Index Funds Finally Get Some Love in India

I must say, I was pleased to see the headline in the Economic Times talking about investing in index funds (article link). And really shocked they mentioned an allocation of 25% to passive index funds. When people ask me for investment advice, I usually roll out the passive index fund speech and literally with 14 seconds people just tune out. Why? Because passive index funds (or ETFs) are boring to talk about.

It’s more exciting to talk about some hot-shot fund manager that someone has found that can outperform the markets. Remember Prashant Jain of HDFC who had the HDFC Top 200? Years ago, he WAS the talk of the town and basically was the hot shot who ran one of the best performing mutual funds. But, it was renamed Top 100 and the fund is still struggling with performance. The reason is because as a fund gets bigger and bigger they need to deploy that money and finding opportunities that outperform the general market are tougher to find.

I remember an investment professional once told me that index funds don’t work in emerging markets like India. That is absolutely garage. Most financial advisors and anyone on CNBC-TV18 will never talk about index funds or ETFs because the commissions are so low. Did you know the largest mutual fund in India is the SBI – ETF Nifty 50 at over Rs. 51,800 Cr. and the expense ratio is only 7 bps that is friggin’ crazy talk.

The tide is turning and more people are looking at these passive index funds because if you are not actively tracking the market then these instruments are great. Investing in a passive index fund is a general bet that the market/economy will do well and that’s pretty much the future of India.

Taxes, Tariffs, and Testarossas

Ferrari Testarossa

A couple of days ago there was an article in the DNA newspaper, an Indian daily, discussing how the high import tariffs/duties on luxury vehicles are killing the growth of high-end car sales. Well, I can’t argue with that!

But, that’s not the point of this blog post, it’s to review why there are tariffs/duties on certain products/markets and the thinking behind it. The basic idea of a tariff on imported goods is to protect the local market and give them an edge. Some may call this protectionist or nationalist but, pretty much every country does this to protect certain industries in that country. India is no different in that regard.

India has import duties on mobile phones so that local brands like Micromax have a price competitive edge over Chinese brands like Oppo and Vivo. To be price competitive, the next logical step would be for a foreign company like Oppo or Vivo to set up a manufacturing facility on the ground in India and avoid the import duties on fully assembled phones. The premise is that even if Oppo or Vivo send a large chunk of their profits back to their mother country of China, at least Indian workers have jobs. Not only are jobs created but all the other ancillary businesses would benefit from a manufacturing facility such as retail stores, restaurants, logistics companies, construction companies, etc.

Another market that India puts heavy import duties on is the automotive industry. Again the idea is to have the local companies like Maruti Suzuki, Tata Motors and other local players benefit. My issue is that I don’t see Maruti Suzuki competing in the same space as Mercedes, Ferrari or a Lamborghini.

This is where the Indian government’s logic is flawed. Imagine you bring down the import duty to 50% then the sales of these high-end cars will increase. Again, consumers that are buying a Mercedes-AMG G63 are definitely NOT looking at a Maruti Vitara Brezza as a viable option. So there is no chance of Mercedes cannibalizing the sales of Maruti. In fact, you will be creating a larger ecosystem for these brands which will mean more salespeople, more mechanics, more spare parts, more locations, etc.

car-import

The import duties are around 240% of the cost of the car. As you can see from the above example, if the cost of the car is imported at $100,000 then you will pay $240,400 in duties. For a total of $340,400 not including registration, transportation, insurance costs and the customary flower garland that is put on new cars! And of course, don’t forget about the manufacturer and dealer margin as well.

According to the article, Lamborghini sold 26 new cars last year across India…that is pathetic for a country with a population of 1.3 billion people. I’m guessing if the duties were cut to 50%, they would sell 10x more cars and would need more infrastructure to handle it. Which would generate more jobs and taxes for the Indian government. Looking at the raw revenue numbers from the import duties is misleading since you miss out on the entire ecosystem that is created in the process.

A big thanks to Gautam Madnani of Lamborghini Mumbai who patiently answered my 754 questions on pricing! He also was the first guest on the Performalux Podcast.

ETFs in India

WhatsApp Image 2018-09-05 at 2.01.32 PM

A cousin of mine who is pretty savvy with the stock market sent the above WhatsApp message to me. I was a bit surprised he had no idea about index ETFs, then it dawned on me. ETFs are like the stepchild of the Indian investing world…no one wants to talk about them.

First of all, ETF is an acronym for exchange-traded funds. So what is an ETF? I’ll let Investopedia explain:

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.

Think of it as a basket of stocks that trade throughout the day. Mutual funds are similar but they only trade at the end of the day.

I personally think ETFs are a great investment vehicle for people that want exposure to the equity markets but have no clue. Even when you pick a mutual fund, you need to know about the fund house, the manager, the investment thesis, etc… By picking one of the Nifty or Sensex ETFs you are essentially saying I want to participate in the equity markets and I’m betting on the growth of the India story.

For the longest time, the mutual fund of choice was the HDFC Top 200 managed by Prashant Jain. It recently got renamed to the HDFC Top 100 with total AUM (assets under management) of around Rs. 16,000 cr (USD 2.4 billion). HDFC Top 100 and Prashant Jain were like the Fidelity Magellan fund in the US and Peter Lynch, they could do no wrong. But over time they stumbled and started to lose their sheen. That’s where an index ETF instrument is great because you are not betting on a sector, company, region, etc…you are betting on the entire country. If you don’t believe in India, then you got bigger problems.

The ETF fund I always recommend to people is the SBI Nifty ETF, as the name implies it tracks the Nifty index. The fund has about Rs. 41,000 cr (USD 5.9 billion) in assets and it’s the largest ETF or mutual fund in India by AUM. More important than AUM, is the total expense ratio (TER) of the fund and this one is 0.06%, which is very, very low. Compare that to the HDFC Top 100 which has a TER of 2.21% (almost 37 times of the SBI Nifty ETF).

ETFs by design have a low TER and it’s one of the reasons you will never hear about ETFs on CNBC-18…there is not enough money to be made if you are an advisor. Just look at the numbers above comparing the TERs of the SBI Nifty ETF to the HDFC Top 100 fund. It’s similar to fixed deposits (FDs), your financial advisor or wealth advisor will NEVER talk about FDs because they make no money on them and in fact that money is blocked from investing in other products.

I would highly encourage anyone that is looking to diversify their portfolio to look at index ETFs as a simple and inexpensive way to access the Indian equity markets. Then as you gain confidence in the equity markets you can look at investing in mutual funds and then finally move to picking stocks based on your own research. Just start.

 

My New Podcast – Performalux

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They say the third time’s a charm, well I’m hoping my latest podcast is the one. Podcasting has been gaining a lot of traction over the past 2 years and my first brush with the technology was back in 2010. I launched my first podcast called “Semper Chai” with a buddy, Mike Martin, out of Los Angeles. We did about 3 or 4 episodes and then we retired from the game!

Then I came out of retirement in 2013 and tried podcasting for a second time with a friend from Bombay – Sahil Parikh. We were going to talk about about technology and called the show “The DotMatrix Show” – connecting the dots of business and technology. That also lasted about 3 or 4 episodes and then we stopped.

Throughout all of this I continued to blog and have been for 14 years. I told myself that in 2018 I wanted to try a different media. That meant either video (vlogging) or audio (podcasting). I know all the cool kids are vlogging but I decided to try podcasting and see how that goes first.

My third attempt at a podcast is about performance and luxury or simply known as Performalux. I will be interviewing owners of super cars, car enthusiasts, car dealers and automobile manufacturers. Cars are my passion so this podcast just aligns so well with it.

Without further adieu, below is the first episode of The Performalux Podcast. I interviewed Gautam Madnani of Lamborghini Mumbai.

To subscribe to future episodes, you can use the links below or wherever you get your podcasts from.

iPhone
https://itunes.apple.com/us/podcast/the-performalux-podcast/id1367228628

Android
Stitcher- https://www.stitcher.com/podcast/performalux/the-performalux-podcast
Google Play Music – https://play.google.com/music/m/Iyqode7c4qx5lj5idjka44o63hy?t=The_Performalux_Podcast
YouTube – https://www.youtube.com/watch?v=F1fwmYjec18&list=PL6-pF-IU-94eCTLzGvtMtHjjnAVXhbw9m

My Dad’s Charity Work

Earlier this month was International Women’s Day and an Indian news channel wanted to interview my dad for this charity work. His charity has given many loans to women and hence they wanted to highlight the work he has done to help women.

Once the news clip aired we shared it on YouTube, Facebook and WhatsApp and the outpouring of support was amazing. The video is below:

What most people don’t know is that for the past 6 years my dad has slowly been working near his village of Shujalpur, Madhya Pradesh to help people in need. He has helped over 50 families and given out interest free loans of around Rs. 10 lakhs (USD $15,000). The default rate on these loans is something that not even a top banker at ICICI Bank can touch. He has had a single default of $60 because the person passed away before they could pay back the loan back!

My dad tells me it’s not about the money for many people, they need guidance. A simple example is someone wanted to open a small provisions store and so may dad gave them a loan. After a month, my dad went back and asked about the sales. That person didn’t keep track, so my dad said get a diary and write down all the sales. Once this person did this, he could see a pattern emerge and realized what sold and what didn’t.

To most people this would seem standard to track daily sales but for many people that’s not the case. This person was able to figure out that certain days were consistently slow, so he would close the shop and go into town on that day to buy more goods. A clear example of where money helped but the guidance and knowledge was much more useful.

For the past 6 years, my dad has kept a blog describing all the people he has given loans to. The stories are really interesting to read, visit ShantiSeva.org to read more.

Securing the India Stack

IndiaStack-logoOver the weekend, the Times of India ran a front page article about how someone was able to hack into India’s Aadhaar database.

Aadhaar is India’s attempt to give everyone in India a unique 12 digit ID that can be used for a variety of government services. The Aadhaar project is part of what many call the India Stack. According to Wikipedia the India Stack is:

…a set of APIs that allows governments, businesses, startups and developers to utilise a unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery.

IndiaStack

In a nutshell, the government is going digital and everything will revolve around this unique 12 digit number. Initially, it will be basic government services then it will move to eKYC (Know Your Customer), payments and beyond.

As more and more services go online using the Aadhaar number to authenticate services, we will hear about more and more security breaches. This is not uncommon in the technology world, in the early days of PayPal (they provide online money transfers) they dedicated a large number of resources to “plug” these holes. The reason why people prefer open source security solutions is because you have a large community of programmers that are looking at the code base and constantly testing it to find holes in it.

The Government of India (GoI) should not sweep these issues under the rug and say everything is secure. When a government official says their technology is “tamper proof” that’s when you know they don’t understand technology. Actually, if they are so confident they should host hackathons. These hackathons have two purposes: 1. potentially find bugs or security issues 2. an excellent hunting ground to find talent for the India Stack team.

The Government should actually embrace these hackers whether they are black hat or white hat. Creating a platform like HackerOne would be a step in the right direction. HackerOne is a bug bounty platform that connects hackers (or as they called them “cybersecurity researchers”) with companies to crowd-source security vulnerabilities.

The idea of embracing hackers goes against the grain of conventional thinking but when it comes to digital, I think it’s the best way to constantly improve security and enhance service delivery. The current thinking of “nothing is wrong and nothing to see here” is old school and needs to die.

By the way if you are concerned about AI (Artificial Intelligence) and robots taking over your job, you are in luck! I think India has a severe deficiency in technology security experts which I don’t think robots will be able to takeover…for now. If I was coming out of college today:

  • I would read every API spec document on Aadhaar, UPI, eKYC and others
  • Not only would I read them, I would tear them apart and see how they work
  • Build Android apps around them to understand a real world implementation
  • Start a blog and give recommendations on how to make them better
  • Download other apps to sniff the traffic and see how they implement these APIs
  • Find Indian companies on HackerOne and monetize (as of now, only Ola is on the platform)

Then the next battle will be those robots!

BharatQR, Another Payment Option?

It’s another day and yet another payment option/technology was launched in India. The newest one to the party is called BharatQR, it’s being launched by the Government of India. BharatQR is like Paytm except instead of using e-wallets, you just need a bank account. It’s pretty clear the Indian government is hell bent on getting most people to transact online. With the explosive growth of Paytm, I’m guessing the government decided it needed it’s own QR-code offering.

I think this is a great move but I think the average user will be even more confused now. Below is a list of electronic payment options that I have compiled in alphabetical order:

  1. Aadhar Enabled Payment Service (AEPS)
  2. BharatQR
  3. BHIM
  4. Apple Pay and Android Pay (coming soon…)
  5. Credit/debit card
  6. E-wallets – Paytm, Mobikwik, etc…
  7. IMPS
  8. NEFT
  9. RTGS
  10. RuPay
  11. UPI
  12. USSD

Yeah, even the most tech savvy person would get confused. I think the government should just wrap AEPS, BharatQR and BHIM into a single app and make that the defacto standard.