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.

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.

 

“Hello, World!’ for Quant Traders

high-frequency-tradingThis is the second blog post on my journey to learn Machine Learning. My first blog post talked about setting up the infrastructure. Now that the infrastructure is up and running, I’m able to get to the business of writing Python code.

Whenever you start to learn ANY programming language the first lesson is usually titled “Hello, World!“. It’s something of a tradition to teach the person the basics of the programming language to output something to the screen which is usually – “Hello, World!”

For quant/algo traders the equivalent of “Hello, World!” is calculating a simple daily moving average (DMA) and building some logic to buy or sell a security based on the DMA parameter.

Below is my “Hello, World!” Will this strategy make you money? Absolutely not. Will it help you build other strategies? Absolutely.

The Future of Payments

Fintegrate_2017
Earlier this month I had a chance to be on a panel discussing User Experience (UX) for payments. The panel was part of the Fintegrate Zone 2017 event located at the BSE Building in Bombay hosted by the Zone Startups.

The panel was moderated by Harsimran Julka @HarsimranJulka an editor for the Economic Times. The panel included:
Anurag Sinha, Co-Founder, Walnut App
Deepak Agarwal, CDO, Barclays Wealth
Sohini Rajola, @RajolaSohini, RVP, Western Union
Tina Singh, @tinasinghj, CDO, Mahindra Finance
Malcolm Anthony, Head of User Experience Design, PayPal
Nitin Vyakaranam, @vnitinb Founder & CEO, ArthaYantra

As with any recent discussion involving the Indian financial markets half the time was devoted to talking about Modi’s demonetization. It was more about who benefited from it and who struggled with it, as a whole most fintech startups all benefited from it.

Although we touched on the overall user experience of payments and had much to debate about, I still feel most of the world is struggling with a seamless payment experience. Part of the issue is that people are used to physical cash and it’s been around for ages. People are familiar with it and how to use it, kids from a very young age are taught about physical money and many have piggy banks with some of that loot! Basically, cash is convenient, intuitive and effortless.

But as with everything else, we need to move forward and electronic payments are the future and most governments are behind it as a way to tackle the black money and counterfeit money. Credit/debit cards are a hybrid instrument, although the card is physical in nature it connects to an electronic platform to authorize, clear and settle the payments. Credit cards are prone to fraud since someone can steal your card, go to an online store and enter your card details and buy stuff.

This is where a whole new generation of solutions are entering the marketplace under the banner of mobile proximity payments (MPP), this includes near field communications (NFC) and quick response (QR) codes. NFC is the technology behind Apply Pay, Google Pay, Visa payWave and MasterCard contactless,  it’s a communications protocol that works with devices that are within inches of each other. With Apple Pay when you are ready to checkout, the retailers point of sale (POS) system will “talk” to your phone and then you use Touch ID to authenticate and enable the payment. That really is the way to do it. The problem with NFC is that the phone has to have an NFC chip and so does the retailers POS system. I don’t see this gaining much traction in India as many of the phones are fairly inexpensive and won’t include an NFC chip for years.

How-to-get-paytm-QR-code-175x300
Surprisingly, because of India’s demonetization the use of QR codes has gone from a niche type of application to full mainstream usage. Demonetization was a stroke of luck for Paytm and they turned it into gold. Overnight people needed to send money and many people quickly downloaded the Paytm app and started to transact.

A couple weeks ago, I used the QR code functionality to pay for parking at Phoenix Mills and it was pretty seamless. Since all smartphones have a camera they can scan this QR code and submit a payment to an individual or retailer. I really see this taking off and becoming the standard in India, it’s a low tech solution but sometimes that’s required to get high (mass) adoption in India.

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.

Modi Marches On

We live in an era of limited attention span, super short news cycles and the upcoming President of the US who uses Twitter and it’s 140 characters to talk. When PM Modi announced on November 8th that all Rs. 500 and Rs. 1000 notes would stop being legal tender as of midnight that day, it was like an earthquake and here we are almost 46 days later still talking about it.

The demonetization topic has come up at almost every party or business meeting I have attended and it’s been great to hear the pros and cons of PM Modi’s actions. First, I think we Indians can adapt to any damn thing and this exercise clearly shows that. People that had stacks and stacks of black money figured out ways to deposit their money into the banks. It remains to be seen if they will be able to get their money back or how much of a penalty they will have to pay. On the other hand, the middle class waited patiently to deposit their money and waited even more patiently to get the new currency notes.

The poor ended up being pawns in a political game where the opposition party said the poor were suffering the most. Actually, the poor have been suffering long before demonetization. The per capita income in India is about $1,500…not per week or month that’s per year. The Chief Minister (think Governor of a US State) of West Bengal, Mamta Banerjee, was one of the harshest critics of the policy and was on TV almost every night to highlight how much the poor are suffering. Because of the lines that people had to stand in line to get cash their own cash. Uhhh, we Indians are used to lines. Go to VT or Churchgate train station at 6:30pm and tell me what you see. Come to Nariman Point at 6pm to catch a bus and tell me what you see. I’ve seen these lines in Nariman Point for the past 10 years and that hasn’t changed.

The opposition party even played some of their classic hits like ex-PM Manmohan Singh. Manmohan Singh is like a one-hit wonder, he might have been the chief architect of India’s entry into the global economy in 1991 but he also was the PM during one of the most corrupt periods in recent times and was absolutely silent about it. (The joke is when he visited the dentist, the dentist said “at least open your mouth in my office”.)

I hope Modi doubles down on his drive to make the country a digital currency nation. When people say, how can you expect a poor man to buy a smart phone to take part in this new digital economy I just lose it. Have the politicians scammed this country for so many years that they have not been able to lift people out of poverty? That’s the real tragedy, not demonetization.

US and India Taxation

18949788.cmsDear e-commerce expat,

So you moved to India to join the e-commerce boom, you get to deliver packages during the day and tweet selfies all night. My only advice to you is get your financial house in order. In the weeks and months before you moved to India, I’m sure several people asked you “do you have to pay taxes in both countries?” The short is no, the long answer is – it’s complicated.

Why is it complicated? Because if you are a U.S. citizen and moving to India, you are essentially stuck between two countries that are absolutely obsessed with milking you for every dime that is owed to them. It’s justifiable, but let’s rewind and understand how we got here and go over the basics of each countries tax regime.

U.S.
The U.S. national debt is at over $18 trillion dollars and many of the largest corporations like Apple, Microsoft and Cisco Systems have kept their profits offshore and refuse to repatriate (fancy word for bring) the funds to the US and pay taxes.

The Internal Revenue Service (IRS) is the government agency that collects the taxes. The tax year is based on the calendar year (January 1 to December 31, 2013) and for individuals, the taxes are due on April 15, 2014 based on the example. They refer to the different rates of taxation as “tax brackets”. The IRS is sometimes referred to as Uncle Sam. If you are a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax, regardless of where you reside.

In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA). This made it mandatory that all non-US financial institutions automatically report if they have accounts for US citizens and report that information back to the US authorities. But, why let the institutions have all the fun? Individuals still need to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). An FBAR filing is required if all foreign financial accounts exceed $10,000. In addition, a Form 8938 – Statement of Specified Foreign Financial Assets is required if you have assets over $200,000 during the year. The amounts vary, depending on whether you are single, married or filing seperately.

India
In India, the issue is with a cash based economy and corruption. When people pay for services in cash, the government has no way to track it and thus people avoid paying taxes. With corruption, much of the money that is meant for government programs for the poor gets siphoned off and put into off-shore bank accounts.

The Income Tax Authority is the government agency that collect the taxes, it’s part of the Ministry of Finance. The financial tax year is based on April 1, 2013 to March 31, 2014 for example. Individual taxes are due on July 31, 2014 based on the example. They refer to the different rates of taxation as “tax slabs”.

In 2015, the Indian government passed the Black Money (Undisclosed Foreign Income and Assets) Act. It’s commonly referred to as the “Black Money Act” and the intent and spirit of the law was to go after politicians and large businesses that for years had stashed their money in foreign countries. The deadline to declare ANY and ALL foreign assets was September 30, 2015 and the results were less than stellar. Many of the people that declared their assets were working professionals and not the intended target of politicians and large businesses.

It’s Complicated
The US and India do have a Double Tax Avoidance Agreement (DTAA) in place and for the most part works. So if you make the equivalent of USD 100,000 in India, then India will tax you at 30% and the US will not double tax you because of the DTAA that is in place. However, if you make the equivalent of USD 500,000 in India, then India will tax you at 34% (30% + an additional 10% surcharge on 30% + an education tax of 3% on the entire tax amount). In the US, since the highest tax bracket is 39.6% you will have to pay the delta of 5.6% to Uncle Sam.

Suppose you have a 401k retirement plan which allows you to generate income within the account tax free and pay taxes at the time of distribution. Unfortunately, according to the DTAA between India and the US, India does not recognize the account as a pension so you will have to pay taxes on the income generated in the account to the Indian government. 😦

Another example, suppose you buy an equity mutual fund in India and after 13 months you sell it. In India, there is no long-term capital gains on equity mutual funds – awesome right? Wrong, since you hold a US passport you will have to pay long-term capital gains in the US based on the US tax bracket you are in.

So technically, there is no double taxation but you will get taxed at the highest rate whether it’s in India or the US. DTAA should really stand for Double Trouble And Anguish.

An Example
Suppose you earn Rs. 78 lakhs for April 1, 2014 to March 31, 2015 for the work you have done in India. That is Rs. 6.5 lakhs a month and at the current exchange rate comes to USD 10,000 a month. In India you would fall under the 30% tax slab and in the US you would fall under the 28% tax bracket. You will first have to file your US taxes which are due on April 15, 2015. Since you earned USD 90,000 over the 9 months you fall under the Foreign Earned Income Exclusion which means the US government won’t tax you on anything. You will need to look at Form 2555 and Form 1116 for Tax Credits to see which makes more sense for you.

Then when you file your Indian taxes on July 31, 2015 you will report the Rs. 78 lakhs on your ITR (income tax return). You will have to show the long-term capital gains on your Indian taxes in Schedule TR which is for taxes paid outside India. And of course you will need to fill out the Schedule FA for foreign assets. If on February 10, 2015 you have a short-term capital gains of Rs. 5 lakhs, your tax will be Rs. 1.5 lakhs which is 30%. Then when you file your US taxes for calendar year 2015, you will have to show the gains and the credits will be listed on Form 1116.

Yeah, it’s almost better to be just a delivery person in India.