June IREF: On Investing

And outstanding posts from Punjabi, Abhishek, Wiseman and others.

My own two bits - this discussion is putting the cart before the horse. For financial planning, the purpose is to replace your main income with passive income. So if you are having 2L per month income, when you accumulate 2 Crore or some such, you can retire on the income and stop working.

Without knowing the income amount and age, one cannot calculate the amounts which can be generated from passive investments.

If the target is 5Crores, then why in 10 years? Why not a simple aim - I want to be rich.

There are only two ways (apart from the jokes already made :-)

1. Earn more in a better job
2. Start your own business

First you need to know yourself - do you have it in you? 

If the thought of starting own business gives you a heart attack - dont do it. In business you have to survive many heart attacks and put up with many vagaries out of your control.

Why not try for a better job? Why not emigrate to better paying countries? Cant you upgrade your skills and get a better job? A person in their 20s should spend all their time doing only these things.

Investments will not ever make you rich. They can only make your situation slightly better - it cannot change the order of magnitude of your money.

But for many people, business might be too difficult because of deficient people skills - and a better job might not be possible - and emigrating might not be possible.

For them, Abhshek (and one other person's idea) is best - if you can make 4-5 hours of time every day, after your main job, do a low risk business. Possible low risk options (already mentioned by others):

1. Real estate (requires capital - need to start with 1Crore) and good understanding of business and real estate cycles. Those with deficiencies in both attributes - stay away or be lucky (luck has made many people I know quite rich)

2. Cars, vehicular hire - low risk business, requires some amount of risk taking with good returns. Many low level govt servants earn well in this

3. Rental property: 

4. Shops - if you can meet an existing demand, you will become quite rich

5. Writing (like wisey, I am intrigued how the blogger made money)

At the end of the day, being rich wont make you happy. The 4 hours making money in the evening might be better spent in relaxation and family - after al that is what money is for - it is ony a means to an end.

Another point - there is little point in earning more than 1 Lakh per month in India - even if you have more, it wont improve your quality of life much. Most things which can be bought with money are already available in that salary -or it is simply unavailable (like water, electricity, air, good food, good people, good homes, clean cities.

Of course, periodic inflation adjustment is needed for that salary.

And who knows - after a while your low risk business might make you much more money than your salary








Buy the 2BHK now - but buy the best investment location and dont try to live in it . Just rent it out. It is an investment, not to be mixed up with own home.

While waiting for equity of various kinds (including home equity) to accumulate so that you can buy the best - live well in a rented 3BHK in a good location.

Treat your 3/4BHK as a "purchase" i.e. chose the location which suits you, the size which suits you, the quality which suits you - dont compromise. This is an expenditure. The 2BHK was an investment. Dont confuse.

But also, while waiting, dont compromise the quality of your life by trying to live in the 2BHK just to save a little rent - there is no harm in renting a house which gives you a better quality of life than the flat you can afford - rent in a good area with good schools, close to work, with good shopping. The money spent on renting is not a waste - it is money well spent. Take advantage of the fact that rentals are low in India. In fact, rent a home in your dream location where you would buy in future - make the area your own, make friends and also live the same life which you would lead in the future - when you shift from rented to own.

And never make the mistake of buying in a hurry the wrong home in the wrong location just because prices are rising every day. There are ways to hedge against the price rise as already detailed above.

Your location and size should be decided properly based on expected accumulated equity of all kinds at about 45 years of age i.e. project the best possible price you can pay when you are about 45 - jack in 12% per annum price appreciation for homes into it - and estimate what your affordability is (45 is the target age because one assumes 15 years home loan and 60 years retirement). Based on this factor only your location and size of flat should be determined - not based on what you can afford now or the locations sold to you as up and coming by builders






The time to buy is always now - provided you can afford it (talking about roof over the head here - not second house). It should be done

1. When career is well settled. Buying too early is also wrong - the 20s should be spent in bettering one's earning capacity. Buy when career path and ideally even city is well settled. 

2. When you can pay down 50% of the cost if needed - that means financially well secure

3. Buy the best - dont settle for "buy a 2BHK and then shift to 3BHK later" type of thinking - again, that usually happens when one buys too early when career is not settled and bank balance is too low.

4. If you are not buying what you need right away, split the cost of RE into 2 and buy a plot (within capacity) now - sell the plot to buy the flat when you are ready.

5. If you cannot afford a plot, put part of money is a short term (5-6 year) RE investment. Remember, EMI is another name for a systematic investment plan into RE. Keep EMI low so that your other savings can also accumulate i.e dont overinvest in RE component - try to split investments into 30%RE, 30% stocks and 30% fixed return. 

So if your investible surplus is 30,000 per month, then EMI should be for 10,000 Rs i.e. you can take a 10L RE loan without skewing your investment into RE. Since you cannot get anything for 10L, exept small shops, get that if your career has peaked - or wait for a bigger capacity - since if you have 10L in FD, your loan bearing capacity increases to 20L since the 10L in FD pays interest of around that much.

Best way is a do it yourself SIP - buy group of funds whenever market fall.

Another way is SIP plus bulk buys into same funds whenever markets fall.

Both need some market knowledge



My bond funds have also done well and even gilt funds are now giving return. Naturally since we already had a 50bps cut couple of months ago - lets see what happens monday.

Returns are likely to be muted going forward. I dont expect Repo rate below 7.5% no matter how much Indian growth slows done - because it is a stagflation and RBI just cant lower it to prevent runaway inflation.

I will exit all bond and gilt funds when Repo touches 7.5% and switch to stocks. 

A 1% drop in Repo from 8.5 to 7.5 if faithfully translated into a 1% drop in gilts will give a 10% return on a bond/gilt fund. Assuming a years time for yields to drop by 1% and an 8% return on the bond for one year, one can anticipate an 18% return from gilt/bond funds assuming bought at 8.5% repo and sold after repo touches 7.5% over holding period of 1 year.











Good for you that you are waiting and accumulating a downpayment amount. Kudos.

But you are making one essential mistake in your analysis. Real estate has to be "REAL"

Booking of under-construction flat is "UNREAL" - you are trying to discover a price for something which does not exist.

"Real" estate means registered property with people living in it.

"Unreal" estate means flat bookings and plots where nobody can live. These are speculations and subject to crazy price movements based on herd instinct and external factors.

Your booking or plot is just a piece of paper which you can trade.

If real estate is like a share, unreal estate is like a futures and options contract with your builder buyer agreement being the contract.

People keep mixing up investment (in "real" estate) - (an investment means buying a future stream of return), speculation (in "unreal" estate) - (speculation means buying something whose price can fluctuate, hoping you can make a return) and expenditure (buying a house to live in - roof whether rented or own being an essential requirement for life - which millions in our country lack)

Prudent people will take care of their expenditure, then make investments and only then go for speculation (to boost their returns, since their risk bearing capacity has increased)

In India people make a flat booking and think they have done all three when actually it is just a castle in the air. Sometimes it works, sometimes it doesnt - it is totally chaoic and irrational and unpredictable.

As far as I am concerned, unless quite rich, a person buying a roof over his head should buy RTM. If capital is scarce, it should not be risked in speculation over "bookings" and "plots". First house should be bought after career is settled, (usually mid thirties). Later, one can go for a "booking" for an upgrade in their late 40s or so.





Indian RE is a black market where people corner a scarce commodity (RE) and have enormous holding power.

The day Indian RE stops being scarce, its prices will drop. That requires RE reforms.

All indications are that it will continue to be a scarce commodity. So Indian RE should be analysed as a black market and not as a regular market.

Basically the small supply of new properties will be cornered by a small group of well to do individuals who will dictate prices - as it happens today. This situation needs different type of analysis.

India will essentially double its supply of upper middle class people as the children of the current middle class grow up. They will provide the captive market for this RE expansion. The money for this will come from Mummy Papa's savings.

As it does today - right no



RE is scarce in India because people buy vacant property and keep it locked up (at least in Delhi). THey have enough money and dont want to sell it.

Try buying a RTM flat - nobody will negotiate prices with you because it is a seller's market and buyer has no option.

Number of vacancies has no relation to the number of properties on the market. Flats kept empty become a store of wealth for the future. Also a store of black money (selling RE without paying capital gains tax is also the biggest source of black money in our economy - not corruption)

Not everyone has bought flats for their children - that activity is ongoing and will consume most of the fresh supply for the next many years. Captive customer base of well to do people, who started earning well in the last decade and have another 2 decades of working life left.

Otherwise, prices would be one third of current prices

As someone said on another thread elsewhere - property (plots) in India gives 10-12% return every year, except in one or two "leap" years where it gives 20-40% spurts. Every ten years, there is a temporary 20% drop in resale plots, always followed by quick recovery.

The last 2 such "leaps" were seen in 2007 and 2010. The last 2 slumps were in 1996/7 and 2008/9

All I can say for sure is that there will be no leap in 2012 or 2013.


Inflation can also destroy value of money - in inflationary times, a 30% weight in RE is the best way to stay safe and preserve capital.

10 years from now, 1 or even 5 crore might seem a trivial amount.

Remember how 1 L was a big sum 10 years ago? Now it is monthly salary for many and writing 1L cheque is routine - in 1995 1L was my entire lifetime of savings

Rupee depreciation can also play a role - ridiculous current dollar valuation of property can then seem normal - since dollar value of the property will drop as rupee depreciates.






I actually said wealth preservation - so if you have 1Crore, putting 30L in RE (flat booking) makes sense. 

With bigger net worth of 5Crore, putting 2 Crores in a couple of plots makes sense.

The only time loan for property makes sense is for own home - and that is an expenditure, not an investment and is based on personal things. 

Taking a 11% loan for an investment giving 2-3% (rental) yield is not so great an idea - one can do it, if your own roof is paid for and you feel you can rebuild your stock and bond portfolio - even then, at least 50% downpayment should come from own funds.

Or if you are a really long term player and dont mind a high maintenance illiquid asset like rental property - then a loan for maybe 25% of income going out as EMI may be justified, given the tax breaks for rental property - and only for RTM flat.

In any case, property investments require a lot more effort and headache than stocks. 

Right now is a recession and not a bubble - a time for slow projects and project abandonments, not price correction - some people will lose their shirt if their builder collapses. As inventory is destroyed in this fashion, prices wil paradoxically rise for the remaining good projects




































On Stocks

In every stock recommendation, I look only for "sell" recommendations. The buy reccos are usually a dime a dozen and in one week of business dailies, almost every company in NSE will geta buy recco.

Thanks for your sell recco - I have some underwater Chinese funds (down 10-15%) and will sell them off now - the sums are small and after 1.5 years of following them (one tends to track what one owns much better - so I always buy a tracking amount to see how it goes), I see no hope of any sensible recovery. Better to exit.

Also, better to exit LAtin American funds also. In fact I plan to exit all international funds - as a whole I must have made some 2-3% return after one year of staggered SIP entry - one fund (global real estate fund) - gave good returns, rest lost money on the stocks but made money on currency depreciation, mostly breaking even.









Caveat to above - From 2003 to 2005, PE ratio stayed same at low levels, while earnings grew so fast, company stock prices raced.

Same thing can happen with earnings degrowth - curent PE of 14 can go up to 20 also, with a 30% earning degrowth.

The whole stock market question is this - how low will the next 2 quarters earnings be? Static or degrowth?

I am personally staggering investments over next 6 months keeping this uncertainty in mind.

Regarding building strong equity portfolio, 5L is too small an amount for individual stocks - go with a good large cap fund like Franklin bluechip or a balanced fund like HDFC prudence and buy on every dip, stagering investments through next 2 quarters of earnings.

Ideal fund portfolio has about 40% in large cap (2 funds), 20% in small/mid cap (1 or 2 funds), and the rest depends on liquidity needs - if you need the money in next 3-4 years, keep rest 40% in balanced fund (2 funds) or go with 20% balanced and 20% FMCG fund. Either way you get 5-6 funds.

If you dont have liquidity needs at all and can ride for 15 years, stay with 40% large cap (2 funds), 30% mid cap (1 fund) and 30% smal cap (2 funds) for a total of 5-6 funds again.

All fund entry should be during bear markets (like now) and exit in bull markets (expected somethime in next 5 years). This is because fund managers have to be in equity at all times - whereas we can hold cash as individual investors. Funds fall and rise with the markets - we can however be fully in equity in bear times and pull out systematically when market gets overvalued in bull phases.

Once corpus exeeds about 10L, one can allot next 5L for direct equity.

In bear markets like now, always select only large cap sense-x/nifty companies and avoid small and mid cap totally. Reason for direct stock investment is only one - fund manager will never stick with contra ideas. With direct stocks, contra ideas can be explored and held through recessions - for example, in the current recession, metals and infrastructure are beaten down - you can buy a L and T and a Tata steel and hold it for whatever time is neded to get good returns. Direct equity is always - ALWAYS - or time periods exeeding 15 years if necessary.