate?); from the need to continue social distancing (Automobiles sector?); from need for home deliveries (last mile logistics companies?). However, these are early days and trends are not clear. For illustration, if you have to permanently work from home, wouldn’t you want to buy a bigger house? But work from home might also mean lower future salaries and buying a bigger house would mean higher EMIs.

Focus on things that won’t change: Maybe it’s time to focus on things that will not change – clearly, the need to eat & live better (food & health sector); the need for entertainment (gaming, drinking, smoking, socializing) and the need for financial services (insurance, investments, borrowing) is here to stay. Even while investing in such sectors, never forget the basic rule – companies with the highest chance of survival are the ones with strong balance sheets, leadership position in their micro-market, track record for innovation and customer satisfaction of its customers.

Sticking to your long term plan: It is easy to get excited or scared by happenings in the near term. In fact, the near term is highly overrated. This is despite the numerous ancient stories that enlighten us about success, that it is a result of consistent efforts over long periods and not a random impulse decision. Ignore the short term noises and continue to have a balanced asset allocation across cash, fixed income instruments, gold and stocks.

Trivia – A little bit of everything!

“A little bit of everything has never killed anybody” – the last 100 days re-iterated this age old saying through the story of Aparna, a diligent investor. We call her diligent because she has adhered to her asset allocation plan to the last decimal point. Her portfolio is a healthy mix of equities (stocks, MFs, ETFs), fixed income (FDs, Govt bonds, corporate bonds, ETFs and REITs) and gold (digital, physical).

During the market meltdown in March’20, her equity portfolio lost 20% of its value. Though she was not surprised by that, she was a bit surprised to see that her bonds too had lost 5-15% of their value. But she was most surprised when rumours started floating around that private banks like IndusInd & RBL may face problems. She even enquired if her FDs with ICICI Bank were safe!

That was the first time in last two years that FDs seemed like a god-sent instrument and no one would complaint about the low returns. Beyond FDs, Aparna’s portfolio had gold bonds, which gave her further relief as gold prices in India rallied to an all time high. Thanks to her adherence to the diversified asset allocation plan, her financial anxiety levels were low even during the worst period of Mar-April’20. The worst is clearly behind and stocks & bonds have rallied significantly since the March lows. But the age old wisdom got re-iterated yet again i.e. do not put all your eggs in one basket.

Feel free to reach out in case you need professional help with your investments!

P.S:

1. Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.

2. Names of individuals mentioned above have been changed to protect their identities.

Based on our individual personalities, some people will see this event with huge anxiety while some others may see it as an opportunity. Both of them need to take a deep breath first! While we do believe that “this too shall pass”, it is always helpful to take a balanced approach.

Is it time to make fresh investments?

It may be tempting to take advantage of the lower stock prices today. Once the positive outcome in humanity’s fight against Corona (vaccine or natural slowdown) comes into action, we will see a sharp rebound in both economy & stocks. But if the fight lasts longer, it may take a year or two before you see meaningful revival in your investments. Before investing in stocks, make sure you are clear with the three conditions below:

1) Expense buffer – You need to keep 90-180 days of expenditure in your bank account (cash/FD) so that you are comfortable even if virus related lock downs last for six months.

2) Asset allocation – You need to ensure that your financial wealth is spread across asset classes like FDs, Bonds, Stocks and Gold. We have time and again discussed the perils of putting all eggs in one basket. Please get your asset allocation aligned as per your risk profile. Feel free to reach out to us if you need help with this

3) Time frame – Invest only that money in stocks incrementally, which you may not need for next 5 years. It is possible that stocks can fall further even from current levels!

What will happen to the existing investments?

Most of the stocks have declined 30-40% in this fall as investors rush to raise cash. In such situations, markets make no distinction between good & not so good companies. Below is a guide on some common questions:

1) Wasn’t it possible to predict the fall and sell everything before the fall?

Investing is about finding right opportunities and not about making accurate forecasts. Nor do most investors have any special abilities to forecast a sudden crash. The best of investors have always focused on identifying great companies and holding them for many years.

2) Should one sell everything today, so that we can protect future downside?

If you do not have enough buffer to tide over next 3-6 months of expenses or if your salary continuity is at risk, you may have to take out some money. Otherwise, you may just be better off waiting out and riding the recovery as and when it happens.

Another way to think about this is to assume that property prices too have fallen 10-25%. Do we consider selling our house or our shop? Of course not, because we have a long term view here. And we cannot sell it immediately even if we want to due to lack of liquidity. The ability to sell stocks instantly is both a boon & curse.

3) Some insights on reviewing your investments

Never waste a good crisis. Use this time to understand few parameters about your invested companies: a strong balance sheet; interdependence on global trades; leadership position in their micro-market; innovation track record and satisfaction of its customers.

When the dust settles, people will still eat out, drink, shop, socialize and travel. Companies with most of the above characteristics are best placed to weather the impending slowdown and recover from it.

Trivia – Money & Well being

A lot of us spend more than 50% of our day on either earning money or worrying about money or even worse, quarrelling over money. The virus scare can create further anxiety but it also opens doors for newer aspects in life. The other day, I was speaking to a fellow investor who has been in the stock markets for over thirty years. Being true to my expectations, he was much calmer and visibly less perturbed by the market fall and Corona scare.

He started off by saying that he read a lot of positive news in the past two weeks – the drop in global travel and lock downs in many countries has resulted in significantly lower pollution. So much, that dolphins have been spotted in canals of Italy after many years! Further, he suggested there is no need to get worried if you have followed the below rules:

1) Differentiate between “needs” and “desires”

Categorize your expenses into what you absolutely need and what is good to have (but not essential). This will help in arriving at the minimal amount required to maintain a lifestyle. After doing this, most of us will realize that we are in a better financial position than we think. The virus scare may actually give you chance to save some money which would have otherwise been spent on travel, vacations, movies and fine dines.

2) Stress test your finances

Most of us are so busy in our day to day lives that we never get chance to look at our wealth in a holistic manner. We can use this spare time to ponder over these questions:

· Do we have adequate health & life insurance?
· Do we have enough buffer fund (FDs, gold) to last us for 12 months of bad times?
· Do we have a long term financial plan?

These are indeed testing times, but also offer “time” for personal, emotional, social and financial development. Let’s hope that in a few months from now, people will talk more about Corona beer than the virus.

Feel free to reach out in case you need professional help with your investments!

P.S: Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.

There is lot of bad news around the stock markets & the economy. However, this can itself create some good news – that you can go out and get a large discount on practically anything – stocks, bonds, homes, offices, cars, bikes, clothes, etc.

Economic slowdown – Fifteen months and still counting

It’s been fifteen long months since the economic slowdown started and it has only intensified across sectors – electricity, real estate, cars, bikes, trucks, etc. As of now, it looks like an unwanted guest that will stay for few more quarters.

What caused the slowdown? Confluence of multiple reforms like demonetization, GST, stronger compliances impacted the old economy companies & old ways of doing business. Most of them had loans from banks & NBFCs and started defaulting. This in-turn started having a spiral impact on India’s financial system, which was anyways reeling under NPA problems. No economy can perform when its financial system isn’t ready to lend.

How long will the slowdown last? This turbulent phase is turning out to be so long drawn that many iconic companies & brands like Yes Bank, DHFL, Reliance Capital, Sintex, Eveready, CCD, Zee, Emami, Crompton, Vodafone, Idea, Karvy, Talwalkars, etc have fallen from grace. Not that they were the best managed companies, but these were well known consumer brands. Time & government are the best healers for any financial system when trust deficit is high. While the government is trying multiple things, it’s rather slow and will take a few quarters before things normalize.

Stock market slowdown – Two years and counting

Struggle for most: It’s been almost two years that stock markets have been struggling. Most investors have experienced negative returns over this period. NIFTY & SENSEX, the index of top 50 companies, however, do not reflect this pain. This is because few large companies have been able to do well despite slowdown and their stock prices have done well. Such a narrow market is a sign of the low trust that investors have on the broad economy and smaller companies.

Are there any green shoots? The slowdown doesn’t impact everyone in the same manner. Most well run companies are still showing decent growth by gaining market share from the weak players. For example, DMART is doing well but Future Group is struggling; Tanishq is doing well but majority of jewellery industry is struggling; Indigo is doing well but other airlines are struggling; CERA is fine but its competitors are under severe stress. These trends represent opportunity for investors.

What can you do?

Prices are attractive, be ready for shopping: When there is slowdown, no one wants to buy anything. Hence, the prices across asset classes become attractive. There are some government bonds that will yield 7% post-tax; some corporate bonds & debt mutual funds that will yield you 11%; lot of stocks that offer 12-15% growth opportunity. But all of this will require a long holding period as we wade through next few months of slow economy.

Have a systematic plan: We all make mistakes in good times but slowdown is usually the time to introspect and improve over our past mistakes. For some the mistake could be over-allocation to stocks; for others, it could be under-allocation. Some may have parked lot of money in “not a well run bank”; some may be paying heavy interest rate on home loan. Whatever the mistakes are, this slowdown offers an opportunity to relook and re-allocate.

Trivia: Money & mental health

There is little doubt that money cannot buy happiness & peace. But loss of it can surely bring a lot of turmoil in our life. Since it’s a season of “fall”, we are sharing few stories where these unfortunate things have happened. It teaches us the same old lesson of “not putting all the eggs in one basket”.

Story 1: Since the past 13 years, Keshav worked in a well reputed broking company in Mumbai. Over these years, the broking company diversified into many other financial services business and grew 10x in size. Not only did he make a good career, but he also made good wealth – a healthy salary, assured bonuses and generous ESOP program. The share price increased 6x over 2015-18 and Keshav’s ESOP value alone surged to Rs. 2 crores. He got so confident on his company’s success that he started investing a large part of his savings into company’s bonds (offering 9-10% interest). All looked good until Sep, 2018.

This company suffered so much in the slow economic environment that its share price fell by 70% and has retrenched 30% of its employees including Keshav. To add salt to the wounds, Keshav is worried that his “fixed income” investments in the company’s bonds may also go bad. Keshav was already thinking of retiring at age of 40. Unfortunately, he is now looking out for job and anxious about the erosion in his wealth.

Story 2: Sandhya, a mother of two, had always been a happy home maker. Fortune wasn’t kind on her personal life and she had to separate from her spouse. The only silver lining was that she got 50lacs as maintenance amount as a part of the separation. Having no experience in handling finances, she approached her family for advice and invested all the money in bank fixed deposits instead of spreading it out in other low risk instruments.

While bank FDs are always assumed to be safe, Sandhya’s misfortune was that the bank wasn’t safe. Half of her money was parked in a cooperative bank, which just went bankrupt. The only reason she parked money in that bank was because it was close to her house. While she realises that the bank is in trouble, she doesn’t have an idea of the long battle ahead for getting back her own money.

Feel free to reach out in case you need professional help with your investments!

P.S: Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.

Names of individuals mentioned above have been changed to protect their real identities

The only thing that is predictable about the stock markets is its unpredictability in the short term. The stock market indices not only touched new life time highs, and they did so in the face of India’s worst bond market crisis. However, there was no celebration this time. As a matter of fact, stock & mutual fund portfolios of most investors are nowhere near all time highs. “Josh” among investors is low to say the least

The key reason for the above disconnect is the narrow nature of stock market rally, where-in stock prices of only 25-30 large companies have surged sharply. On the contrary, prices of most other large, mid & small sized companies are 5% to 40% below their highs. Usually, markets behave in such a manner whenever it believes that there is large uncertainty ahead. For now, the uncertainty pertains to election outcome & ability of bond markets to recover from risks posed by ill-health financial entities like IL&FS, DHFL, Reliance Capital, Yes Bank, etc.

Do election outcomes really impact your investments?

India has a reasonable institutional framework to ensure that no government can either do much good or damage in a short span of time. Also, the relationship between economy and government is self-correcting – if government actions damage the economy too much, its own tax revenues are impacted and it will eventually lose people’s mandate. The base case growth of Indian economy is ~6% and government actions can at best add or shave off 1% to the base number.

The noise, information bombardment, and excitement around elections force us to believe that it is a very important factor for our investment decision. Based on performance of Modi government, there could be 5-10% movement in stocks on either side in the short term. But we all know that over time, stock prices reflect the earnings delivered by the underlying businesses. A bad business will not do well even if Modi wins and a good business will not collapse even if Modi loses.

What are the new trends that are emerging?

Debt mutual funds too can give losses: People invest in debt mutual funds in order to earn slightly higher returns than bank fixed deposits. Mutual Funds in turn invest in bonds of various companies to generate high returns. However, the bond market crisis resulted in many defaults and mark-downs and many MF investors will witness “principal losses” or “lower than FD returns”. If your MF schemes have exposure to Essel Group, Eveready Group, IL&FS, Anil Ambani Group, etc, chances of sub optimal returns will be very high.

Retail bonds are giving once in five year opportunity: Thanks to the bond market crisis and tight liquidity environment, many NBFCs have started tapping retail investors like us for borrowing. Many highly rated NBFCs with sound business models are offering 9-11% interest rate. One can allocate some portion of their fixed income portfolio in retail bonds (selection of NBFC is crucial, consult your advisor).

Select NBFCs & real estate developers will reach new heights: Although both these sectors were at the epicentre of the crisis, the good players have been unaffected. These players will gain market share in times to come and create good wealth for their investors. Stock prices of some of the good NBFCs & developers are already making new highs.

Trivia: Talking long term vs. being long term

Over the past ten years, we have got many formal & informal opportunities to interact with working professionals and discuss about investments & personal finance. As a rule, whenever we are asked about investment in stocks, there are two questions that we unfailingly ask:

Question 1: Are you investing for the long term of the short term?
Question 2: Have you ever witnessed 20% loss in any activity in your life?

Answer 1: Majority, if not 100% of the people we meet say that they are in the game for long term. So unanimous is the response, as if the other answer will lower their self-worth! Most of them do start investments with long term outlook of 5 to 7 years and have reasonable expectations of 12-14%.

Investor expectations from stock investments

Answer 2: The answer to the second question, too, is a re-sounding NO. Most of the salaried class never suffers loss of money. They may spend it, waste it or save it, but they never lose money; worse case they only lose the opportunity! Unfortunately, investments in stocks and bonds can result in temporary or permanent losses. Since the prices are available regularly, the losses are visible on regular basis too and they hamper with your long term resolve.

Over last 25 years, Indian stock markets have delivered 14%+ returns. Ideally, that should have delighted the investors. However, majority of investors have failed to enjoy those returns because they could not continue during the tough years. Long term is an emotional game rather than a numbers game. No doubt that most of the investors are dejected about their recent performance rather than being excited about the opportunities that bad times provide.

Feel free to reach out in case you need professional help with your investments!

P.S: Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.

• Change 1: Mutual funds will attract 10% Long term tax & 15% Short term tax from this year.
• Change 2: ULIPs continue to remain exempt from long term tax.

Some of you may remember that ULIPs had become a bad word by 2014 due to huge amount of mis-selling & exorbitant charges levied on investors. A lot has changed since then – Some ULIPs now have charges that are similar to mutual funds (MFs) and have delivered returns that are similar to MFs. The winning point for ULIPs is that it’s tax efficient – It attracts 0% tax on long term returns.

Where ULIPs score over Mutual Funds?

*Some schemes only

Hence, instead of ELSS, you may consider doing fresh investments in ULIP vs Mutual Funds. Please note that above advantage is for people who invest atleast Rs. 2 lacs per year. If you need assistance contact us and we may be able to help you navigate through the maze of ULIPs.

GreenEdge’s View on Gold

Gold has been accepted as a store of value since the last ~5,000 years in the minds of human beings. No other currency can boast of such a feat. (We all know the fate of crytos, bitcoins today after the initial hoopla surrounding it. You can read our Bitcoin article here – Memo 22: Bitcoins – Better or Bitter?)Gold is a hedge against inflation, war, famines, geo-political risks and possible human madness :). Hence, at GreenEdge, we believe that 5-10% of an individual’s total wealth should be allocated to gold.

In India, we are love-struck with gold jewellery as a form of exposure to gold but Sovereign Gold Bonds offer an attractive option to take exposure to gold. You can invest in the Series V of Sovereign Gold Bond which is open for subscription from 14th Jan, 2019 to 18th Jan, 2019.

Advantages of Investing in Gold Bonds vs Other Gold options

1. Capital Appreciation + Interest – The scheme not only offers capital appreciation on value of gold but also offers an annual interest of 2.5% which is payable semi-annually. Jewellery, gold coins, bars, gold ETFs, funds do not offer any interest.

2. Cost Savings –Transaction charges (including making charges) in jewellery can be 25-30%, whereas in gold coins/ bars can be as high as 13-15%.Gold ETFs/ funds attract expense ratios of ~1%. Gold bonds score over these options with low transaction costs & NIL expense ratios

3. Storage & Purity – Unlike physical gold, gold bonds can be stored in demat form or as a certificate. Risks of theft/ impurities don’t exist in gold bonds unlike physical gold.

Features of the Scheme

1. Limits – Minimum & maximum investment is 1 gm & 4kg respectively per fiscal year. Each bond is equivalent to 1 gm of gold. In the current series V of gold bond which is open for subscription, the issue price is Rs. 3,214 per gram/ bond. Online application will attract Rs 50 discount taking issue price at Rs. 3, 164 per gram/ bond.

2. Pre-Mature withdrawal – The tenor of the gold bond is for 8 yrs; however, it’s possible to do a pre-mature withdrawal on interest payment dates in 5th, 6th& 7th year from date of issue. The bonds can also be sold on secondary market via NSE/ BSE subject to available liquidity.

3. Taxation – The periodical interest received on bonds are taxable but capital gains made at the time of maturity are tax-exempt. In case of pre-mature withdrawal, indexation benefits can be availed while calculating long-term capital gains.

4. Application – It can be done online (can be purchased/ sold on NSE/ BSE) or by filling a physical form

Feel free to reach out in case you wish to seek professional help for planning your finances systematically – https://greenedgewealth.com/financial-planning/

What was the panic attack & how did we come out of it?

It has been highlighted in the previous two memos that Indian stocks were going through a weak phase since Feb, 2018. The situation got exacerbated in September, 2018 when IL&FS, a large infrastructure financing institution with debt outstanding of Rs. 90,000crores defaulted to the bond markets. Lot of Indian institutions had exposure to IL&FS, either through direct loans or investment in their bonds:

• IL&FS has to repay ~Rs. 60,000crores to 37 Indian Banks

• IL&FS has to repay ~Rs. 6,000crores to India’s debt mutual fund

• IL&FS has to repay ~Rs. 8,000crores to HNIs and corporate investors

Clearly, this is India’s largest ever bond market default. Apart from the primary impact on the above banks, mutual funds & HNIs, the secondary impact was that bond markets completely froze for few days, with no one lending to no one. The log-jam was broken with SBI announcing an indirect liquidity window of Rs. 40,000crores to NBFCs. This is not to say that the crisis is resolved; the investors in IL&FS will still lose 40-50% of their money; but bond markets have started lending to good companies and business is getting back on track.

What are the trends that have emerged?

Worst for India seems over: We witnessed a perfect storm over the past three months – Trump trade wars resulting in intense FII outflows, bond market crisis, currency depreciation, oil price shock, melt-down in FAANG stocks and correction in US markets. The fact that we weathered it and bounced back in three months is testimony to our belief that India is a strong economy and an island of stability.

Pain may linger, but pockets of opportunity are emerging: As we take stock of the damage caused in the storm, some clarity is emerging – interest rates on home loan or car loan will inch up. Another casualty is the real estate developer community – non-customer centric & unscrupulous developers will find the going very tough; many may default, causing further pain to home buyers, banks & some NBFCs. Folks in financial services industry will have to brace for lower salary increments and bonuses this year. Good NBFCs, good developers and good banks will emerge stronger from this storm.

Stock specific is the way forward: Given that we are just recovering from bond market crisis and bracing for national election in five months, it’s unrealistic to expect a secular rally in stock markets. However, stock prices of many good companies have fallen to attractive levels and there is high probability of making good returns over next few years.

What should you do?

It’s only natural to be scared when you lose money in every possible investment at the same time – your investment in debt & equity mutual funds might be in losses, stocks would certainly be lower by 20%, real estate continues to remain very slow and crypto currencies have miserably failed in their objective of being a global alternative currency, leave apart the fact that Bitcoin has declined 85% from last year.

We have seen many have held back investments in the past few months and continue to hold it back for the fear of elections. To us, it seems that the worst for India is over and it’s a fantastic time to re-start or step-up your investment activity. India is bigger than a single political party or a personality and will do well irrespective of the election outcome.

Trivia – Mickey Mouse vs. Snow White & the Seven Dwarfs

For most of us, Mickey Mouse is synonymous to Walt Disney. However, you will be a bit surprised to know that 90% of the Mickey Mouse short cartoon movies didn’t make profits for Mr. Disney despite being popular! Even after producing over 400 short cartoon films by 1935, Disney was barely breaking-even. It was his venture into full length animated feature film that actually began improving his fortunes. The high production cost (US$1.5m) of “Snow White & seven dwarfs”, their first full length movie forced Mr. Disney to even mortgage his own house. The film went on to create history by grossing US$9 million in 1938! This not only helped Disney pay off all his debts but left enough surplus to buy his own production studio and experiment more. Disney is a $167 Billion corporation today.

There are a lot of parallels in life, sports & investing in the above story. It’s only natural for all of us to crave for early success – an actor hopes for blockbuster in his debut movie, a cricketer hopes to score a century in every match, a start-up wants highest valuation in the first fund raising, a fresh B-school graduate wants to make big impact in the first year and stock market investors desire multi-baggers in the first year of their investing life.

But life is not designed to work that way. An actor has to keep making movies to deliver a few blockbusters,a cricketer has to play hundreds of innings to score a few centuries. Similarly, if you are an investor, you have to be in the stock market long enough to get a few multi baggers. Being long enough in an activity significantly improves the odds of getting the reward due to two main reasons:

• Over the years, you get better at avoiding obvious mistakes

• More opportunities present themselves in front of you in a longer time span

• The “timing” factor of investment becomes less significant

Friends & colleagues who started investing prior to 2010-11 will clearly understand the above analogies. After the tough phase of 2011-13, the bull phase of 2014-16 created huge wealth (Similar to Disney’s SnowWhite moment) which enabled them to not only diversify into other assets like high yield bonds & start-up funding but also digest the losses of 2018 with no significant impact. For those of you who started investing post 2016, situation would be very similar to Walt Disney of 1935 i.e. hardly any profits! If you chose to stay for long enough, it’s only a matter of time that you will get your “SnowWhite” moment.

Feel free to reach out in case you need professional help with your investments!

P.S: Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.