The Capitalmind Podcast ●
access_time4 days ago
On today’s show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) try to understand the ₹30 trillion behemoth, the Life Insurance Corporation of India (LIC). Transcript: https://www.capitalmind.in/2020/02/podcast-how-big-is-lic-anyway/
How India’s amazing new financial infrastructure will enable better, more inclusive “Bharat UX” (Ep-23)
The Capitalmind Podcast ●
access_time12 days ago
On today's show, Deepak Shenoy (CEO) and Sahil Kini (Co-founder and CEO, Setu) talk about the problems ailing the Indian financial infrastructure and how APIs are shaping the way digital businesses are built. Transcript: https://www.capitalmind.in/2020/02/indias-new-financial-infrastructure-will-enable-better-more-inclusive-bharat-ux/
The Capitalmind Podcast ●
access_time22 days ago
On today's show, Deepak Shenoy (CEO) and Aditya Jaiswal discuss the impact of the union budget on our savings and investments- would you be better off moving on to the new tax regime? how does the budget impact your mutual funds (dividend options)? Are the Arb fund dividend reinvestment plans dead? Transcripts: https://www.capitalmind.in/2020/02/podcast-22-how-budget-2020-impacts-the-way-you-save-and-invest/
The Capitalmind Podcast ●
access_time1 month ago
Is passive investing making investors insensitive to price and valuations? Is this distorting the capital flows to the market? In U.S, the market share for passively managed funds has risen to about 51 percent, but what is the number for India? Where do we stand? Transcripts: https://www.capitalmind.in/2020/01/the-amazing-rise-of-passive-and-what-you-need-to-do-about-it Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) answer these and a lot more questions on today’s show.
On today’s show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) take you back to the 80s, when the Indian stock market was all wild wild west. It's the April of 1982, a powerful bear cartel has raided the shares of Reliance, they short sell Reliance shares so heavily that it plummets from Rs131 to Rs121 in a short span of time. They have done it in the past and they have done it to many, but this time they have messed up with Dhirubhai Ambani- a businessman who was known for his astute business acumen. Will the bears succeed? or will the tables be turned? Transcript: https://www.capitalmind.in/2020/01/podcast-surviving-a-bear-attack-how-dhirubhai-did-it/
On today’s show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) discuss the New Pension Scheme in detail. Transcript: https://www.capitalmind.in/2020/01/podcast-19-understanding-the-new-pension-scheme/ We discuss the NPS from the perspective of a 30 year old who opts for NPS and contributes INR50,000 every year. How much will he accumulate at retirement? What happens if he loses his job after 5 years? How will the forced annuity impact him at retirement? If he doesn’t wants to opt for NPS, how much should his investments earn to beat the NPS returns plus the associated tax benefits of NPS?
On today’s show, Deepak Shenoy (CEO) and Vashistha Iyer (COO) discuss effective ways to make life simpler by managing cash flows using credit cards and bank overdrafts. Transcripts: https://www.capitalmind.in/2019/12/how-to-master-your-cash-flows-with-credit-cards-and-overdrafts/ Heads-up: 1. Is parking money in bank accounts a risky proposition? 2. If you earn 1 lakh a month and you get a 1 lakh credit card bill, what do you do? Do you not invest that month? 3. Do 'No-cost EMIs' really cost nothing? 4. If you consistently use more than 60-80% of your credit card's limit, does it affect your credit score? 5. Is it better to have multiple credit cards? 6. Is it safer to swipe your credit card more often than your debit card?
On today's show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) discuss the Bharat Bond ETF in detail. Transcript: https://www.capitalmind.in/2019/12/bharat-bond-etf/ Q) Will it provide the much needed liquidity to the debt market? Who are going to be the market makers? Q) Is it a zero credit risk option? and what about the interest rate risk? Q) Is it a good deal for the fixed income investors? Q) Which option will suit you better, the 3-year variant or the 5-year variant? Grab your popcorn and stay tuned, you are going to enjoy this one!
Deepak Shenoy (@deepakshenoy) speaks with Nithin Kamath (@Nithin0dha), CEO of Zerodha about the Karvy mess- does it reflect a systemic failure? do brokers like Karvy have legacy issues? how differently does Zerodha operate? and most importantly, what should investors do to protect themselves from such scandals in the future.
The year 2019 has been quite eventful for the Indian markets! Right from corporate governance issues popping up almost every month, the collapse of NBFCs such IL&FS and DHFL, then the shady practices in scheduled banks such as the PMC Bank and now comes the Karvy fiasco. Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) discuss in detail how the Karvy fiasco unraveled followed by series of questions such as: What is a pool account and are brokers using it as means to fund themselves? Can brokers misuse the power of attorney signed by their clients? Is it safer to have demat accounts with banks? What should the existing clients of Karvy do? What happens to the banks/NBFCs who have lent money to Karvy?
We often hear that "Mutual Funds Sahi Hai". But none of the experts answer, "Konsa Mutual Fund Sahi Hai?" Host Deepak Shenoy (CEO) and Aditya Jaiswal bring you another Podcast where they simplify mutual funds, allocation (debt-equity), SIP vs lump sum debate, the myth regarding Star ratings, ELSS funds, expense ratios, Sectoral funds and a lot more!
The Capitalmind Podcast ●
access_time4 months ago
Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss a bunch of interesting things in this podcast including, whether it makes sense to buy a house in the Uber economy, the mother-in-law economics, the financial implications of having a portfolio of properties, and the outlook for the property prices in the near term. Transcripts: Deepak: Hi, this is Deepak Shenoy. Welcome again, this is the Capital Mind podcast, number 13. We're going to talk this time about housing. Aditya has a very interesting set of questions, so welcome Aditya first to the show and welcome to all of you. Aditya: Hi Deepak. Thanks a lot, it's a pleasure being here. So today we're going to talk about should you buy a house? I want to start with the types of buyers. So the first type of buyer that I want to discuss is the emotional buyer. Generally, we have seen that in Asian cultures, buying a house is considered to be a bedrock of stability. Generally, society considers it that way. We know that this happens in India for sure, but I was surprised when I came across a survey done in China, which found out that when it comes to marriage, 75% of the Chinese women consider a man's ability to provide a home as very important. The Chinese actually call this the mother-in-law economics, where the prospective mother-in-law actually prefers men having their own house. It's funny, but it's true. Also in traditional societies, parents generally consider owning a home as a good loan, rather than buying an expensive car, which is considered as a wasteful expenditure. They believe that property prices generally appreciate over the long-term and monthly EMIs enforce some sort of financial discipline, especially the middle class parents, that young couples will blow up their money in discretionary spending, so better lock them up in a property loan. These kinds of buyers look at property as an emotional investment, but even for these people, this decision will have financial implications, isn't it? Like paying 30%, 40% of your salary as monthly EMI towards an illiquid asset which locks you in and you also have to sacrifice other goals. So what do you think of real estate as an emotional investment? Deepak: From a point of view of where Indians are, I think we are like the Chinese. We think real estate is the next best thing in the world and perhaps next only to gold, though we will actually considered real estate ahead of gold, buying real estate first and then consider consider buying gold. But here's where I think, as an emotionally decision it's paramount. I'm saying that because people like to own their own houses. People like to have a house they can call their own. We've gone to an Uber economy where people say, "Okay, I don't care if the car I own is something I own, so why don't I rather rent that car?" That part is also going to flow into houses. So to a certain extent, you can do a set of things in a house that's rented just as well as you can do in a house that you own. But the ownership is a nice, fuzzy, warm feeling that you have and for that if you're willing to pay, you should pay. Now, I'll stop there because most people know at this point start saying, "Oh, but it will also appreciate." I'm like, "No, no, no. Forget about this." It will also appreciate. You live in the house. It's not an investment, it is just because what will happen as long as you live in a house, you will never get out of living in your own house. so You will always say, "Listen, I'll go to my next house and sell this house and go buy another house." So no matter what you do, that money is never going to come back to you. That money is gone. It's a expenditure. You are spending on a house. You are not investing in a house. That's your first house and subsequent houses you might buy, those can be considered investments at some point then because you could sell it without actually changing your lifestyle and actually take the cash and use it for something. But the first house you buy is always or the house you live in is always going to be an expenditure. The other part of this equation is should you buy it from a financial investment kind of game? Now, I feel that is a waste of time for multiple reasons but as we'll go into each of those, but suffice it to say, the reasons why people thought that having a house over your head is good is because in the earlier era as we've had, and even now perhaps in certain cases, you will have situations where a landlord can just throw you out. To the point where once a landlord throws you out, you might go to have to find something else, you may have a small baby, you don't know where to find the house. You feel sick of this whole thing and it's gone. But it's not like that in more developed economies, where what happens is that there are professional companies that own apartment blocks and they rent them out. If you look at the home ownership statistics, that means if you look at any house and check if a person who's living in it is a person who owns it or a person who rents, 70% of urban and more than 95%. So a blended 87% of homes in India are owned. Aditya: That's a big number. Deepak: So that means if you look at the US they call 63% too less and 66% good. So that's fantastic. Germany is, what? I think 35%, 40%. New York is 35%. The more developed you are, the lower your home ownership statistic is. It's the same in India as well. In the urban towns, the larger urban towns, you have extremely high home ownership and because we have extremely high home ownership, sorry, extremely low home ownership, when you're extremely high renting, so because you have that, people are mobile. When I say mobile, it's like if you want to move to another part of town when you're renting, it's easy. Just pick up your stuff and go and that is actually why Germany or New York has such low home ownership rate. So having a high home ownership rate is not a good thing in fact, it's probably a negative of development and other thing there is that our fascination with having a house we own has started to weigh in because houses are now so much more expensive. Aditya: Yes, true. Deepak: And as a percentage of your salary Now, if you look at what home ownership did in the US, is they have, if your annual income is $150,000, you might pay $175,000 for a house, maybe $200,000. In most of the US, other than the Bay area, and New York and all that, where you would actually have to pay 2X, or 3X, or 4X your income. In India, the average has been 5X. It's only come down to maybe 4X very recently. Our affordability is extremely low. Aditya: True. Deepak: Our interest rates are extremely high. So therefore, our EMIs are irrationally high compared to the West and yet we are fascinated with home ownership. So it's not a great financial decision and the amount you pay for making this emotional decision that cripples you for, what? 20 years of EMIs is actually an emotional toll you have to take to make that emotional decision of having to buy a house. Aditya: Even in China, bachelors have gone crazy. They have taken home loans and they have taken loans to even furnish the house, so I believe this is common across Asian cultures. Deepak: It is. In fact in India also, you could have, I don't know if it's still possible, but you could take a home improvement loan and it classifies the same as a home loan. Remember home loans are actually cheaper than other kinds of loans. So a loan to buy a car is most likely to be more expensive to you as an individual than buying a house. There's a reason for this, because the government wants to promote home ownership. Why? Because it has it's root from the US. The US actually had done a bunch of surveys and they found out that people who own their own homes are likely to be more politically active, stable and participatory and that is always good for democracy because you have a set of people who are politically stable, they will participate, and they will perhaps vote for you. So somewhere around the between the '80s or the '90s, they started to promote home ownership by giving tax breaks around home ownership. Where India went to the other extreme, we have given like 17 different types of SOPs to home ownership. To the extent we get the lowest loan because they have the lowest risk weight among personal loans. People think the collateral is safe, therefore they're willing to give you big ticket loans, five times your income. Whereas anywhere else, you will get only maybe one time your income. There are other SOPs as well. You get an interest tax break, you get a tax break on principal, you get a If you sell a house, you can buy another house and you will not get taxed on the capital gains in India. That sounds absurd, because you can't sell one stock and buy another stock and say, "Listen, I just moved the money from one to the other." Aditya: Exactly. Deepak: So it's one of those investments where you can do these things. Then these are some of the areas and the other's also There's home ownership subsidies at various times. They give you lower, cheaper loans at afford some kind of houses. So we pamper the sector tremendously. So at this point, if you were of the opinion that you didn't want to buy a house and they start pampering you so much, you'd think that, "Okay, may I should." So it's cultural from a perspective of not just China and India, it's also been in the US. The US quickly discovered of course, from 2008 that promoting housing to this degree is a little crazy. But they still are in a situation where more than some 80%, I think, or 70%, of loans given by banks are to mortgages. India is only 10%, thankfully. So I think India is doing the right thing but the US still depends a lot on real estate and real estate movements. So although the prices may not increase, their affordability is much more in smaller towns. So home building is actually a GDP activity and people tend to look at it as this and, "I'm building a house. I'm building something I own," it's not necessarily they care about whether its value goes up or down. To that extent people are, for the most part, happy. And India isn't like that. In India, you pay for a house, you pay so much more than you rent, versus in Germany, or in the US. So for instance, if your EMI was $1,600 a month, if you rented the same house, you would probably pay $1,500 a month. So it's so close, it's comparable. In India, if you rent for 15,000 rupees a month, this EMI for the same house for a 20 year period, if you put 20% down, would still be 45,000 or 50,000 rupees. So you're paying three or four times in EMI what you would pay in rent. Aditya: That actually brings me to the next type of buyer. So this type of buyer is the one who screams that, "I don't want to pay rent." They don't go to the extent of doing the detailed calculations. They simply say this, "I am paying 28,000 for a two BHK apartment in Bangalore. Why not take a home loan and buy a two BHK for say, 50- 60 lakhs?" But this category is different because they are not even concerned about the fact that the rental yield in Bangalore is, what? Hardly 2.5% and the home loan rate is around 8.5%. They simply say this, "I don't want to pay exorbitant rents." It's interesting because they look at rent as some sort of a wasteful, rather consumption expenditure. Various EMIs are payments towards building assets. This is how they think and even I know a couple of working professionals in Bangalore itself, many people I interact with, they have actually built spacious homes in their hometown yet they have bought a house in Bangalore just because they didn't want to pay exorbitant rent. So it starts pinching them after four, five years. So what are your views on rent versus EMI debate? Deepak: In any other part of the world, I'd say if you can get rent close to EMI, then just go for the EMI, it's just easier, you don't want to get thrown out of the house if the landlord doesn't like you and so on. In India, it's not so simple because while the not getting through all of our house is a good thing, most landlords now have figured out that, "Listen, there's just way too much supply, better keep that person I have, otherwise I'm not going to get somebody else on rent and that's going to hurt me." Aditya: True. Deepak: The second part of this equation is it's completely financially crazy in the sense, you buy a 28,000 house where you're living on rent for 28,000, you'll pay 1 to 1.1 crores in the house value, let's say 1.1. You even get a loan somehow for the 90 lakhs and you put 20 lakhs down. So 90 lakhs loan will cost you around 80,000 rupees in EMI. Now you're pay 28,000 I am paying 80,000 how doesn't even compare, but the important point is this, the 80,000 rupee EMI consists of a 70,000 rupee interest cost. And a 20,000 rupee principal components, so 90 lakhs in the first month goes down only to 89,80,000 because you only cut principal by 20,000 rupees. You are effectively paying 70,000 rupees of rent to the bank, it's just called interest. If you think it is wasteful to give your landlord 28,000 bucks, how is it not wasteful to give a bank 70,000 rupees for the same house, for the same place and a house that you think you own, but actually the bank owns it, until you've paid off most of the loan. But the point is that, assuming that you've gone to all this trouble to actually buy a house, your EMI is going to consist of way more rent paid to a bank than the rent you're paying your landlord right now. So if you financially look at it, you're paying rent either way. So the argument, "I don't want to pay rent," is specious, it's incorrect because you are paying rent. Whether it's to a bank or to a landlord is irrelevant. You're paying money that's going down the drain for you. It's just the principle part that's building your house and that principal part is 20,000 rupees. Now tell me this. If you have a 20 lakh balance and you can then invest that money, and even get 10%, 8%. Okay, let's say you just get 8%. If you get 8%, that's 1.6 lakh, it's nearly 15K per month that that investment will give you. So instead of putting in the principle of 20,000 rupees a month, you can take the principle that you have, which is 20 lakhs, put it into a deposit or something like that or a fund, get 8% and you get 15,000 or 14,000 rupees a month back from that investment. Whereas if you buy a house, we'll first pay 70,000 rent to the bank, you'll put 20,000 in to buying your own house which will take you 20 years to own. In the end of it, you will just have a house, which you can't sell because you own it and you have to live in it. If you sold it, you'd only have to go and buy another house in order to live in that because now you want to live in the house that you own. So technically your doing nothing versus on the other side, if you just rented and put the money into a bank, you will have an investment that actually pays you back. That is the real difference but if people don't look at it emotionally, I mean financially, they look at it emotionally. While I'm okay with that I just am not convinced with any financial argument that is required to own a house. Aditya: Okay. So the third type of buyer is a typical real estate investor having a portfolio of properties. So people who accumulate houses to make a killing. So my point is, in the early 2000s when the home loans were cheaper and property prices were moving at 20%-25%, it made some sense to invest in an upcoming project. You could book two projects, sell one of them after a few years for a big gain and use that money to repay the loan taken for the first property. Those days are now history. Property prices are now appreciating at a very slower pace. In some markets, prices have actually come down. These kinds of investors have suffered also, as property prices have stagnated and many builders have gone bankrupt and delayed completion of projects. So what would you advise such investors? Is it worth having a portfolio of real estate properties? right now? Deepak: So I think that first thing that we'll mention was common in India as well, where you have people who bought six or seven houses, most of these were under construction. So what will happen is they would say, "Okay, you're to put 10% up front," and then the next 10% after, say three months. So the deal was so good that if you bought a thousand square foot apartment or six of them and they were costing, say 4,000 rupees per apartment, in three months, the builder would increase the price to 4,500. Aditya: Exactly. Deepak: So what would happen there, is your thousand square foot apartment with the 500 rupee price increase gives you five lakhs if you sell it. Aditya: True. Deepak: So if you put 10 lakhs per property down, or sorry, four lakhs per property down, because it's a 40 lakh property. Aditya: You could make a killing. Deepak: You could literally roll every one apartment. After three months, you sell the first one, pay the second instalment, which is now subsidized by the amount that you made, the profit that you made from the first one. Then after three more months, the price has gone up to 5,000 rupees, another 500 rupees up. So that increase kept on paying for it, so this portfolio kind of approach worked. You didn't have to put a lot of money. So Instead of putting, 40 lakhs into six, which is 2.4 crores I will put only 40 lakhs because I need only 10% and then I will slowly, over time end up with only one apartment. But in the middle of having sold off five apartments, I might have generated enough profit to have paid for maybe half of this house which actually own. So I have got a 40 lakh house but I put only 20 lakhs of my own money. In many cases the house is also free in the sense the profits generated from the first flat- Aditya: True. Deepak: pay. But this thing has gone and you have no idea. In fact, what's happened in a lot of cases is people have tried this and when the prices didn't increase and they weren't able to sell their apartments, even at the original price, they stopped paying. So the builders got stuck and some of these builders now have clauses that said, "If you owned five or six, you going to have to pay a premium, or you're going to have to see some more cashflow from you," and so on. Because what's happened is if people don't pay for the intermediate instalments, a builder is stuck. If the builder gets stuck, genuine buyers who want to actually live in that project, rather than do this five investment thing, they also get stuck. So this portfolio approach works if you have a lot of money and you are able to sustain yourself for a period of time by owning and putting this money down straightaway. Now this has worked in the US. I have friends in the US, in Florida for instance, who buy the entire condominium building. So the whole buildings are purchased by them and then they rent them out. They don't actually sell them, they rent them out. The idea is to buy a entire building a low interest loan. So say you pay 3% of the interest of a loan. The rate that you can actually charge your customers, adds up to an 8% charge. So you make the remaining 5% with some occupancy, or details and all that stuff. You might make, what, maybe So out of $100, you'll pay $3 as interest, you will make $8 as rent. Now people in India might not find that really exciting because if a property earns you only 2.5% in rental yield and you have to pay 9% for an interest of a loan, it's the opposite. If you buy a set of houses and rent them out, you're going to still continue to pay the bank on top of whatever rent you earn. Aditya: True. Deepak: So that's a complete waste of time in India. So the opposite situation happens, so it's financially unviable to buy portfolios for renting out. Given the situation today, it's unviable to buy properties to hold and then sell them but there are sometimes it's distress sales and if you have a lot of money, this perhaps is one of those times where you might say, "Okay listen, if I have maybe I can raise a couple of crores, so maybe five or six crores." There are houses which are perhaps unfinished, where they will be building with about 10 flats, just to give you an example and the builder is bankrupt and he can't finish it. So you might go to him and say, "Listen, how much do people owe you for this property today?" So the guy says listen, "The last instalment has left and each of them has to give me 25 lakh rupees," and he will think about this and say, "Listen, if I were to get 25 lakh rupees from 10 people, that's 2.5 crores the people will give me, if I'm able to finish the project." Maybe I can pay the builder one crore, or even lesser. Perhaps you will pay nothing and say, "I will take it off of your hands. I will put some of my money to finish this project and that last instalment of two and half lakhs, will actually make me a profit when I build that out and turn it around and flip it to all of these people." So it maybe that it's a 10 flat apartment where two flats aren't sold. So the eight flats that are sold you could complete, take the final instalment from them and you still have two flats left off an apartment that is now complete and those two flats may add up and give you a profit, that you could perhaps share with the builder. Aditya: But that's a lot of work, Deepak. Deepak: That's a lot of work. The other thing is to just go is pure distress. So pure distress is somebody who's got a loan, he wants to sell it, the bank is trying to repossess and sell but you know that as an investor, you might say, "Listen, this is going to take five years." It's a good area, maybe there's a metro coming along, but that metro you know is going to take about four or five years for it to come and you don't have a problem staying. If you get a very good price, for a property that Forget what it used to sell at but let's say it sells at 50 lakhs today and you get an offer for 40. You'll say, "Listen, in five years, my IRR needs to be say 18%. In five years. I need to see this property double." So go from 40, to 80 or 90. If you have the staying power and you believe that that place will see that appreciation, you might want to take such bets, but this is a business. This is the same as saying, "I will hoard potatoes, or tomatoes, or onions." Aditya: Yeah, true. Deepak: It doesn't always work, to be willing to take that kind of a risk. People think there is some kind of guaranteed profit. Real estate is a bunch of disappointments, one after the other and if you're willing to go through all of that, be my guest. I mean, really. I don't own a house. I'm very happy to do that. I can tell everybody in the world, just own one house and leave it there. Aditya: Sure, absolutely. A quick question, is there a case for the prices to go up from here? Everyone is asking this question. So we all know that no asset class can keep going up forever, but how do you see the property prices panning out in the near future? So see, I meet a lot of people and one set of people say that the property prices have bottomed out and will recover from here. Then there are those who say this is the beginning. There will be more default by real estate companies and there'll be more distressed properties, so the prices will stay soft for some more time in the future. Deepak: So I think, you will not find prices going up very substantially because if they do, there'll be more availability that comes along and cuts down the price because actually inflation is low. People are not getting huge salary increments as they used to. They can't afford to buy a two crore house now because earlier, what used to happen was even if you bought an expensive house, your income will keep going up. So if the income keeps going up, your EMI becomes more and more affordable because your EMI is fixed and your income is growing. So you start off with the 40,000 EMI, which is 40% of your salary. Your income grows to in short from one lakh a month it becomes three lakhs a month. Now it's only 13% of your salary, far more affordable. Today, if you're getting one lakh a month, your increments alone are substantially lesser. You might end up with, in a period of say 12 years, only grow two to two lakhs a month, just to give you an example. The 40,000 still is 20% of your EMI and at this point, the house has already become 10 or 12 years old and it's not going to be it's going to be something that you'll say, "Let me sell and go buy another house," which will cost you 80,000 rupees, I mean you think that. The problem really is in all of this, the price increases have to be linked to inflation, have to be linked to the kind of houses and properties they are, an old property which does not have a lift today will sell for a lot lesser. So today you may have a house with a lift but tomorrow there may be a house with an automated security input, output, something, which comes next door to your apartment. So now your apartment is not going to sell for as much because all this automated stuff is sitting in the other apartment. So the more facilities that are in the newer set of apartments, the older ones get depreciated in price accordingly. So the price inclement that you might see on your apartment, may be relative to these improvements that happen in other apartments going forward. Everything that is very expensive today to do, like say internal wifi or whatever, will become really cheap at some point in time. Once that happens, it's like a phase shift at some point. Today you might say, "I will not buy a house if it doesn't have a play area or a swimming pool." But there are lots of apartments without swimming pools. I mean, Bombay is full of them and Bombay's of course the other side of price, these things. But you have a situation where people now demand, a lake view and this and that and all that stuff for a basic apartment and at the same time, another apartments which you paid a lot of money, would have otherwise appreciated 2X, is now trading at maybe 1.2, or 1.3X. Over the history of time that people have tracked property prices in India, we've seen that real estate has roughly given you the same kind of returns, or less than stock markets. In fact, they've given you more like a fixed deposit, talking 10% or 11%, because 10% was the kind of FD rates you used to have in the 80s and 90s and that was all you would get. I mean, you would not get more than that, whereas the stock market for that time was on 18%. So there's been a very big differential. So currently now, the stock market's giving you seven or eight, housing prices may give you three or four. So I think housing prices will go up with inflation, but that's about a little bit more than inflation, that's about it. Aditya: Deepak, there is another question that people often ask is, should I buy a house for tax saving purposes? Deepak: Over here, it's a very complicated thing. Do you want to pay tax to the government, or do you want to pay interest to the bank? The answer is both ways, money is going. I'll give you an example. Let's say you have a 20 lakh rupee loan left. And you're thinking, "Should I pay it back? I have 20 lakh somewhere." I have two choices for you. One is, let's say your loan was 10% and you were able to instead of paying back, you are able to deploy the money somewhere else and also get 10%. So what would happen? You will get two lakh rupees as interest from wherever you earn. And you will pay two lakhs of interest to the bank. Net net, you make nothing, because whatever you made as income, that will also be taxed, let's say an FD or something like that, it will also be taxed. What you paid out as interest to the thing, that part is tax free. So net net is nothing. So what you made is what you paid out and they cancel each other out and boom, that's done. So the only the other way would be to say, "Listen, no, no, no. A bank has given me interest rate 8% and I can make 10%." Now, that would be awesome but it's not always true that you make what if you take some risk because the industry risk rate is say, 7%." You've taken risk to make 10% and you don't make it. Stock market falls, something you buy falls, then you'll end up with a situation where you actually lost money on your investment and also paid interest on the loan, so both things are important. So you say, "Okay, there's a tax saving. What happens if I kept the loan, I got two lakh rupees that I paid as interest, but I save 20% which is basically my tax rate, was 20%." But let me ask you this. There is no reason why this changes. So let me say you wanted to go risk-free on both. You paid a 10% interest on your home loan, but the best interest you can get in a risk-free instrument is 8%. So 20 lakh 8% is is one lakh 60,000. You earn one lakh 60, you pay 10% on the home loan, which is two lakh rupees. On the crew, two lakh rupees to pay out, your net effective tax rate is about 20%. So you might say, "Listen, I saved 40,000 rupees by paying the interest on this home loan." Remember, at two lakh rupees, it's capped. Anything more than two lakh rupees, you don't get a benefit anyhow. So anything more than this 20 lakhs, or 25 lakhs, you should not even think, you should just pay off. But less than 25 lakhs, people ask questions and I say, "Okay, listen, there's no difference really, because if you paid it, if you didn't pay it, you'd have to really struggle to earn this return back." You may be lucky and earn it and then that differential you might make the differential is very small. It's what? 20, 30, 40,000 rupees for a person making with a house off say, one crore. That much doesn't make a huge amount of difference to that but even if it did, it's not a significant amount of money and there's significant risk because no matter which way you look at it, at one end you're earning money, the other end, you're paying out money. The net effective saving of doing all of this is only about 10% to 20% of the principal, the repayment that you're making, the interest payment that you're making, and that is almost useless. With a two, two and a half lakh rupee interest saving that you're making, it would actually be better to say, "Listen, let me get another loan. I will use new savings to build up my long term corpus and let me take it forward from there." Then what'll happen is the EMI that you are starting to pay, which is for a 20 lakh loan will be 20-22,000 rupees, EMI. Take that EMI, put it and invest it somewhere. In a couple of years, I am sure that will earn you more than trying to do this interest and saving the money somewhere else stunt. It will just give you a much better peace of mind because you own the house outright, and over time, that's actually a better The only thing, the caveat that I would suggest is, that if you can get one of those SBI MaxGain kind of loans where they say, "I'll give you " it's a loan, like an overdraft, where if you have excess cash, you can park it in that overdraft. They won't charge you interest but you can keep on paying back principal. If you did that, it's effective to your having a fixed deposit, tax free, that's giving you as much yield as the loan itself. So if your loan was 8.5%, directly earning 8.5 tax free on that cash. So you pay back the loan and then you use a certain amount of time to pay your EMIs and reduce the loan to zero. Aditya: Interesting. Deepak: There is no interest on that loan at all. You're only paying back principal every month. So this is actually a much better structure. It's not actually going to help you from a taxation perspective, but it's actually a better way to structure your loan so that you pay back whenever you have access to cash. Aditya: Okay, thanks Deepak. That's it, Deepak. That was my last question for you. Thanks a lot for taking your time and doing this. I hope our listeners like this topic. Deepak: Awesome. So this has been a very interesting session. Let us know. I'm Deepak Shenoy. I'm on Twitter, @deepakshenoy. There is AstuteAditya on Twitter, that's where Aditya is. We are @capitalmind_in on Twitter. Please do log in at capitalmind.in, tell us your views. We've had a bunch of posts, we'll put the links in this podcast, there are posts around housing prices, how to calculate whether you should rent or whether you should buy, our calculations actually show that you should actually rent, unless you think prices are going to go up at 10% a year for the next 10 years. More on that in another separate podcast, where we'll have some visualizations for you also available on the website. Consider please also looking at Capital Mind Premium. We have a Diwali offer for you guys. We have a 40% off for the next 15 days, that will allow you to get Capital Mind Premium at a 40% discount from its original price. So it's about 10,000 plus GST. This is a phenomenal offer, you'll get to interact with us on our chat, on our Slack platforms, read all our Premium articles and also look at our portfolio. So love to hear what you think. This is a real estate sign off. Thanks, Aditya and this is over and out for me, Deepak. Aditya: Thanks a lot Deepak.
Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss about Yes Bank – The “Kohinoor” of Rana Kapoor, pledging of shares by ZEE and deferred tax assets (DTAs) in the books of private and public sector banks. Deepak’s thoughts on Yes Bank (1:35) Cockroaches in Zee’s Books? (5:45) Deferred tax assets in the books of private and public sector banks (10:00) Excerpts: 1. Deepak's thoughts on Yes Bank: Why should people continue to retain deposits with the Yes bank? The answer to this is two things First of all, the bank accounts itself don't show us the kind of panic that people seem to have in their heads the deposits seem relatively safe. And to that extent, you know, if you look at the numbers that they have their INR 58,000 crores in government bonds are the 2 lakh Crore in govt deposits, that's 25% straightaway or 30% early and then they have loans worth INR 2,30,000 crores, they have another you know 10,000 crores of cash with RBI they have another INR 5000 somewhere else. So, there is essentially about 75,000 crores of very, very liquid assets that they have. They have also told us that, you know we've still seeing certain amount of rationalization in their in their loans. Even if all the BB loans were to go to zero and their current NPAs are all supposed to go to zero, they would lose roughly 20-25,000 crores this would take you know eight quarters because RBI way gives them already quarters write them down, in those eight quarters they will generate INR12-13,000 crores of profits because they have other loans which are good, there is a potential another fund raise that will come up so, at max I think even if they were to take this extreme step of where all these loans go bad, the capital ratios will still be okay "I don't think it's a great time for anybody to buy Yes bank stock, it's a lottery! But the chances of winning substantial amounts are very low. So I'm not really interested in the stock. I am, however, of the opinion that the deposits are safe." 2. Cockroaches in Zee's Books? (5:45) If you look at the FII holding of ZEE, about 47% of ZEE is held by FIIs, out of which the big guys that is anybody who owns more than 1% of Zee add up to only only 19%. So, the remaining 30% of ZEE holding (held by FIIs), is held by a lot of FIIs who have less than 1% shares. Who are these FIIs? Why are there so many of them? And how come they all own these tiny little percentages of ZEE? We don't know the answer to that 3. Deferred tax assets in the books of private and public sector banks If you take the 22% tax regime, you can't use the deferred tax assets. Whenever you take an asset and say that as it is worthless now, because I'm going to the 22% tax regime and that tax regime does not allow me to take the deferred tax asset, I am immediately going to lose that amount
Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss the corporate tax cut and it's impact on the economy and most importantly, on our portfolios. We discussed seven questions: Corporate tax cuts are fine but why aren’t we talking about the consumption demand? (1:26) Why corporate tax cuts why not cut personal taxes? (9:15) How will the government bell the fiscal Cat? (13:00) Will India finally become the factory to the world? (16:58) Will the improving profitability lead to re-rating of the Indian market? (21:26) Why are the Megacaps rallying? (28:30) Are the good times back for the portfolios? (32:33)
We discussed five broad questions: 1) Should India borrow abroad, if yes, then why? (10 mins) 2) Domestic liquidity issues and crowding out effect (8 minutes) 3) Why are experts (Ex- RBI governors) against this move? (3 mins) 4) What are risks o going overboard with overseas borrowing? (4 mins) 5) Risks of borrowing abroad (15 mins) Below is an excerpt of the podcast with time stamps of important sections! 1.Should India borrow abroad, if yes, then why? (2:00) The government borrows roughly INR5 lakh crores net per year. In the next year, the estimate of revenue that we want to collect just taxes, Indians will collect about 16 lakh gross, the government will pay 6.5 lakh crores in debt interest payment. About 40% percent of all of money that you're paying as a tax, is going not to build infrastructure, not to feed the hungry, not to pay farmers for food. It's going towards interest payments on the debt they borrowed in the past. Why would this be a problem? because we borrow debt at extremely high rates part. And here's the important thing, India's own companies that borrow abroad (ONGC for an example) has a bond issued in euros and euro denominated debt 2. Domestic liquidity issues and crowding out effect (10:40) You know, this is interesting, because what some of the economists have put across is or you know, what Indian Government is borrowing 3.3% and 2.2% is by states and some 4% is something else. And therefore, India's gross financial savings, which is about 10% of GDP out of which about 8% of GDP is borrowed by the government, my answer to that is that's not true! 3. Why are experts (Ex- RBI governors) against this move? (18:00) About 1% of GDP is about 2 lakh crores. I think it's too small. I think in any given year, you can say don't borrow more than 1% of GDP. That's fine. I don't think India will see appetite for more than 10 billion euros at this point, which is about 70-75,000 crores thousand crores. I don't think any more appetite exists right now because everybody wants to wait and watch. And I think this is a good start. If there is an appetite, of course, we can look at more, I think you know, go and give more and buy a bottle more, especially if they're going to give it to you at negative rates, just go and borrow as much as you can, up to say 10% of the total debt 4. What are risks o going overboard with overseas borrowing? (21:00) The problem is that, what if another government is in power, right?. What if the same government is in power? Your problem is this, you're creating debt, it could be a poison- poisoning the well phenomenon. And the idea is that poisoning the well is like, you know, when, when people used to attack another country, these two are another place which will which had a fort, the idea was to throw poisoned frogs, rags, with darts and arrows. Some of them could fall inside a well which would then get poisoned, then nobody would have any source of water and everybody would die. Poisoning the well is to say to the next person that comes here, he will not enjoy that place because the water will be poisoned, they won't be able to drink the water. If you poison a well, you too can't come back! 5. Risks of borrowing abroad (24:50) I think the point is if we borrow $100 at 70 rupees, we get 7,000. We may get it at 0.45%, but three years later rupees or 100. And then we return the hundred dollars and we return 10,000 rupees.
"Under normal circumstances, merging PSUs would have been impossible, had the government tried it 5 years ago, there would been riot on the street, today there is not even a murmur. They were able to do that because the slowdown is obvious!" - Deepak Shenoy Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss about the economic slowdown witnessed in the Indian economy. The Podcast was divided into three broad sections: a) Macro indicators (20 mins) b) Recent federal regulations (8 minutes) c) Few sectors which are currently facing a slowdown (30 mins) Below is an excerpt of the podcast with time stamps of important sections! 1) Macro-indicators 1:40- GDP growth: We have had 5 consecutive quarters of decelerating GDP numbers, right from 8.2% in Q1 18 to 5% in Q1 19, this was the slowest growth in 25 quarters. How bad the situation is and is the worst behind us? Or should we expect a couple of more tepid quarters? 3:20- Inflation: Inflation has been under control, it has been consistently falling for 6 straight months since Jan 2019, when inflation is under control, why is the GDP falling?, does this reflect weakening demand ultimately cooling off growth? Weakening of demand is concerning because we recently heard two big biscuit manufacturers going on record to say that people are not buying even 5-rupee packet biscuits. 8:07- Unemployment: Unemployment in FY18 stood at 6.1%, a 45 year high, now with big manufacturing units announcing massive job cuts, auto alone has seen 2.3 lakh people losing jobs, where do you see unemployment situation going in the near term? 11:02- Private consumption: Private consumption which constitutes about 58-59% of the GDP has been slowing down. Urban wage growth has stagnated, white collar wages have been slowing and rural consumption has also fallen on back of collapse on food prices and job cuts by manufacturing units, where do you see this going? 15:00- Investments: We looked at the GDP growth, inflation, unemployment and consumption, let's talk about investments. The gross capital formation has fallen from 34% in 2011 to 29% in 2018. Do you believe that we are stuck in a low growth cycle (Falling wages- falling savings, falling investments and low GDP growth)? 2) Recent federal regulations 20:30- Impact of GST and Demonetization on the economy About 30% of the Indian economy is completely informal and employs a chunk of the population. In 2014-15, late Arun Jaitley had made a statement, the informal sector doesn’t want to operate in shadows, neither they are corrupt, rather it was a failure on the part of the federal governments that even after six decades of independence, we couldn’t integrate them with the formal economy” In the pursuit of this integration, the government went ahead with the vision of cashless economy, demonetization and GST. Do you believe that demonetization and GST have actually hit the informal sector really hard? Do you think, somewhere, it turned out to be a shock therapy for the unorganized sector? 3) Sectors 28:18- Real Estate Residential real estate which was mostly fueled by black money is really not moving except the affordable housing part. Now that black money is hiding in may be gold! How will that come back into the economy? Where do you see the sector going? 33:09- Automobiles Now, we all know that there is a crisis in the Indian auto industry, all big manufacturers are reporting double digit falls in volumes. TVS chairman made a big statement, that this slowdown is the worst in 3 decades and spread across sectors. Auto stocks recently witnessed buying interest in the anticipation of a GST cut, do you believe that a GST cut can change the fortunes of the sector? 41:28- Automobile replacement cycle A lot of existing car owners have started using Ola/Uber/Quick ride and this has led to postponement new car purchase, where do you see the replacement cycle going forward? 45:23- FMCG Parle-G and Britannia went on record to say that people are not buying even INR5 rupee packet biscuits. But FMCG stocks still command relatively high premium, why is that? Do you see optimism in investors, that among autos, infra, discretionary, real estate, financials, FMCG will be resilient. 50:50- Final thoughts! You can also listen to our podcasts on our app: www.capitalmind.in/podcast
Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss investor queries in a new show - The Investor Wants to Know. Topics discussed include passive investing, current NBFC scenario, slowdown in the auto sector, cooking up of books by companies, fundamental analysis, global recession, surge in gold prices, aviation industry. Notes: How do you see the investment horizon for different categories of MFs? If you are looking for a horizon for investing, then it's not investing, it's a trade! Asset allocation metrics (large, mid and small caps) can shift, but horizon should be long term. Stay invested as long as you don't need the money! What are your views on passive investing? Is it advisable to invest in small cap index funds as most of good performing stocks will become midcaps and non-performing midcaps will become large caps which might pull the returns down? In India, one should look at the large caps because that is where the index funds will benefit the most. If you invest in small cap index, your best stocks are going to move out. Rather, one may look at the stocks which are actually leaving the small cap index. How bad is the NBFC scenario? Many of the NBFC's may lose their current structure- few will be taken over, few will be cut up into pieces and sold. Global P/E players are also keen on buying assets on discounts. None of NBFCs will go bust, since they have valuable assets. It will take another year for clarity to emerge. How to find out if a company is cooking up it's books? It is very difficult for a retail investor to dig up gold plated numbers, there is no one way. Retail investors should diversify, do not put more than 5-10% in one stock. It's not worth losing sleep over your investments! What are your views on auto sector? We are going through a time when people are not buying cars, at the same time, India is not at a stage where people who aspire to buy cars or bikes, have bought enough of them. China sells 16x more vehicles than India. This is not an unending cycle or death of auto industry. You can also listen to our podcasts on our app: www.capitalmind.in/podcast
Detailed Notes from Episode 6 Episode 6 - Momentum: The Anomaly that Persist Fri Aug 23, 2019 Host Deepak Shenoy (CEO) interviewing Prashanth Krishna (Trading, Momentum Portfolio) on the Momentum Strategy and why it’s the anomaly that persists. Capitalmind offers the Momentum Portfolio as part of Capitalmind Premium (subscription service) in Wealth and as part of our Wealth Management Service. What’s the Definition of Momentum Stocks moving in one direction continue to do so. Speculation? No, Momentum is a factor identifying a stock that is going up and that continues to do so. As part of Momentum, we are not asking why - we’re just identifying when this trend is happening and when it’s stopped. Same exercise on the way down as well. We are betting on the trend of the market, not taking a contrarian view. Why does Momentum work? We have research going back decades (generally in the US and other developed markets) that clearly shows that momentum works. We can show the persistence and impact of momentum but the reasons aren’t very convincing (Rory Sutherland anecdote on knowing something works but not having the exact reason why). One of the best reasons I’ve come across attributes this to behavioral factors. Investors underestimate at beginning and over-estimate at the end. Another is asymmetric information - if you know or have figured out something about a stock you will start to acquire more and more shares. As information trickles in, people will jump on the bandwagon and others will replicate. The stock goes from under-information to over-participation driven by FOMO and greed. Isaac Newton story about the South Sea Company, He got in, made 100%, got out, but jumped in once again on peer pressure and then eventually lost everything. Momentum has an end too How Long do you hold a stock for and what are the Portfolio Construction Strategy, Diversification criteria: We don’t buy for life like Buffett. The average holding period is a couple of months. We know something about the stock but simply not enough to make long term hold decisions Price is the key, price action is the trigger for our investment and exit choices. We don’t want a low liquidity stock We would rather not have a high volatility stock either that keeps hitting upper and/or lower circuits. The best fit is a stock that goes up steadily without making waves So avoid the parabolic rise? Yes, HEG is an example that after it hit all time highs it was subject to indefinite growth style justifications. You can’t start with momentum and then transition to fundamentals. 25-30 stocks is an optimal choice. Even a 50% fall in Vakrangee where couldn’t get out.only caused a drop of 1-2% of your overall capital which is still manageable. How do you Rebalance? Rebalancing is meaningful - selling and buying has costs, taxes and slippage. Monthly is a sensible level. Let it ride for a month unless there is extreme news. At the next month, re-visit is the stock still worth holding. What do you do in times like these (months leading up to Aug 2019) when there’s not enough momentum In Bear runs like the current environment, we stay in cash if we can’t find 30 stocks. If we only find 20 stocks (instead of 30), we have 33% in cash. Momentum is often viewed as a negative because of the dangers of manipulation (promoters and operators driving prices). Since you don’t have filters that can track manipulation - how do you deal with this? Manipulation happens at every level, at accounting, price, balance sheet - even an analysis of fundamentals have risk from misleading or false financial statements. Manipulation is easier in a low volume stock. If you filter on high volume, it’s tougher to get caught in a pump and dump. Between filters and diversification, we avoid mistakes or avoid mistakes that we can’t recover from. In Vakrangee - we rode the stock on the way up and then down as well! Once the lower circuit hits, you can’t exit no matter what your back test claims. Do you get time to exit? We’re scared of parabolic charts - they become waterfall when the stock comes down. The lower circuits often kick in (unless it’s an F&O stock) so it’s not easy to get out. Fortunately, momentum normally exhausts over time so it gives you down to exit. It’s the series of small waterfalls kills an investor in a stock. Pitfalls or Things to Watch out for How will you build your version of Momentum? If you’re not looking at volume filters - that’s a big risk. What’s the universe? Momentum today would be say 50% in large and 50% mid cap. Outside of a wholesale fraud, you should have regular market risk. When there’s a drawdown, will you have the conviction to exit the stock like your model tells you to or will you be loss averse? Alpha comes from behavior rather than the genius of the strategy. Have faith in the strategy. The biggest failure point is us. What are the returns like? Return of this strategy is linked to the market. This isn’t a contrarian portfolio, In a bear market you don’t do great either. Above Nifty returns are achievable based on the track record. During the bull market days you could easily hit the higher end of this range and the numbers looked abnormally great in the short term. However, drawdowns are similar to Nifty. Your portfolio make-up changes from small to mid caps in the bull runs to larger companies in the bear market. You’ll know this is working when Momentum falls in line with Nifty even on the downside but has beats it during the upside. This has played out in foreign markets as well? Yes, in US like markets we have some data going back nearly a century and this very much works. Low volatility strategies don’t always prosper but Momentum is an anomaly the persists. Just buying small cap stocks looks great in bull markets but risk adjusted doesn’t really do better than large cap. Momentum gives alpha even after adjusting for risk. Next Steps: If you’re interested in learning and doing this yourself Capitalmind Premium articles on Momentum (we have a smallcase) https://www.capitalmind.in/momentum-portfolio/ And if you would like us to invest for you, we offer the Momentum to our Capitalmind Wealth customers (Wealth Management/PMS) as well.