'True Form of Work'

Most of us believe in God and do our best to please him .Many do it in the form of various offerings like fruits, flowers, Candles and so forth. While doing so, we also ensure it’s the best quality and he is happy with what we give him .However when we delve into it, we know these things are given to us by him and in turn it goes back to him.  When we pray, the very breath is his gift. So what is it that we give, that is not given by him?  This very question was put forth to God.

God replied “I gave you every resource you needed .In (my) case, Food, Shelter, Clothing and so much more. How best you utilize these and how you do your duties in the best possible manner is the best offering you can give me “. This whole episode was narrated to us by our mentor in the midst of an office meeting. This came up when we were discussing quality controls with context to work/processes. The episode implied that we can give God nothing, but when we offer our work to God /higher self, the best comes out with ease and quality simply follows as it leaves it no choice. And this is all he expects and wants.

This very aspect, my mom drilled into me since my childhood and Of course I have had my share of experiences. Although it is consciously never practiced .When our mentor , quoted the very same thing , it just reinforced the thought and how true it must be ,if  he had to say that with confidence backed  by the immense experience he has had himself. When we perform our duties /work with no vested interest and dedicate it to the higher self, it just results into the best and one gets that absolute sense of fulfillment. More than fulfillment, it leads on to working with passion and absolute integrity……………………………..

My Understanding Of Debt Funds !!!

Macro View

This week was a loaded one with a lot of crucial figures hitting the headlines. The WPI figure rose to 6.84% versus the January figure of 6.62%. This followed by the IIP and CPI which came in at 2.4% and 10.9% respectively. Although the IIP figures seemed to be better than expected, the Inflation figures were bit disappointing. The GDP figure remained stagnant at 4.8%. If we re-view these figures in hind sight, headline inflation has dropped from a peak of 10% in September 2011 which seems appealing. However the growth figures have dropped drastically from 9% in Q1FY11.  With the re-view of monetary policy on the 19^th of this month, RBI is in a pressure situation with context to cutting interest rates. Despite WPI figures spiking as on today, the good news is that the core inflation as an indicator of demand side pressures on prices - fell below the 4.0 per cent mark for the first time in past 35 months, strengthening the case for a repo rate cut by the RBI on March 19, 2013. 

Why is rate cut imperative?

GDP has been on a decline for a pretty long time and the further it deteriorates; the tougher it is to pull it back to the growth phase. One of the impediments to growth is a higher interest rate. But with Inflation ruling high, RBI was not able to lower the rates without it impacting the economy in other ways. But with core inflation finally cooling off and government promising to spend less, which in turn shall mean a lower pressure on funds, a rate cut via Repo maybe on the cards when RBI meets at its policy meet on 19^th March 2013.

Impact on Debt Funds

Macro economic factors impact interest rates which in turn affect bond yields and bond prices. The announcement of a higher WPI number, yield rates went up, but dropped 5 bps as core inflation moderated. So based on all the above parameters, I anticipate interest rate (repo) to be cut and as a result, bond prices will go up to adjust for the lower interest rate scenario that shall get played out.

At this juncture, the question we should ask is, if the interest rates in India are turning around, what fund in the debt segment should one invest?

The answer to this ultimately depends on the horizon of the investor. The short term debt fund is good for a tenure that is less than a year. The factors that become more pertinent are the liquidity situation and thus a CRR rate cut would imply better returns on a short term fund. However, for an investor who is comfortable locking in funds for a long term, this is a good time to invest in long term bonds funds to ensure that he locks up his funds at the current yields which are reasonably higher than what can be got in the future when RBI starts to cut interest rates to stimulate the economy.

Where to Invest?

With a plethora of funds available in the Mutual Funds – Debt segment, it is important to pick the appropriate fund. After evaluating the macro scenario and the debt investment duration, the fund evaluation is the last step to the process. The long term debt fund involves Income Funds, Gilt Funds and Dynamic Bond Funds.

The top 3 picks are:-

·         IDFC SSI Invest A (G):- This fund was launched way back in June ‘2000 and is managed by Mr. Suyash Choudhary. The fund has managed to sustain itself in the top quartile of funds, year on year which exhibits consistency in performance. It has delivered a return of 12.37% in the last one year and a return of 8.57% since the launch. The average credit rating has been AAA. The number of holdings is 17 with an average maturity being 2 years.

·         UTI Bond Fund: - Another good income fund which occasionally is unpleasant, but mostly it’s about pleasant surprises. It found itself amongst the top five twice; once in 2005 and the other instance in 2011. In recent times, the fund is seen to more actively manage its maturity bets. It is fairly consistent in its performance which does not deviate too far from the category average and has a long term track record to back it up. The fund maintains a high quality portfolio with majority of the investments into debentures and government securities.

·         Morgan Stanley Active Bond Fund: - With an inception as late as 2009, the fund has picked momentum and is one of the best performing funds. It had its share of initial glitches; however we anticipate a good show in the times to come. It is a fund for investors with lower risk appetite with a portfolio of just 10 securities and an average maturity of 3.18 years. The quality of security is good and well maneuvered by Mr Ritesh Jain.

My Encounter with the Book 'The Checklist Manifesto"

All of us want to be associated with success .And most times we would wonder, what is it that successful people do so differently? Are they necessarily gifted with more inherited intelligence? Perhaps, there is no denying that .But is that the only reason why they end up being successful.

I so disagree. That would just be an excuse to shield our laxity .The latest book that caught my fancy, simply reinforced that thought. The book was called the ‘Checklist Manifesto’ and written by a very renowned surgeon called ‘Atul Gawande’. Now this book isn’t as glorified as the name suggests. But it simply gives us the magic of what ‘simple’ checklists can do.

The author despite being a surgeon has explored into areas beyond his expertise. To highlight its importance, he researched into construction of sky –scrapers, aviation and Investment Banking. He has emphasized the fact, that profession is irrelevant, but the usage of checklists stands inevitable. And this thought is definitely that ‘secret’ that these successful people possess.     

Being in the field of surgery, the author gave umpteen examples on how a simple checklist saved lives and brought complications to a very base level. He explained the routines that take place in an Operation Theatre and how minor changes done in them, gives a better result. He drilled into the importance of how every member in the OT had a key role to play and how pertinent every member is while hoping for a successful outcome. Generally, as he put it, an anesthetist’s role is usually undermined. But he highlights the crucial pointers like timing, quantum and patients past history /allergies that are needed to be taken into account by the former. In a similar manner, he explained the importance of nurses and resident surgeons. He further highlighted the importance of having a team meeting of all the members with the consent of a common checklist. This led to better harmony and understanding when the actual proceedings were being conducted.

The book gave a glimpse on the author being approached by WHO (World Health Organization) and how this common checklist was implemented in select hospitals across the world. It brought into lime light the common problems faced by all doctors across the globe and how these solutions can be incorporated by everyone in their checklists. What caught my attention was the fact that the best brains are capable of making the most trivial of errors. Errors like operating on the wrong patient, dissecting the wrong side, leaving objects inside the body etc. These factors also seek place in the checklist. The objective that was considered in these checklists was to assess what the worst case scenario would have been and what is the best possible solution and requirement that could have been put into place.  Thus the experiment of a common checklist which was implemented in the poorest to the richest of countries reduced surgical complications by 36% and deaths by 47%. So, as seen the checklists may seem very rudimentary and rigid in nature but they certainly help improvise and not repeat errors.

Now aviation was another aspect he highlighted. In Surgery it’s about a life, however in Aviation it’s about many lives. In this case, it’s more than imperative that they use a checklist. In an example, he highlighted how the plane ascended in the Hudson River and timely sent lifeboats saved all lives. He also explained how the co-pilots role is not considered as crucial and that aspect cannot be ignored. The very communication and coordination of the pilot and co-pilot with use of checklists helped save lives in this case.

He even transcended to areas of Investment Banking and how the best of investors use the checklist. He quoted an example of the Value based Fundamental Investors who studied companies for months together to infuse their money. However, they did make mistakes and lost some money on account of some judgment errors. These aspects were enlisted, so that same factor is not missed out on while assessing another company /investment bet.

To sum it up, he quoted Discipline as the prime factor which must be an integral part of every individual’s life. It must be that extra cost that one must pay to derive that success one dreams of getting. We are not born to maneuver our bodies and minds as per a fixed schedule and checklist. When that extra push is given and discipline is maintained, we turn extra –ordinary from the ordinary. And that’s certainly the secret of people who touch the pinnacle of success.

Is Equity the Multi – Bagger amongst all Asset Classes??

One of the most predominant features of the ‘so –called ‘developed economies is its depth in their financial markets and the financial Industry, with about 30% of their savings being infused in the market instruments. However, Indians in general do not seem to have the faith, of their savings being captured in the gamut of market instruments. The recent affairs seem to have consolidated this fact. The year 2012, saw 55,000 cr being redeemed from the Equity Mutual Fund Space wherein FII’s pumped in $23 Billion in the Indian Markets.

Now those figures are mind – boggling .Its enticing as to why less than 5% of the household Savings in India is invested in Equity Mutual Funds. This write up pretty much tries to analyse that.

One of the primary reasons, of course is the lack of investor education and how there is no substantial penetration in the Tier2, Tier 3 cities. These figures, even made SEBI wake up from their slumber and take some rectifying actions. The Rajiv Gandhi Savings scheme launched in September was one of the primary steps taken to incentivize investing in Equity with tax breaks as an important feature. The next step was incorporating more safety measures for a retail investor with Regulations like Direct Plans and Actions on Mis-selling. Perhaps this would propel the retail towards the equity market.

Another concrete reason why an Indian abstains from putting the surplus in equity is his/her belief in physical assets like Real Estate and Gold. It’s undoubted that these asset classes have given phenomenal returns over varied time frames.

But the corollary to this is , the equity is not well analyzed .Every asset class has its pros and cons .And the Equity as an instrument is devoid of too many cons. Let me name a few pros to begin with which is not a pre-dominant feature in the other physical asset classes. They are Liquidity, Diversification and Systematic Investing or Leveraging risks. Generally Investments are made with a certain purpose /goal. When that goal needs to fulfilled, liquidity becomes an essence that cannot be missed on. Diversification into different categories or Schemes of equities makes the scope of loss even lesser. Systematic Investment Planning across time frames will average out the bears and bulls garnering sumptuous returns. So these pros give Equity an edge.

To further assess, a chart of performance asset classes is extracted. The premise being, Equity Mutual Funds is the universe of Diversified Equity Segment, the Real Asset considered is the Delhi –NCR region and data considered is till March, 2012.

The chart suggests that the last three years equity has done marginally better than the Real Estate Category with a 29 % CAGR returns compared to a 27%, where as in the 5 year period it was a dismal 8 % CAGR. An exceptional year of 2008 ushered in the down-slide. However, if we increase the band-width to a ten year horizon then 23 % CAGR in Equities with additional features of liquidity, Professional Fund Management and Diversification of Risk is a feather to the cap. Even gold hasn’t managed to cope with those figures despite being the best hedge against inflation and financial turmoil. Real Estate undoubtedly managed to win the game in terms of returns, but the hassle may not be worth it. Real Estate generally implies locking up a huge corpus, piled on with EMI’s and the exorbitant high interest rates in India, maintenance of the property and not to forget insuring it against the worst come scenarios. All these hassles are eliminated in Equity, though the risk of capital erosion will always be pertinent.

Taking all of the above into consideration, the next thought that comes to us is the future of these asset classes. If analyzed well, we understand that the upside of the equities is Unlimited whereas the upside of Real Estate and gold is limited. Wouldn’t we all agree to that?

The equities are at a nascent stage in India and the scope of growth is massive. Every developed country has immense depth in its financial markets and that step would be taken for us to reach that pedestal. According to us, the financial services are bound to see phenomenal growth. As the chart below deciphers, the upside from 1991 upwards .Most likely the trend will remain upwards. One of the prominent reasons being the growth of the Companies underlying will always see more growth than GDP of the country and that has been the trend of any growing economy.

The reason for limited Upside in Real Estate will be for varied reasons like Expensiveness of liquidity, lack of availability of Service Urban Land and thus Land Acquisition costs will sky rocket, Delays in Approvals and general pace of construction. All these factors could certainly prove to be detrimental for the sector. The 96-99 plummeting of prices in Real Estate prices is a live example.

Equities when compared to Gold are a clear cut winner in terms of performance over years. Gold is an exhaustible commodity with its set of cons. Its utility scope is limited, purely used for hedge and sentimental reasons and thus usually not recommended more than 5-10 % in an individual’s portfolio.

To further highlight Gold v/s Equity, this chart has been extracted. Over the span of thirty years, Rs 100 invested in 1980-81 in Equity has culminated to Rs 10,060 and Gold is Rs 1690. There is a very good possibility that the next thirty years could give similar returns.

Conclusion: - The final verdict after understanding the asset classes is that Asset Allocation is imperative and every individuals risk appetite should be measured. Real Estate and Gold are certainly not bad Investments. However it demands a lock in of huge amounts which may not be affordable after a certain point in time for majority of the population. As we see, the prices today are sky rocketing and is an investment option which is confined to the affluent class. In comparison, equity has a good scope. If investments in equity are done with absolute discipline, appropriate study and Expert-advise, then garnering decent returns and achieving goals will be an easy deal.