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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Wisely Speaking- 2

Posted by Muthu on October 19, 2011

I’ve contributed for the cover story on gold in the October’11 issue of ‘Gokulam Kadhir’. It is amusing to note that what I said and what I did not say; both have appeared as my contribution:-) Spoke to the journalist and suggested that differentiation be made between my inputs and that of his. 

There is propaganda going on that Gujarat is the best growing state in theIndia. No doubt that the state is doing well on economic indicators; but other better growth stories are simply not highlighted. 

Bihar is the fastest growing state in India at 14.5%. Next comes Tamilnadu at 11.74%.

If opposition wants to project development as an example without the baggage of religious intolerance; then Chhattisgarh fits the bill. It has been growing much better than Gujaratat at 11.57%. The state’s per capita income has increased by more than 50% the last 5 years. It along with Tamilnadu is ranked the best in PDS (Public Distribution System) with only 4% slippages. Raman Singh deserves lot more credit than Modi. The development in Chhattisgarh is an inclusive one and no segment of the population is kept out of the growth.

The most important things is Chhattisgarh has achieved the above despite strong Maoist insurgence.

As per the latest report the dollar millionaires (people who have investible surplus of around Rs.5 crore+, excluding primary residence) inIndiais around 1.5 lakhs. So roughly we can assume that there are 1.5 lakh households. The total number of households inIndiais 225 million. So 0.06% population of the country are only dollar millionaires.

There is another yardstick which is being increasingly used to define rich. These are households which own a primary residence and have a positive networth with investible surplus of $100,000 (around Rs.50 lakhs). By this criterion, we have 3 million households inIndia, 1.33% of population which can be classified as rich.

The interesting debate which was going on for the last few weeks is Rs.32/- per day as poverty line. Since I’ve already written a lot about fallacy of this poverty line, I don’t want to go through the same again. I’ve a suggestion for planning commission. Declare that anyone who owns a mobile phone connection is above poverty line.This means that more than 70% of the country is already above poverty line and in next few years there would not be any poor left in this country.

When Anna & team captured the imagination of the media on 24/7 basis; I wrote a satire on the same. Some wise counsel prevented me from publishing it as it would go against the ‘middle class’ mood. Sadly for this country, which tries to create a super human at every available opportunity; my thoughts are coming true.

Corruption like honesty can never be eliminated. Laws can be made and it can be kept in check. A most corruption nation like ours has tremendous scope of improvement; but definitely not on the lines suggested by Anna and his self righteous team. I read somewhere that saline water which normally costs around $1 is procured at $8 by Medicare in U.S.A. As a nation develops, corruption gets replaced by lobbying (i.e.) corruption becomes transparent and measurable:-) 

CLSA has mentioned that they expect equities in India to provide 14% annualized returns and real estate at 5%.

Talking about real estate, there are certain basic information one needs to be aware while looking at a flat. When a promoter offers a 2 BHK, 1000 square feet flat for sale @ say Rs.8000/- per sq.ft, you may end up actually occupying only 750 sq.ft.

What a promoter offers is a super built up area which includes common areas like lift, stairs, passages etc.

Built up area refer to the area you occupy including the walls.

Carpet area is the actual area you occupy in the flat. Carpet area means the area on which you can lay out a carpet, between wall to wall.

Roughly the carpet area is 75% of the super built area. The higher the proportion of carpet area; the better value for money you are getting. One of our clients who is promoting a project told me recently that the flats he would be offering would have 81% as carpet area.

Also many projects these days offers lot of amenities. Before you buy a flat, ask yourself whether you need these facilities. Because none of this comes free of cost and the monthly amount you need to pay for these would be a mini EMI.

I feel that going forward in metros and bigger cities, one bed room flat may become a norm.

For middle and upper middle class population, the price of a flat now is roughly ten times of their annual CTC. As a thumb rule, the price should not be more than 3 times of one’s annual income; a scenario which may be next to impossible in cities.

Considering the affordability, nuclear families, more migration into urban areas; one BHK would be a better investment both in terms of rental yield and easy saleability.

When we look at buying a stock, we look at its PE multiple; this means how many years of earnings (income) we are willing to pay today to acquire a share. Generally, higher the PE, the stock is considered expensive.

A similar comparison for a flat would be the rent. A Rs.1 crore flat in Adyar may fetch an annual rent of Rs.3 lakh today. This means the ‘Price to rent’ (PR multiple) is 33 times. As a thumb rule, any price which is more than 15 years rent is considered expensive.

In the above scenario, the rental yield works out to 3% per annum. A rental yield of 6% and above is considered as a good investment.

For people who are finding it difficult to service EMI due to higher interest rate, good news may come latest by March’12. RBI expects the inflation to settle around 7% by then. This is partly due to higher base effect. When inflation comes down, interest rate too would automatically come down.

Talking about interest rates; people who invest in MIPs need to remember that the suggested investment tenure is 5 years. The tenure is suggested keeping in mind the nature of interest cycle in our country. In 2008, when one of the MIP we suggested gave a negative return, a client was anxious even though he was very well made aware of the tenure of the product at the time of positioning it. The same fund has now given an annualized return of well above 15% during the last 3 years.

It is very easy to have conviction in good times and when results are immediate. To get good results, one needs to understand the nature of the investment and its tenure. Any mismatch in this is a sure recipe for disappointment.

In markets, patience, conviction and courage are supreme virtues than knowledge. As I always mention all information is not knowledge and all knowledge is not wisdom.

So when you invest in equity with a 10 year outlook, don’t keep looking at the monthly statement. Or rather look at the statement without emotionally reacting to the same. There is no point in measuring short term performance of a long term investment.  Neither the exaggerated return of the bull market nor the poor return of the bear market is an indicator of long term return.

If you ask me, the key to investing is discipline and patience.

People earn very poorly from markets because of emotional cycle of investing; buying at market highs and selling at market lows. This is because when markets are high, our confidence level is high and when markets are low, our fear is high.

Investing regularly and for long term acts as a hedge against this emotional cycle.

The monthly SIP book size of the industry is Rs.1300 crores with 6 million folios. Assuming an investor has atleast 2 folios, there should be around 3 million people in the country who should be investing regularly through SIPs. If this 3 million can have develop unwavering conviction and stay course for  next few years, the results itself would serve as a positive reinforcement that they are on the right path and bring more people (what is 3 million out of 300 million investible population?) into capital markets. A well developed and participative capital market is an essential ingredient for economic growth.

I heard a fund manager saying that as a country we save $2 billion a day and NRI remittances are $1 billion every week. Whereas the entire size of the equity funds in the country is only $40 billion; 20 days of our national savings??! I don’t know how he arrived at the above saving number. As our GDP is around $1.25 trillion, at 33% savings rate, we still save around $1.2 billion every day.

While we are saving more than a billion dollar a day, do you know what  U.S is doing? Busy borrowing more than $4 billion a day! 

When they say God bless the United States of America; they really mean it.

2 Responses to “Wisely Speaking- 2”

  1. Shinu said

    Dear Muthu

    Thanks for the great posts as always.

    personaly i have 7 folios. None of the people i know who do SIP is having anything less than 3 folios. so the actual number of investors i fear is much less than 3 million. There is a great deal of education required for our society in personal finance and investing.

    i really dont think you will can find any property less than a PR multiple of 15 in the whole country. Moreover i dont know why everybody link property investment only to “flat” but not commercial space or land in itself?

    Just thinking loud.


    • Muthu said

      Hi Shinu,

      I agree with your observations.

      Wonder how come an entity like Sahara group is able to collect money from 30 Million+ people.

      We’ve a very long way to go in financial literacy.

      Yes commercial property or land too are good investments. Given the nature of real estate industry in India, one has to be very diligent in finding right place and price.

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