Simple 'Mantras' for Wealth Creation

Wealth creation is a very simple exercise in reality, but many people have a tendency to make it look complicated. And this complication is created by those who want to create wealth at the cost of others. This includes a host of advisors and product pushers who complicate the matters without focussing on the crux of wealth creation, that is matching resources with the underlying needs. The problem with most advisors is that they take a very 'myopic' or 'short term' view of the client's situation, without taking into account the importance of fostering long term relationships. The gullible client falls into the trap laid by the maze of information floating around in the media in the shape of short cut schemes of becoming rich overnight. But, fortunately, there are no short cuts to 'Wealth creation'. One has to practice the simple mantras to accumulate wealth steadily over a period of time. Here are five time tested mantras of wealth creation:

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  Goals need to be defined: We all have certain dreams, these dreams are the starting point for determining our life's goals. But these goals must be defined properly and nurtured towards their fulfilment. Each goal must be reasonably linked to the resources available presently as also the resources that can be raised in the future.
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  Earnings need to be saved: Indians take pride in being called a 'nation of savers'. Our net savings ratio as a percentage of GDP has consistently been over 35%. Savings is a good habit which if learnt in the childhood lasts a lifetime. We must inculcate the importance of saving to the younger generation. Regular savings provide the cushion to tide over emergency situations in life like illness, accident etc.
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  Savings need to be invested: Earnings saved is only 25% of the job done. Unless saving is invested profitably, wealth creation remains a distant dream. Many of us have never thought of savings beyond the bank deposits or guaranteed return government schemes. But, little to our knowledge, most of us are destroying wealth by putting our entire life long earnings into these schemes, as most of the appreciation in their value is eaten up by inflation. We must diversify our investments to gain in the long run. Investment in riskier assets like equity is not a bad idea, provided we understand its worth.
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  Expenses need to be budgeted: With the advent of development in the Indian economy, our expenses are multiplying fast. Many earstwhile luxeries like mobile phone and laptop have become necessities in modern life. But one must control the temptation to acquire a product unless it is matched to your need. We need to budget our expenses: a classification into essential and non-essential expenditure will help us tide over this dilemma. Most non essential expenditure needs to be foregone or at least postponed.
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  Debts need to be limited: Easy availabilty of credit often lures people to go in for non essential puchases, thus imparing their capacity to repay the debts taken. Debts must be properly analysed, otherwise we would lead ourselves into a 'debt trap', which can ultimately lead to a 'death trap'. The recent global meltdown, that ocurred in 2008-09, is a grim reminder of the reckless recourse to debt without having proper earnings/ resources to match it.

To practice these five wealth creation mantras, we need to have a better understanding of the financial world, either independently or with the help of a trusted advisor. 'Financial Wellness' is definitely a step towards attaining 'Physical Wellness'.

Emerging Markets set to outperform Eurozone

Stock markets in India have ended FY 2009-10 on a buoyant note, and most investors have made decent money during the past one year. Infact a majority of the global markets have been on a sustained uptrend since the beginning of the year, backed by excess liquidity on the back of massive stimulus packages doled out by Central banks. What lies in store for the world markets in the next year?

There are signs of inflation crossing the safe limit stipulated by the RBI, and accordingly the Central bank has started the fiscal tightening process by raising the Repo rates. Experts feel that more tightening measures are in store in the first quarter of the next fiscal, as inflation is likely to increase till the end of June on a low base effect and supply-demand mismatch for agricultural commodities.The equity markets look fairly priced based on the fundamentals, but India and other emerging markets are likely to outperform the markets in US and the Eurozone.

The GDP growth in US and the Eurozone, on the back of stimulus packages, can at best be maintained for 2 quarters, and the second half of 2010 will see growth in these economies slip by 100-150 basis points, once the demand created by the stimulus packages runs its course. There is more trouble feared in the Eurozone on account of huge deficits in many countries, Greece seems to be only the tip of the iceberg. Japanese economy continues to falter as the Yen strengthens. The 2nd half of the year would be critical for the countries in the Eurozone and Euro as a common currency. India will continue to be a favoured destination, against the weakness in the Eurozone. But the jitters of the negative developments will be felt in our markets too. And any political instability could add fuel to fire.

In such a situation investors are advised to adopt a wait and watch strategy. Although equity investment remains the best bet in India, intermittent corrections should be made use of to enter the markets at lower levels. Currently our equity markets seem overheated, although they may attain new two year highs in the near future. Buying for long term can be considered when panic sets in due to any of the factors mentioned above coming into play. Overall, Indian economy is likely to outperform developed world economies in the next 2-3 years.

Unique ID Project: India on the threshold of another IT revolution

Unique Identification Authority of India (UIDAI), established in February 2009 promises to become the harbinger of another IT revolution in India. The authority, headed by Nandan Nilekani, aims to provide a unique number to all Indian nationals based on a biometric database. The major advantages of the UID numbers will be:

• Promoting 'Financial inclusion' through smooth distribution of subsidies and grants under the poverty alieviation programmes such as NREGA
• Conducting free and fair elections, sans rigging
• Controlling illegal immigration into India
• Combatting  terrorist activities on our soil.

The estimated cost of providing a unique identity to Indian citizens is expected to cost US $ 6 billion (Rs.30,000 crores). The first phase of its implementation is likely to create business opportunities worth over Rs.6,500 crores. The finance minister has provided Rs.1,900 crores for this prestigious project in budget 2010-11. Top IT vendors including Infosys, TCS, Wipro, IBM, Accenture, Mastek, Mindtree, Siemens, Mahindra Satyam and Logica have been initially shortlisted for the UID project. This will be followed by technical evaluation of these vendors. 'Ernst & Young' has been appointed as consultant to the project. The project will be a major milestone for India's Rs.66,000 crore domestic IT market.

The gigantic proportion of IT spending envisaged through the project will give a major boost to the revenues of Indian IT industry. The learning generated through the implementation of the project will help these companies to tap the market for such project around the globe. Evaluation of this project and the vendors associated with its implementation, augers very well for the bottomline of these companies. Investors are advised to have a decent exposure to the domestic IT sector to reap the benefits of the second IT revolution in the world, this time led from the front by India.

Eqiuty Markets give a thumbs up to budget 2010-11

Of the past 19 budgets presented in India, bears were leading the bulls by a whisker 10-9 (i.e, the equity markets had fallen 10 out of 19 times immediately after the budget was presented). However, the response of the market to Pranab Mukherjee’s Budget 2010-11 has helped bulls draw level. Both Sensex and the Nifty made handsome gains immediately after presentation of the budget. The gains have continued to grow during the two weeks post budget presentation. The consistent run up since the budget, has some investors worried. How long can this bull run last?

Although, the long term trend for our equity markets is definitely up, because of the spectacular turn-around in the fortunes of the Indian economy after a brief slowdown. If the recent economic data is an indication, the economy is firing on all cylinders, and might surprise us with a GDP growth of well over 7% in 2009-10. The budget has given a booster dose to the India growth story with consumption oriented incentives. In the short run, some of the budgetary measures may seem to be inflationary, but removal of supply side bottlenecks will ensure easing of the inflationary pressures from the 2nd quarter of fiscal 2010-11.

The post budget bull run is driven by FII investments, FII's have pumped in over Rs.10,000 crores in the equity markets since presentation of the budget. But domestic institutions and retail investors have been booking profits in this bull run. Two major factors that need to be watched by investors for sustainance of the current bull run are:

• Strengthening Rupee: The rupee which was trading around 46.50 to a dollar before budget closed at 45.45 on Friday 12th March. Analysts expect the rupee to remain firm during the current month. January industrial growth at 16.7%, and the marked improvement in exports augers well for the stregthening rupee.
• Falling VIX: The Nifty VIX, which measures the immediate expected volatility of Nifty, closed at 19.73 on friday 12th March, its lowest closing since its launch on November 1, 2007. The VIX breaking down below 20 is likely to trigger a further upside in the NIfty.

Investors are cautioned to watch these two key indicators closely, and any reversal in any or both should be taken as a cue to trim your positions in the equity markets. After all, it is not a bad idea to take some profits home as the old proverb says 'Make hay while the sun is shining'.

Budget 2010-11: Cheers for the Tax payer

According to Pranab Mukherjee, Minister of Finance "The union budget cannot be a mere statement of government accounts. It has to reflect the government's vision and signal the policies to come in future." Viewed in the context of this statement, the Union budget presented by the FM on 26th February 2010, is a precurser of the changes envisaged during the remaining tenure of UPA II government.

FM has enumerated the undernoted challenges before the government:

• Quickly revert to the high GDP growth path of 9%, and then find the means to cross the 'double digit growth barrier'.
• Harness economic growth to consolidate the recent gains in making development more inclusive within a fixed time frame.
• Remove weaknesses in the government systems, structures and institutions at different levels of governance.

The message of the FM is pretty loud and clear: Growth cannot be sacrificed at any cost. Some economists may term the budget as inflationary, but the govt. is confident that the growth in demand complimented by augumenting the supply side mechanism can stiill avoid an inflationary bias, while steering the economy on the growth trajectory. Budgetary allocation fo infrastructure development has been raised to Rs.1,73,552 crores (46% of total plan outlay), and spending on social sector has gone up to Rs.1,37,674 crores (37% of total plan outlay). Augumenting fresh resources to the tune of Rs.75,000 crores through disinvestment of PSU stock and 3-G spectrum sale will enable the FM to reign in the fiscal deficit to 5.5% in 2010-11, as against 6.9% envisaged in the revised estimates for the year 2009-10.

In his endeavour to deliver inclusive growth, FM has made sure that while selective subsidies and cash subvevtion would continue to be made available to the weaker sections of the population, the burden of taxes shall be shared amongst a large cross section of the population rather than a handful of tax payers. The tax bonanza to IT payers is a step in this direction. The revision of tax slabs upwards will lead to a substantial cash in the hands of individual tax payers which will give the necessary boost to consumption and saving, and lead to the feel good factor amongst the honest tax payers of the economy. Whereas these measures would lead to a revenue loss to the govt. agg. Rs.26,000 crores on the direct tax front, shall be more than made up by the additional revenue of Rs.46,500 crores through indirect taxes including service tax. There has been an appreciable shift towats indirect taxes to ensure inclusive participation in taxation.

In meeting the third objective, FM has spelt out the following initiatives:

• Tax reforms: Roadmap for role out Goods and Services tax (GST), and the Direct Tax Code (DTC), wef 01.04.2011 has been laid. This will lead to uniformity and simplicity in the tax structure.
• Nutrient based fertiliser policy already notified shall be applicable from 01.04.2010. FM has spelt out that Kirit Parikh committee recommendations on deregulation of motor fuels shall be taken up by the cabinet soon.
• Companies bill 2009, will address issues related to 'Corporate governance'.
• National Clean Energy fund will encourage research in innovative projects and will ensure use of alternate energy resources like solar and wind energy.
• Unique Identification Authoriry of India (UIDAI) under the Charmanship of Nandan Nilekeni will be able to roll out the first set of UID numbers in the current year.

Individual Tax payers owe a special thanks to the FM for the special IT bonanza in this years budget.

Banks to move from BPLR to 'Base rate': Implications

The issue of Banks differentiating between old and new borrowers has come under the scanner of 'Competition commission'. Existing borrowers feel cheated when their bank offers a lower rate of interest to the new borrowers, while they are not allowed a reset for their existing outstanding loans. If they want to liquidate the loan and move to another lender, they are required to pay a hefty pre-payment penalty ranging anywhere between 1-3%. Banks have justified this juglery on the pretext that they need to protect their Net Interest margin (NIM), and the banks can offer loan reduction to existing borrowers only with a time lag, because they need to overcome the mismatch between their asset and liability buckets. Moreover, with more than 50% of the loans sanctioned at sub-BPLR rates the concept of the BPLR has been rendered redundant.

To enable the banks to set their lending rates in a scientific and transparent manner, the Reserve Bank of India has proposed a system that will replace the existing system of benchmark prime lending rates (BPLR) with base rates. The formula for calculating the base rate will take into account the cost of deposits, cost of complying with CRR and SLR requirements, and the need to retain a profit margin. There will be a markup depending on the cost of operation for a particular type of product and premiums for credit risk and tenor of loans. The existing BPLR system does not quickly or adequately respond to changes in policy rates, thus reducing the effectiveness of monetary policy. Transparency will be enhanced under the new syatem. The priority sector lending at sub-BPLR rates will be unaffected as the base rates will be set much lower than the existing BPLR of the banks.

Based on the 2008-09 numbers, the base rate varies from 5.22% for Citi to 8.91% for OBC. Broadly speaking, foreign banks have the lowest rate followed by public sector banks and then private banks. Currently, the PLR of most banks are more or less the same. It would be interesting to find out  that once the base rate scale is known to all potential borrowers and varies according to a uniform predetermined formula, potential customers would have a choice provided the banks have the willingness. With savings bank deposit rates set to be calculated on daily balances from 1.4.2010, banks profitability will be under some more pressure. Most Banks have sought period till the end of June 2010 for implementation of the new lending regime.

Speculation: A blessing in disguise!

We take many decisions in our day to day life, without really knowing the outcome of those decisions. There is always a probability of success or failure of that decision. For example, during the rainy season, we have to take a decision whether to wear a raincoat or not, based on our expectation whether or not it will rain during the day.What exactly is speculation? Speculation in respect of the financial world includes the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument. It is different from buying because a speculator does not buy goods to own them, but to sell them later. The reason is that he wants to profit from the changes in market prices. Speculation is one of the market roles in  financial markets. The others are hedging, long term investing and arbitrage. Speculators do not plan to keep an asset for a long time.

Common features of non speculative markets are:

• Almost total absence of leverage, and has limited depth
• Shares, bonds and other assets are bought primarily for cash and not on credit
• The expectations of capital gains are low
• Trading volumes are low, and trading is dominated by a small group of people.
• The markets are traditionally undervalued markets

A majority of the Asian markets, including India were non-speculative markets till the 80's. In India, in the 70's and 80's people bought homes only to live in them. Gold & silver held by the families were non-speculative in nature. With the globalisation of asian economies an element of speculative interest has been built in these markets. There has been a lot of interest in these markets from the foreign investors largely because of the huge growth potential, as most of these markets had been depressed for long, because of the lack of speculation. The Asian markets led by China and India are currently going through a long term "bull phase", which is marked by higher speculation.

According to John Templeton "Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.” An investor should not be unduly worried about the higher volatility in our markets, because just like small cap growth stocks tend to be more volatile than established blue chips, emerging markets tend to be more volatile than matured western markets. But then they also have the potential to deliver higher returns.

However, investors must be aware of the speculative excesses, which often cause the end of bull markets. Here are some of the symptoms of speculative excesses:

• The long the uptrend in the market, the higher is the likelihood of creation of a mania or 'herd instinct'. Long term bull markets survive only if there are intermittent corrections within the bull run
• In the maniac phase of the bull market the mood is euphoric, and even dud stocks rise appreciably
• The number of new issues is very high
• The mania is whipped by the media, because their business survives on creating the hysteria.
• Towards the end of the maniac phase, insiders resort to double standards - painting a rosy picture about their businesses in public but paring their holdings in the company
• Sometimes it results in surfacing of 'Ponzi schemes' and 'Swindlers'. The likes of Harshad Mehta and Ketan Parikh are the creations of the excessive speculation phase.

Sir Isaac Newton amply sums up this frenzy when he says: “I can calculate the motions of heavenly bodies, but not the madness of people”. Speculation is good for the markets, untill the above symptoms appear. Investors can safely ride the current long term bull market in India, but must guard against the above factors to protect their interests.