Ranveri – The Road, the Ring and the Ringmaster!!!!

Note: Ranveri (Khurd),  my native place is around 250kms from Mumbai and around 30kms from Billimora in the southern part of Gujarat. (http://village.org.in/Ranverikhurd )

Like most kids who were born in the pre-digital era, summer vacations usually meant spending April and May at your native place. Whilst it’s difficult to remember when I started to like the place and the rural lifestyle suffice to say it was from a very early age. So through the late 90’s and early 2000’s travel to Ranveri meant 1) Train travel from Mumbai to Billimora  2)Bus Travel from Billimora to Dholikuwa or Kharoli (3kms or 2kms from our house) and 3) Bullock Cart ride home or in later years bicycle ride. Train travel from Mumbai to Billimora was usually peaceful and people were far more considerate then they are today. Bus travel from Billimora to Dholikuwa could end up being erratic at times but was by and peaceful. However at most times for my Dad/Mom/Kaki it would be a task to manage 3 kids who were 3 years apart in term of age.

Once you got to the place there was nothing much to do. Most of the time was spent playing at home, games ranged from carom, cards, cycling and others. Once in a fortnight you got a chance to go to the nearby market (Dholikuwa) where bare essentials (pulses/grains/basic farsan items like Khaman etc) were available which were mostly unbranded/regional brands. As kids there was nothing pulling us to the market apart from may be salted peanuts or sugarcane juice. Electricity used to be extremely erratic in those times and if there was some issue, people would have to walk up 3-4kms to catch hold of an electrician or cycle towards in later years. Electrician would come and check the fault if there was a major issue, parts were available only 20kms in Chikhali which was a slightly bigger market/central place, just off NH8 (Mumbai-Delhi Highway). This meant a downtime of 3-4 days in some cases. This onetime I remember we had to get our bullock cart repaired; the place was around 15kms from our native. It was like a day picnic where-in we left at 7.00am only to return back at 06.30pm. I remember in the good old days around 2000-2001 when i went to my native place with my friends we had to work with clock perfection, Train has to reach at X hours, catch the bus at Y hours and ensure you reach of time. This onetime we reached Dholikuwa at 8.00pm after catching a late evening train from Mumbai; and true Mumbaikars were taken aback when the whole market had shut down and it dawned upon us that we would most likely have to sleep empty stomach that night. Luckily we had a Panipuri guy who was about to call it a day; he managed to give us some puris filled with whatever was left behind. Essentially life was slow, small issues would take days to get resolved; there was barely any form of entertainment.

Cut to 2003/2004 two major events started taking shape which would change India and its rural landscape forever. 1)NDA Government under Prime Minister Atal Bihar Vajpayeeji started focusing very aggressively on infrastructure development (1998 to 2003) especially roads 2)Mobiles made their way into India with insanely high tariffs of Rs.32/minute or so. At the same-time there was an RSS Pracharak who mysteriously had survived vacating his Chief Ministers chair in the aftermath of Gujarat riots in 2002. Determined to change the face and catapult Gujarat to the next level, CM Narendra Modi got down to serious business. He worked tirelessly to fix the power situation, agri situation, roads and other infrastructure over the next 13 years or so that he remained Gujarat Chief Minister. However this blog is not about Narendra Modi but how his policies and work affected and changed the economic outcomes of the entire state. Ranveri could be any other rural place in Gujarat or for that matter any other place in a decently doing state in India. However I write about Ranveri because I have experienced it first hand over last 30 years or so.

By the middle of 2000-2010 decade things had started to move. Roads had started improving big-time in Gujarat and had started reaching the interiors (places which were 30-40kms away from National Highways). This meant 2 things 1) People were happy to travel longer distances in search of work and 2) it saved a lot of time. This just propelled the entire economic engine in my view – people could travel more, meant people could do more work in a day, could travel longer distances for more remunerative work, small standalone operators like Electricians, Carpenters, Construction workers all had more work. As mobiles became more affordable and calling more reliable it gave a massive fillip to this economic engine which has already started rolling. The economic engine could now propel at meter gauge pace v/s narrow gauge earlier (There is a narrow gauge line which still runs from Billimora to Waghai - http://indianexpress.com/article/india/bilimora-waghai-narrow-gauge-train-completes-104-years-all-you-need-to-know-about-it-4750130).

Just a small example on what a massive transition we have seen over last 10 years or so. We drove to Ranveri from Mumbai around 3 months back (this I end up doing around 15-20 times a year). When we reached my native place there was some issue with the electricity. Steps were simple 1) Call the electrician (mobile made it possible) 2) He zoomed his 2W and reached the place in 10mins (roads made this possible) and in next 20 minutes electricity was fixed. Efficiency of the electrician had gone up multi-fold – He doesn’t have to wait for state transport bus to come, he can be reached at any-place/any-time during the day on his mobile. And this electricity example can be virtually applicable to anything else car repair, caterer, trader, construction worker.

As I have mentioned earlier in the blog, this would be true about any part of this country. Why is the ringmaster so important? Whilst this could have happened in a lot of parts of this country the impact on Gujarat has been of a different magnitude altogether both in terms of its speed and its coverage. Over last 15 years or so I have had the privilege to travel across India either for work or for holidays and I can safely say there isn’t any state/region which has seen this rapid transformation ( if there are I havent been made aware of it till now). Roads are made keeping in mind the traffic situation 20-25 years down the line (so called state highways which cover internal roads operate at 10-15% of their capacity in my view and yet they are made today).Government departments have embraced technology much before rest of the country. Gujarat is one of the few states where Agri power is available only 8 hours a day despite being a power surplus state and farmers pay market rates without any subvention/cross-subsidisation.

There has been an entire metamorphosis and how. Road from Chikali to Ranveri which would take an hour to drive now takes around 15-20 minutes. You can continue zooming at 70-80kms/hour easily. Dholikuwa today is a much bigger market v/s what it was 10 years back. While it’s difficult to hazard a guess on how many people the market services, my guess is it won’t be more than 5-10k. Yet everything from Cheese to dressing sauces to fruit juices are available. There are 8-10 traders stocking goods worth 15-25 lakhs each (some would be even stocking worth a crore). Roads are broader and could match Mumbai city highways easily with around 10% the traffic. Commercial complexes have come up, Restaurants, 4-5 Petrol pumps (in vicinity of less than 5 kms or so). My dad tells me it’s reminiscent of how some smaller places like Virar/Vasai were in late 1990’s.

Given that most of my friends are in early to mid-30’s whenever we travel we Ranveri with kids along its always important for parents to be sure that milk, medicines, kids products are easily available. They are now available a plenty. Shops are open till 10.00pm. Life is a lot more happening in Ranveri/Dholikuwa then it was 15 years back. However people still find time for friends, family functions. Money is not the single motivator as yet. Bania/Money Lender Credit still runs deep in villages even today.

In my view there are anywhere between 1000 to 5000 Ranveri’s waiting to happen in India over next 10 years or so. Irrespective of which Government is in power the reform process is now going to be unwavering. People will demand it. The youth today is restless and they will ask questions to the political establishments.

I would love to host you guys at Ranveri someday. Kya rakha hai eet ke makan main kuch din to gujariye Gujarat main……

#SIP9WoW – If compounding is the eighth wonder of the world then SIP is the ninth

#SIP9WoW – If compounding is the eighth wonder of the world then SIP is the ninth

Note: The blog is a little lengthy but a breezy read. Views expressed are personal.

SIP refers to Systematic Investment Plans which is specific amount being invested at a regular date. 

One of the benefits of being born in a Gujarati family is that you are exposed to finance very early on in life. When I was in the 5^th grade (10 years old) I started going to the bank with my dad to update the passbook of my minor account and create a recurring deposit. My Dad would then ask me to check if the eventual interest matched with the rate of interest promised. I don’t know if it’s got to do with the genes but I always had a passion/inquisitiveness for finance. Over a period of time I would take my Dad’s equity statement and read up on some of the companies he held. While I had little understanding of B/S, CF, P&L etc I would read up on what these businesses were, whether they were B2C/B2B, did people crave for the end product, was it a manufacturing or a service company etc etc.

Jump to Jan 2006 I joined Edelweiss on their Institutional Research Desk. It was dream come true. I felt similar to a small kid who was yearning for a small chocolate and discovered a whole chocolate mountain. I was awestruck by the way equity markets operated, how research was done, how many ideas were generated. While building up my knowledge on equities and on investing in companies I was exposed to the ideal of Mutual Fund SIP. While I had read up and heard about Mutual Funds I had little idea about SIP’s apart from the standard rupee averaging. It’s not that most of us at that stage were not aware of MF investing we just thought it was for lesser mortals. Here we were in one of the fastest growing domestic brokerage in the country with a very strong research team; I thought to myself that ill surely beat the returns of these mutual funds.

However from a very young age my dad had taught me that’s it’s very important to save a portion of your income to create future cashflows and for a rainy day. The traditional way would have been a recurring deposit with the bank; however through 2003 to 2008 we were in the midst of a massive bull market in India. MF returns in the popular schemes were running at 15-30% annualized return. So I thought to myself that it will take me at least couple of years to build my understanding on businesses in the meanwhile why not start a MF SIP just to experience how it goes. Since we were starting out our careers its sufficient to say that our pay scales were fairly modest. Competing with MF SIP were our desires to spend on better clothes, better travel, better restaurants and better lifestyle (don’t think you can hold these things against any kid who is starting out his work-life and has dreamt about these things all through his childhood). Within this tussle of better lifestyle and some savings, the Gujarati in me won a semi-battle and in May 2006 I started my first SIP in Fidelity Special Situations Fund. There was absolutely no research backing this.

And the party lasted for a while as we hit 21k or there about in Dec 2007/Jan 2008. Along the way propelled by a raging bull market Reliance Diversified Power, Reliance Vision etc made debuts in my MF portfolio. Amounts were largely miniscule with SIP’s of Rs.1000/month but I still felt good as I was saving and returns were largely beating the 6-9% recurring deposit threshold. However in the period of Jan 2008 and Dec 2008 Global Financial Crisis hit stock markets across the world with most markets losing anywhere between 30-70%. India was no different from a peak to 21k we fell to 7-8k (numbers are not that important). And all the advantages of rupee averaging were thrown out of the window as educated finance professional stopped their SIP’s. I was in a fix. I had read that rupee averaging was the biggest benefit of SIP and ideally we should be happy that stocks were correcting which meant NAV’s (MF price for simplicity sake) were correcting. With just 2 years into your career, with hoards of people panicking and some of the stalwarts saying that they had never seen something like this ever in their career meant that your conviction gets seriously tested.

I prevailed. I dint stop my SIP for 2 reasons 1)at that stage I dint contribute anything to my household expenses which meant that I wasn’t stretched for finances and hence could go through the turmoil a little longer 2) I have always been an extreme bull on India and Indian stock markets. When the world panics that’s your biggest opportunity. Also the amounts involved were not very large on a monthly basis for me to panic. I remember having a conversation with couple of my colleagues around that period who said why waste capital in MF why not take long futures contract on Nifty at 20% cost and ride the upside. Both of them dint put a single penny in any form in stocks or mutual fund before we started roaring again in May 2009 when Congress came back to power in thumping fashion. I was happy that my persistence with SIP will eventually pay-off.

GFC taught me the most important lesson in investing while it’s important to be with fundamentals the biggest deciding factor of how successful you are is the ability to control your human side. We all are greedy when the going is good and we all are fearful when the going is tough. People who are able to operate otherwise even at the margin are really successful investors. And then there is another way to overcome this which is through MUTUAL FUND SIP which is why I call it SIP – The ninth wonder of the world. Before we get more into specifics of MF SIP I would like to spend some time on basics of finance/investing/wealth creation.

My dad hates mutual funds for 2 reasons 1) he feels a well-informed individual can easily outperform them and 2) his view is also clouded by mis-management that we saw in erstwhile UTI.

The core of wealth creation is asset allocation. Most people get their asset allocation horribly wrong. 2-3 key things which I have learnt about wealth creation and asset allocations are

1)     Start early – Start saving early so that the effect of compounding money over a long period of time can play out

2)     Small Amounts – Most of us struggle to make ends meet in initial years of our work life. So start with however small amount as may be Rs.100/Rs.200/Rs.500

3)     Spend time on asset allocation – Most of us don’t spend even 10% time on asset allocation which it ideally deserves. In my view, if you make the right investment decision that can impact 75% of your eventual wealth creation vs only 25% your income. Rs.100 invested at 8% compounding in fixed deposit will give you Rs.216 at the end of 10 years (I have taken the liberty of compounding on FD which might not necessarily be true) while the same money if it can be invested in a share or MF at 15% would lead to Rs.405. So we are at 2.16x in FD v/s 4.05x in Equity/MF without even considering any tax impact.

There are 2-3 key mistakes that people make in Asset Allocation and Financial Planning in general

1)     Spend and Save – Most people spend and then save what is remaining while it should be the other way round. When you have financial goals like Child Education, Kids Marriage, Buying a House 2 things are paramount

a.      start early (If you have to accumulate Rs.100,000/- you have to save ~Rs.6200 at 10% returns for 10 years while if the period is 5 years we have to save ~ Rs 16,400 – the amount is ~2.5x vs if you started our early and had 10 years to go

b.    Know the target – Plan in advance and know that you will need 30 lakhs for your child education in next 10 years. It forces you to think over expected returns, how much you need to save and in most cases it will force you to cut down on unwanted expenditure

2)     Core asset allocation is never thought through – I know so many people who put money in FD without even asking themselves whether they have a better investment opportunity both in terms of higher return at same risk or much higher returns at relatively higher risk. I have seen this happen even with Finance Professional which is cardinal in my view

3)     Never consult – Most people never consult experts in these subjects due to utter ignorance or self-ego (I know what is best suited for me)

So what are the investment options available to average individuals

·         Gold – the metal gives very low returns over a long period of time (low single digits). While what you need for weddings etc can be bought its criminal to invest in Gold

·         Real Estate – Buying a house to stay can be still thought through otherwise I don’t think current real estate prices in large cities in India warrant even considering it as an investment. Government in my view will continue to clamp down on the sector to correct the excesses

·         FD – 6-8% return with a tax liability

·         PPF – 8-8.5% with Tax benefit – some proportion of your income should go into this for future savings and a rainy day

·         Equity/MF SIP – could return 15-18% over a long period of 8-10 years. If you want to invest for less than 5 years please stop reading this blog because it’s going to be a waste of time

So how should one plan their asset allocation? In my view at least 35%-50% of your take home (net of taxes) should be saved. In some cases this might be difficult due to certain liabilities but we should aspire for this. Assuming this is Rs.100/- the younger you are the higher the allocation to equities/MF SIP. A good thumb rule which a lot of people advocate is 100 minus your age should be your allocation to equities. However I would suggest people should at least start with 10-15% equities experience the asset class and then increase the allocation as you get more comfortable with it.

Now back to why MF SIP v/s Equity Investing especially for people who don’t do equities full time or for people who don’t have a finance back-ground. Lot of people keep asking me as to stock ideas which they would want to invest in. In equities you need to give time for returns to accrue. We should ideally invest with 5-7 year horizon. Most people want instant karma and treat equity investing as a gambling den where they wish to make 35-40% returns in 3 months. It usually all good till Bull Markets last but it all falls apart when we are hit by a market correction. Another trait if people want to invest money at the top of the bull market because 1) it’s in fashion 2) they feel they can make a quick buck in 15-20 days. In my decade of working experience I have come across a handful of people who have made very good returns across market scenario’s it’s a rarity.

Hence to avoid falling in market traps and to invest money in small instalments MF SIP is a great vehicle especially for people who are not actively into equity markets or not from finance field in general. Over the decade, interacting with hundreds of my friends/colleague in the industry our biggest regret has been buying too much in euphoric markets and buying too little in tough markets which mean our outcomes by and large will be sub-optimal. I still remember when the index halved in Dec 2008 I was shocked when people I used to look upto as equity experts stopped SIP’s or dint invest money in the markets because the fear took over. So through Jan 2006 to Jan 2008 was greed while Jan 2008 to May 2009 was all fear. It’s very difficult to control Human emotions. If the price is Rs.100 and moved to Rs.110 im enticed to buy because it will become Rs.120. However it became Rs.90 I won’t buy because I will wait for Rs.80 /Rs.70 and so on and actually never end up buying and regret when it becomes Rs.150 in 2 years. MF SIP’s are a great way to tackle this Human Emotion as you can invest small sums of money and it will keep averaging itself and create huge wealth over a long period of time. In the above example if this was hypothetically an SIP I would have bought 1 share at Rs.110, one share at Rs.90, one share at Rs.80, one share at Rs.130. My average cost would still have been Rs.102.5 and I would be sitting on 21% annualized return for 2 years

In my view MF SIP will be able to generate 15-18% IRR over a 8-10 year period which means we can beat debt by almost 2x. So my suggestion would be to start with small sums, invest for the long term and have concrete financial goals. It would be unfortunate if I can’t impart my knowledge and help people make money in Equities. India is undergoing a huge transition and there is tonnes and tonnes of money to be made in Equities.

If compounding is the eighth wonder of the world then SIP is the ninth.

I would like to Thank Apeksha Desai, Ajitesh Nair and Abhishek Bhandari for proof reading the blog.

Cheers - HD

PS: I would avoid recommending MF’s on a public forum but anyone who wishes to discuss financial planning with me is most welcome on hiralbdesai@gmail.com or my mobile number

There are more sophisticated/customized ways of investing in equities through Private Equity Funds, AIF’s and PMS for more informed investors. The above article is for my friends who are either not from the field of finance or are not active equity market investors. Even for people like me who are active in equity markets and do this for a living a small allocation to SIP might not be a bad idea.