personaleconomist - Tumblr blog

[personaleconomist]

Follow ABCDs to navigate stock market volatility...

Stock markets are in the grips of Omicron fears and that is causing jittery to most investors. Investors seem to be worried about a re-run of the 2020 crash in the stock markets. More particularly, for the new investors who came into the markets in the last one year or so, it had been a jolly ride on the upside. And reality bites now. The nature of the stock markets is to react to the short term news & noise and that is the hallmark of the stock markets since the time immemorial.

Seasoned investors know it too well, but for the new investors this could be a jolt. That said, new investors should revisit their strategy by understanding the market dynamics and re-adjust not only their portfolio, but also their mindset. Markets are never one way up or one way down and they always travel in a volatile fashion causing ups & downs along the way. Investors need to understand this important aspect and have to be prepared to handle these kinds of shocks.

ABCDs to avoid jittery volatile markets -

Asset allocate - Getting the right asset allocation based on one's financial goals and objectives is the best shockproof investment strategy one can formulate. By investing in the right proportion across various asset classes, the over dependence or over allocation on any particular asset is avoided. There is always the trend based investing which many adopt and that would be the chief reason for the worries caused by volatile markets. One must never invest 100% into stocks even if the markets look fabulous. Allocate based on the strategy and that would take care of the shocks in the portfolio.

Be & buy long term - Being a long term investor is the best possible way to avoid any kind of market jittery which takes place in the short term. In the short term, markets are decided by the actions of the traders and news & the noise from various quarters which shape the flow of the markets in the interim. By being long term one can navigate such short term crises and make handsome returns provided the investments are in the right portfolios.

Compounding - Money is made in the stock markets if the capital is allowed to compound. Most seasoned investors have made riches in the stock markets through compounding effect. Plan your equity investment in such a way that the capital is deployed to take the advantage of the compounding effect. Nothing multiplies the returns like compounding does.

Diversify - Diversification is key to alleviate such market volatility. By being concentrated on few ideas, one runs the risk of being impacted by the short term market movements. Diversification can be across sectors, themes, stocks and on various other parameters. Even within mutual funds, diversification is key based on various parameters. Diversify as much as possible to mitigate such short term risks.  

If someone diligently follows the ABCD strategy in the equity investments, it would take care of the returns as well navigate the short term volatility in the stock markets.

V Gopalakrishnan

[personaleconomist]

Follow 3D approach for successful investing

Investing is all about common sense and as some say it is not rocket science. Sticking to basics forms the core of investment philosophy for everyone, be it a large fund manager or a retail investor. By sticking to the basics, investors can turn into successful investors. But being simple and sticking to basics is a little difficult thing to achieve, given so much noise and news around us on the financial markets. People tend to get carried away by the news and noise surrounding us.

Following a 3D approach to investing will solve this puzzle for all the investors -

Discipline - Discipline is the core to any financial and investment success. By being disciplined in one's investment process & strategy, it will be a sure shot mantra for success. Not getting carried away by the noise & news, sticking to one's investment philosophy becomes the bedrock for investment success. Discipline comes in many forms and one key form for discipline is following a clear asset allocation model. Based on one's goals, objectives, age & profile a clear asset allocation plan should be devised and ensure it is maintained at all times. Wavering minds will never work in the investment world. Be disciplined.

Diligence - Being diligent with one's investment process and approach is key to investment success. Random approach doesn't work in investments. Having a meticulous approach to investing alone leads to investment success. With the financial markets in general getting more and more dynamic, investors need to stick to a diligent approach while handling one's investment process & approach. Investors after formulating their financial goals and objectives, should work on mapping the right kind of financial & investment products with those goals and objectives.

Diversification - Most investors find their slippery paths on not diversifying enough in their investments. That is a cardinal mistake committed by most investors. Diversification should happen across products, spaces and themes. Too much risk and too little risk is injurious to an investment approach. If the investors are well diversified within various investment themes, risk arising out of a particular financial market may not be a great botheration as long as they follow the basic guidelines.

Investment, if done in a simple and a straightforward manner, can be a rewarding experience for the investors. Follow the 3D approach to a better investment success!

V Gopalakrishnan

[personaleconomist]

Take a "DIP" to overcome the market challenges

Everyone is interested in making better returns than the conventional products which provide meager returns. And stock markets is one place where investors can aim and achieve above average and superior returns compared to the conventional investment avenues. But people are also confused & perplexed about investing in stock markets, as the process is tedious owing to market fluctuations. For those people there is always an SIP method to overcome the investing challenges.

SIPs by nature are designed to overcome the market fluctuations & volatility and to navigate through the ups & downs in the stock markets. The theory of price averaging in the stock markets through SIPs is a very effective tool to overcome the investment hesitation many possess in the process of investing. And if someone wants to even better the SIP process and for people who have reasonable disposable savings can consider doing a DIP, Daily Investment Plan. Which means, investing a sum of rupees on every single market day throughout the year, irrespective of ups & downs in the stock markets.

By doing a DIP into the stock markets preferably through mutual funds, investors can effectively navigate through the market fluctuations and volatility and yet make handsome returns over the years. The sum can be very little, as little as few hundred rupees, but it should be uniformly invested throughout the year to take the advantage of the market swings. Of course, doing a DIP involves a bit of everyday discipline and can be put through an automated process or by doing directly with some discipline. Investing success, after all is an outcome of discipline & diligence. Take a DIP and see the difference it makes in your investment process!

V Gopalakrishnan

[personaleconomist]

Index investing can steer you through the market swings

Equity markets in India are marching forward in an unstoppable fashion. The pace of the rise is unprecedented given the adverse external conditions which shape the market moves. Nonetheless, more and more money pouring into the stocks is fueling the stock markets to reach new heights despite adverse conditions. Given such a scenario, many investors are largely confused on how to deal with such a rising market which seems to be galloping with each passing day. The dilemma for the investors is quite understandable given the fact that the country went through economic turbulence during Covid times, but the markets shrugged off the turbulence with admirable ease to march forward without any break.

It makes a difficult choice for the investors either to invest directly into stocks at such high valuations or invest through mutual funds which again buy into stocks at high valuations. Nevertheless, there is a way out to participate even at these current levels. Investors can look at index funds at the current juncture to overcome the investment confusion and hesitation given the high valuations of the stock markets. For starters, index funds by the mutual funds mirror and mimic the index stocks in the same weightage and proportion, offering a product which can replicate the market indexes.

For instance, if a fund mirrors Nifty 50 stocks, the portfolio will be an exact construct of the original index giving an opportunity to participate in the market index in a simple way and at the lowest possible cost. Index funds, thus, can be a superior way to look at equity investing given the euphoric market conditions and with no correction in sight at least in the near future, though things may change. Index funds for various reasons are not so popular in India, unlike the West where index funds are hugely popular among the investors. Index funds are also good for the investors who look to enter equity markets in any scenario, but it makes more sense for the new investors to enter equity markets through index funds in the current scenario.

Singular advantage of the index funds is that the funds ride on the back of the index performance rather than relying on the fund managers' discretion which may or may not be successful in the current high valuation scenario. The downside of the index funds is that the funds just perform in line with the index and may significantly underperform if the general and diversified equity funds make much better investment picks beyond the index stocks. But that is a trade off one must make if one feels shy about the excess valuations of the stock markets in the current scenario. Once the markets stabilize with some meaningful correction, investors can re-look at other diversified funds to be added into the portfolio. Right now, index funds seem to be the right way to participate in the equity market buoyancy.

V Gopalakrishnan

[personaleconomist]

Moody’s thumbs up to India

"Moody's at times gets moody" was a famous & a cryptic quote decades back by an Indian bureaucrat who handled the economy. The frustration stemmed from the fact that Moody's abruptly downgraded India's sovereign rating a few decades ago much to the chagrin of the Indian policy makers then . This partially explains the highhandedness of the global rating agencies methodology of rating nations sovereignty. The whims and fancies of the rating agencies came to the fore during the global financial crisis, when the crisis emanated from the rating debacle in the US.

Nevertheless, for the starters, Moody's has just upgraded India rating from negative to stable giving a leg up for the country's economic outlook, which is even otherwise looking extremely promising leaving aside rating agencies' outlook. In a broader framework, rating upgrades by global rating agencies do give a lot of positive push for the Indian growth story.  In the post pandemic economic era, Indian economic outlook remains extremely robust when compared with the comparable nations around the world. Having said that, India's hunger for capital to be deployed into various nation building projects, gets a huge boost with this rating upgrade.

Availability and cost of capital from the global markets could become more vibrant in the coming days and months. That said, FDI flows into the country will also accelerate in a big way due to this rating upgrade. Overall, India is in a sweet spot for a spectacular economic recovery post pandemic, given the fact that the country has managed and handled the vaccination process quite efficiently than any other nation in the World. On on hand, we have seen countries with fraction of Indian population messing up with the vaccination process, India has diligently handled the process in a seamless manner.

With the vaccination process getting a quicker acceleration, India can hope to vaccinate most adults by the turn of this year, more or less. That would give a fillip to the country's economic recovery, which is on the cusp of stepping into a double digit economic growth with an ambitious aim of hitting $5 Trillion economic size. Yes, Moody's gets moody at times. These things can pack into a perfect economic recipe in the longer run!

V Gopalakrishnan

[personaleconomist]

WiRe - Week in Review....

Though equity markets in India settled below the previous week's levels, the correction in the markets is to be seen through the prism of profit taking by the market participants. As we saw in the previous weeks, equity markets roared and touched new peaks, like Sensex breaching the 60000 mark for the first time. In such buoyant times there would be intermittent profit booking like we saw this week. Nevertheless, the market direction remains extremely positive and vibrant given the kind of fund flows we are witnessing in the markets. New IPOs are also getting lined up to tap the equity markets, which reflects the depth in the fund flow levels in the markets. Investors across the segments have shown tremendous interests in the Indian equities all along. There is no reason to believe any probable dip in those interests levels in the current levels.

Overall, the equity markets remain buoyant without any major reasons for sharp correction. Investors should pick the right ones in case of long term investment and prepare to stay the course irrespective of the market behaviour in the short term. Investors should stick to ABCs of the equity market, namely, Asset creators, Benchmark beaters & consistent themes to make returns from the equity markets. Constrained investors can choose to invest through the route of mutual funds and preferably through SIP to overcome the short term volatility, if any. The bottom line is, equity markets remain bullish at least in the near term for obvious reasons.

V Gopalakrishnan Author - WiRe

[personaleconomist]

Sensex scales Mt 60000. What next?!

It has been a phenomenal bull run for the Indian equities even during the worst months of Covid-19 with the key benchmark index of Indian equities, Sensex crossing the magical mark of 60000 points, a new high in its long journey. The milestone is an extraordinary feat for the Indian equities, which have been outperforming several other comparable markets around the World. The scaling of 60000 points sums up the vibrancy of Indian economic fundamentals and extremely high levels of positive sentiment among the investors, both on the stocks as well as on the economic fundamentals. The new milestone comes amidst the pandemic led economic compression, which has curtailed the GDP numbers in a significant manner.

It has been a long and chequered journey for the Indian stocks through the last three decades, particularly post liberalization era. The new peaks reached by the key indexes in the country is the culmination of a phenomenal unlocking of Indian economic fundamentals unshackled by the liberalization process. Liberalization process unlocked many sectors in the economy, but most importantly, it unlocked the country's archaic financial markets and various aspects of the financial markets, particularly the stock markets. The reforms brought in the rush of foreign investors in droves into the Indian stocks, making them the largest pack of investors in all these years.

The reforms also saw the emergence of private sector institutional investors such as mutual funds which grew by leaps and bounds over the years owing to the faith reposed by the small investors on Indian stocks. Emergence of new sectors and businesses over the years led to an explosion of economic numbers thereby leading to a massive amount of wealth creation across the sectors. The hectic activity in the stock markets fueled by overwhelming participation by the small investors over the last few years was also largely due to the sliding interest rates in the economy, thereby encouraging many investors to take part in the stock markets, either directly or through the route of mutual funds. Even the global investors made a beeline into Indian equities because of near Zero  interest rates across the World. Stronger economic fundamentals, positive sentiment for the investors and a quick rebound from the economic compression post Covid-19 have accelerated the stock markets growth.

Way forward - Indian economy is in a sweet spot not just right now, but even looking at a 10 -15 year view, given the fact that the country would remain in the top gear to register consistent GDP growth over the next several years. Interest of the investors, both the foreign and domestic, will continue to fuel the stock markets in the future as well. The fantastic stock market journey over the last 30 years or so has been possible only by a series of economic reforms achieved over these years. Country needs to push in third or fourth generation reforms to de-lever the economic engine to push higher levels of growth from the current scenario.

India needs to chase the elusive double digit GDP on a consistent basis, if we were to reach the $5 Trillion economy in the near future. Am sure India is on a cruising path on achieving those mind boggling economic numbers which will also naturally reflect in our stock market valuations. Message for the people who regret missing the current bull run - the party is not over yet. Indian equities will continue to be on the path of glorious bull in the coming years.

V Gopalakrishnan

[personaleconomist]

SPICE is fueling Indian stock markets

Indian stock markets are galloping with no slowing down in sight. With each passing day, the stock markets, measured by indexes are crossing new highs. Though most investors are happy about being handsomely rewarded over the last year or so, anxiousness is also grappling many investors with steady rise in the stock markets. The key questions in the minds of the investors are - Who, why and what is fueling the stock markets to scale new highs almost on a daily basis?

SPICE factor is fueling the stock markets -

Sentiment - First and foremost, the sentiment of the investors is booming by the day. Investors feel extremely positive about the stock markets at least in the short term, which is the prime reason for fueling the stock markets to new highs. In any given scenario, short term movements are largely driven the sentiment, both positive and negative. In the current scenario, positive sentiment clearly over weighs the negative sentiment lifting the markets to new peaks. 

Participation of all - The current bull market is something very unique and not witnessed in the recent times. All categories of investors have jumped into the fray, namely foreign investors, domestic institutions, professional and amateur investors, small, big & HNIs and to top them all, for the first time we are witnessing a boom in the first time investors' category who have been pumping in money into the stocks in a big way. All these years, we have had skewed investment pattern largely driven by the foreign investors and domestic institutions. This time it has been a broad based participation from all the categories.

Inflows - Inflows into the markets are incessant. Liquidity is in abundance in the global markets and they are directed towards Indian stocks. Foreign investors as well domestic investors are pouring in money like never before, which is causing huge upswing the stock markets. As long as the flows remain robust, the markets will continue to remain robust as well.

Corporate earnings visibility - Corporate earnings are stretched due to pandemic linked lock down which has curtailed the business cycle. That said, visibility of corporate earnings is triggering investors to cherry pick good stocks which are available at relatively cheaper valuations. Post lock-down, corporate earnings growth is likely to pick up from the current scenario and that is giving a lot of encouragement to the investors.

Economic turnaround - Looks like bad news on the economic growth front is behind us. Most research reports and analysis point out a healthy growth in the GDP numbers in the coming quarters. Such a turnaround augurs well for the stock markets too. Anticipation of an economic turnaround is certainly playing out in the markets and possibly one of the main reasons for a sustained bull run.

Investors are advised abundant caution while handling such hot markets which seems to be running like there is no tomorrow.

Happy Investing!

V Gopalakrishnan

[personaleconomist]

OFOs or NFOs. What should the investors choose from Mutual Funds?

There are spate of NFOs which are flooding the investment market, just like the case with the previous bull markets. One general indication of a raging bull market will be known by the number of NFOs of mutual funds and IFOs of companies swarming the capital markets. And that certainly suggests absolute caution on part of the investors. Having said that, the million dollar question in everyone’s mind is - should the investors invest in NFOs of mutual funds which are being currently offered in the market?. Of course, the other alternate is about the OFOs (Old fund offers).The answer depends on various factors and largely dependent on the investment objectives of the investors.

Let's see a checklist for making a decision on NFOs -

Is there an OFO aleady? - If a particular NFO comes from a space which  already has existing schemes to purchase from the market, then the investors should analyse the old schemes and relate with the NFO's potential. Remember, the old funds of similar nature would have gone through different market cycles and would have invested in the past even in several market cycles. On the other hand, the current NFO scheme will technically buy in a peak bull market thereby reducing the chances of an out performance of the older schemes in the similar category.

Is it a uniquely themed scheme? - If the NFOs offer something unique other than the schemes which are already in existence, then such NFOs can be considered for investment. Else, mimicking the same funds in the category makes little sense to invest in a peak market. 

Is there a track record of OFOs? - Though past performance shouldn't be a yardstick for future performance, analyzing the track record of the existing schemes over the time will give a fair indication in comparison with the NFOs. Fund management experience will count when it comes to long term track record of the existing schemes. NFOs have the liability to start afresh when compared to the established schemes.

Is the market condition, a compelling reason? - Even if there are no OFOs, the NFOs will make sense only if the market conditions are conducive for new funds. For instance, if the markets are in a bear grip and the stocks are available at an attractive valuation, then NFOs make sense because they can take the advantage of lower valuations. But in the current scenario no such advantage exists for the NFOs as they have to invest in higher valuation scenario.

Does it make sense to your portfolio? - NFOs should make sense only if they a meaningful role in our portfolios. Else it will be an nth scheme in our portfolio adding to the crowd. It is important analyze the role of the NFO in our overall financial planning framework.

Is it in line with our objectives? - Is the NFO in line with our investment objective is a question which needs to be asked by the investors. Any NFO should be in alignment with our investment objective and general euphoria should not be the driving force for an investment.

Investment is complex though not very difficult. Investors should work on their investments on a scientific and data driven method before getting into any kind of investments. Thus said, general euphoria should not be the method to determine the investments strategy. Be cautious while investing in an NFO by going through the checklist.

V Gopalakrishnan

[personaleconomist]

Paytm IPO - Pros & Cons

After a blockbuster IPO of Zomato, next comes another NAT company Paytm through its parent One97 Communications to tap the capital markets. It is stated to be the largest IPO in the recent years, dwarfing several of the current ones like Zomato. Paytm has become a popular digital wallet facilitating billions of dollars of digital payment transactions through its platform. Digital payments have grown by leaps and bounds over the last few years and Paytm has been able to piggyback the digital revolution in the country. Country's payments through digital mode have witnessed a sort of revolution going by the number of people who have embraced digital payments in the last few years. Even small traders have now gone digital for payments. Demonetization, a reform which was launched to clean up the cash economy, led to the surge in the digital payment segment.

Pros & Cons of Paytm's IPO

Pros -

First mover advantage - Paytm has been around for a long time in the digital payment segment. And that gives this company an advantage in this space. Google, the global giant too is in this space though Google pay along with few other domestic players. But Paytm has been able to attract some marquee clients in its investor portfolio, which has given a leg up to its business expansion in the recent years. It's startling disclosures of some of its business numbers in RHP gives a clear indication of its market leadership in the digital payments space. Paytm, without doubt will have the first mover advantage.

Digital payments are the future - The future for digital payments looks robust given the current and the future trends. Digital transactions leaped to soaring heights during the pandemic when people were struck inside their homes. In such a scenario, Paytm will be able to ramp up the expansion plans including some acquisitions in this space which can have a clear edge in the payment space. With the country swiftly moving on and embracing the digital payments, Paytm will certainly look to tap a good market share in this space.

Allied services - Paytm has also found its feet in fintech initiatives as an extension to digital payments. Segments such as financial products distribution will be a feather in the cap for Paytm in the coming years given the huge database it could tap for such initiatives. Its new launch ‘personal loan in 2 minutes,’ is also touted to be a big initiative on its platform. It has lined up several financial services initiatives to cross sell and up sell their services.  Of late, Paytm is also seen assisting people on finding vaccine slots through its platform. With some innovative business extensions, Paytm could get a clear lead over its rivals in this space.

Faith of big investors - Paytm has been able to attract some big names as its investors since the nascent days. That shows the confidence of the investors on the company and its management. With such strong backing from marquee investors, it is easy to judge the capabilities of the company and its management for the future endeavors too.

Cons -

Stretched valuations - The pre-IPO valuations look extremely stretched & pricey and that would reflect in the IPO valuations too. Like several other NAT businesses, Paytm could command a steep valuation for its listing. And that is not expected to augur well for the investors. Some of the signature investors which includes Ant group of China (Alibaba) will use this opportunity to offload their stakes at a steep valuation. To me, valuation could be a big dampener on this issue. Investors have to compromise on valuation in search of a good brand like Paytm.

Loss making - Like many other NAT businesses, Paytm continues to be loss making and it even states in RHP that it does not foresee turning profitable in the near future. Making consistent losses into the future will certainly be a concern for the investors of this company.

High burn rate - The company is also burning high levels of cash, thanks to the liberal investments from various global investors. The company, in that sense, will continue this trend of burning cash for business expansion and possible acquisitions in the future. That again will be a great cause for concern for the investors.

Android risk - This is something which may appear trivial and small, but being entirely dependent on Google apps store is a big risk for such payment companies. Just the last year, Google knocked out Paytm from its app store citing repeated policy violations only to be reinstated later. That is a huge risk given the fact that millions of Rupees are getting transacted through Paytm on any given day. Such face offs will be a risk for the customers and the company in the future.

Overall, the company is looking good in the digital payments segment and that certainly would warrant huge interests of the investors to subscribe the issue. But keeping the other factors in mind could help investors decide the course of action on this company’s IPO.

Happy Investing!

V Gopalakrishnan

(Disclosure - I do not use Paytm app for any digital transactions)

[personaleconomist]

NAT companies are rewriting market fundas...

We have learnt in the stock markets to invest in good and profit making companies as investors. And that’s what most seasoned investors also preach and practice in their lives. In the conventional Stock market World, companies are loved for their profit making abilities among other factors like sales, margins etc. And that remains the bedrock of the price discovery leading to valuations of stock. Stock markets and the investors reward or punish companies which are either profitable or loss making depending upon the financials.

Stock valuations entirely depend on the financial matrix of the companies. But the new round of IPOs from NAT companies are looking to rewrite the games of the stock valuations. The companies which are getting lined up for blockbuster IPOs are not only loss making, but have an ever growing thirst to burn money for their business growth and operations. For instance, One97, the parent company of Paytm in its RHP has stated that it does not expect any profits in the foreseeable future and will continue to burn money for its expansion plans. Which means the prospective investors have been told loud and clear that they don't expect any profits at all and the prospect remains open ended without any trace of a timeline for turning profitable.

In the conventional wisdom of stock markets price discovery of a stock of a company is dependent on strong financial fundamentals which includes a healthy profit growth among other matrices. In the past, we have seen many IPOs fail to cheer the investors for the simple reason that the financial fundamentals are either grey or not in accordance with their expectations. In simple terms, the investors were not ready to put their money in a loss making venture even at the slightest hint.

Against this backdrop, the NAT companies which have the humongous ability to make losses in billions of dollars pretty consistently and keep burning money, thanks to the liberal foreign funds are hitting stock markets with an open declaration of their loss making abilities. This is something very new to the stock market fundamentals and the investors need to tread cautiously as the large and early investors are offloading their stakes in these companies to the normal investors through these IPOs. Perhaps this is the trend which is gaining traction in many of the Unicorn companies which see a surge in the early investments and the early investors take the route of IPOs to make a safe exit with handsome gains. Of course, the investing companies or the investors do take a beating even if some of the ventures fail and that's the investment calls they take. But that cannot be the case with the normal investors or mutual funds which handle the larger retail money.

Investors need to be sure about the prospects of the businesses they are looking to take a slice of exposure through stocks. Most NAT companies will use the capital to burn more cash for business expansion, which means the investors give their money for the companies to keep burning without any bit of profit. Investors have to realize that this is a whole new World of stock valuations rewriting the past rules of the game which were followed for the price discovery. Now prices are discovered for making more and more losses. If the trends are here to stay, we may have to tweak our fundamental views about stock valuations from now on...

V Gopalakrishnan

[personaleconomist]

BEM of NAT companies - PV ratio

After the proposed listing of Zomato, the entire space of New Age Tech(NAT) companies are on the radar of investors, analysts and management professionals alike. The space which has been working with opaque numbers other than once-a-while pop up of the financials, these companies will come under increased scrutiny post the listing of Zomato. Of course, the business models may vary but most businesses have a common template of burning cash in order to grow the business. And not the profits.

NAT companies have been in existence since the last few years with some gems like Flipkart which sold itself to Walmart on a rich valuation. That brings back the question of the Business evaluation matrix (BEM) to be followed on these companies while ascertaining their financial performances. Though the NAT space is a growing space in India compared to countries like US & China, it is definitely an evolving space for sure. Many NAT companies in the US & China have had successful listings, paving the way for a larger space for these companies. But in India, Zomato will be the first one to ring the bells in the stock markets. That said, the BEM for these companies will undergo massive changes as and when the space grows larger in size with more future stock market listings. But the question is, how are we to evaluate NAT companies for assessing their investment potential.

PV ratio (Profits to Valuation ratio) -

Profits (or losses) - Most NAT companies are on losses burning cash constantly to expand the business growth. Thanks to the global liquidity, some of the firms are able to attract big checks very consistently, jacking up their valuations to sky high levels but in the red since the inception. The increasing number of unicorns in India certainly point towards that trend. But the key, worrying question remains - how and when are these companies going to start making profits?

For instance, Zomato, which is looking at an ambitious listing given the huge response it has got, has been consistently burning cash with no profit visibility at all. In all probability, the IPO proceeds will be used to burn more and more cash to expand the business and look at few more strategic acquisitions. Given the trend, it is highly ambitious to expect profits any time soon from Zomato in the near future. Perhaps the listing will throw more light on the financial dynamics of these companies, which otherwise is not freely available in the public domain.

Stock markets and the stock investors are ruthless when it comes to profitability of the companies. Stocks are hammered down if they report losses even for a quarter for any genuine reason. It is seen as a measure of management inefficiency vis-a-vis the competitors. The fact remains NAT companies have a different model compared with the brick and mortar businesses. With NAT companies never going to turn green in a hurry is something investors need to watch out for.

Valuation - For the companies which are in existence only on liberal investor funds, the valuation seems to be too pricey at all points of time. The global liquidity is aiding free cash flows into these companies and with some savvy partners, the global firms are able to take stake at an early stage giving them handsome returns at a later date. Some of the NAT companies are sitting on huge valuations which are disproportionate to the kind of financials they have in their books.

With pricey valuations coupled with poor profit/earnings visibility, the entire BEM model goes for a toss. Valuation is immaterial as long as the firms remain privately held by a bunch of investors and promoters. But when it comes to listing, valuation becomes the buzzword to rank the potential of the company's returns in terms of its stock price. Zomato, for instance, is valued at around $9 billion but the IPO valuation is on par with some of the global peers which have much higher valuation.

It would take few more years to crystallize BEMs for NAT companies, but in the current scenatio BEMs need to based on PV ratio which can clearly lay out a road map for the investors to look at these companies as and when they come to the stock markets. At the moment, Zomato having a skewed PV ratio ( huge losses coupled with high valuations) could come in the way of better returns for the investors. Of course, euphoria is one factor which sometimes overtakes the logic and reasoning in stock markets. If people are euphoric and have a perception on the company's business prospects, the stock may go for an upper ride in the roller coaster at least in the short term. In the end, BEM via PV ratio for such companies do not present a rosy picture for such steep stock market valuations.

V Gopalakrishnan

[personaleconomist]

Should Mutual Funds invest in NAT companies?!

Zomato, the first new age tech company (NAT) is hitting the stock markets with a blockbuster IPO, which has attracted lots of attention across various investor segments. One key reason for the investor interest is the company is pretty much visible on the streets and the roads of India, at least in the major cities through their delivery partners who crisscross the cities at any given time delivering hot meal to their customers. Interest is even more high as many have experienced the service through food delivery through Zomato.

During the pandemic days, the duopolic market witnessed brisk orders for both Zomato and Swiggy which saw a surge in the orders due to travel and lockdown restrictions. Zomato, through its IPO has opened floodgates in the new age tech industry, which has a host of companies lining themselves to tap the stock markets. NAT segment is also witnessing some interesting developments. For instance Uber eats sold itself to Zomato in an all stock deal signalling consolidation in the space. Unlike the brick and mortar companies, NAT companies are a lot more different in terms of business model and operating matrix.

Most of these NAT companies burn huge amounts of cash pumped in by global & domestic investors and perennially run on sustained losses for several years in a row. But the interest in them comes from the customer side of the business. Most of these companies have a huge customer database, who are basically the service users, which in turn creates a sweet spot for future M&A deals. Remember, Walmart took over Flipkart on an eye popping deal despite Flipkart’s sustained losses from its operations. The business models widely differ from that of the conventional industries, which makes the investors’ decisions all the more difficult on these companies. In fact, many of the old time investors and other long term players avoid such plays in their portfolios.

Should Mutual Funds invest in NAT companies through various schemes?

Mutual Funds, as we all know, is a platform for the lay investors to take part in various financial markets without much hassles. In particular, the equity markets are always a challenge for the ordinary investors given their time, resource and research constraints. Every industry and sector has its own set of challenges on various parameters required for investment decision. Given the scenario, they benefit the most through the mutual funds route. Mutual funds via various schemes can invest in companies which are appropriate for the investment objectives of such schemes.

NAT companies make attractive investment bets for the mutual funds given the fact that they are going to be the sunrise segment in the stock markets. Zomato is the first, but there are many NAT companies which are lined up to hit the stock markets. Given the unique business model of NAT companies, mutual funds have a definite expertise in analyzing the future prospects through various methods, largely through their experience and quantitative models. Their awareness about the global best practices on valuing such businesses will also come in handy while evaluating NAT companies. On one hand, investing directly in NAT companies may prove risky for the investors as their assessment about the companies may be more on noise and news rather than quantitative analysis.

Such investors can take the route of mutual funds for investing in these companies, given the fact that mutual funds will only have a small pie in such companies in the overall portfolios. While many analysts and seasoned investors are questioning the valuation matrix of NAT companies thereby shooting down the prospects of such firms, mutual funds will take a closer look at these companies for a variety of reasons. Future outlook, business expansion, diverse themes within NAT space, digitization and demographic advantage are some of the best reasons for the mutual funds to actively look at NAT space in the coming days.

The valuation challenges persist in NAT space, but that's all about solving the puzzle over the period like many sectors in the past. That said, mutual funds should apply caution while taking part in such companies given the list of challenges these companies carry on themselves including valuation and profitability. Investors, at least for the time being, should not be excessively euphoric about NAT companies on their own and should go via mutual funds till some clarity emerges in this space.

V Gopalakrishnan

[personaleconomist]

Investing in NAT companies - Pros & Cons

Zomato, the first new age tech company (NAT) is hitting the stock markets with a blockbuster IPO, which has attracted lots of attention across various investor segments. One key reason for the investor interest is the company is pretty much visible on the streets and the roads of India, at least in the major cities through their delivery partners who crisscross the cities at any given time delivering hot meal to their customers. Interest is even more high as many have experienced the service through food delivery through Zomato.

During the pandemic days, the duopolic market witnessed brisk orders for both Zomato and Swiggy which saw a surge in the orders due to travel and lockdown restrictions. Zomato, through its IPO has opened floodgates in the new age tech industry, which has a host of companies lining themselves to tap the stock markets. NAT segment is also witnessing some interesting developments. For instance Uber eats sold itself to Zomato in an all stock deal signalling consolidation in the space.

Unlike the brick and mortar companies, NAT companies are a lot more different in terms of business model and operating matrix. Most of these NAT companies burn huge amounts of cash pumped in by global & domestic investors and perennially run on sustained losses for several years in a row. But the interest in them comes from the customer side of the business. Most of these companies have a huge customer database, who are basically the service users, which in turn creates a sweet spot for future M&A deals. Remember, Walmart took over Flipkart on an eye popping deal despite Flipkart's sustained losses from its operations. The business models widely differ from that of the conventional industries, which makes the investors' decisions all the more difficult on these companies. In fact, many of the old time investors and other long term players avoid such plays in their portfolios.

So, how should the investors approach the NAT companies?

Pros -

They are the future - NAT companies are the future. While the conventional industries continue to sustain and operate, the future belongs to NAT companies which target the huge demographic advantage the country provides through a young and working population, which has an ever growing appetite for consumption and spending. Even the financial transactions are becoming more digital. Companies like Zomato and Swiggy will thrive in the coming years as the country moves more towards digitization even in the remotest places across the country. The market is wide and growth oriented given the huge potential the country has in itself. The interest of the foreign investors have also been big time in these NAT companies. Some of the marquee global investors have put their money in these start ups.

Tectonic shift - Tectonic shift in the consumer behaviour & pattern and service delivery will open up the NAT space in this country, like never before. The fast pace of digitization over the last few years have catapulted the valuations of these firms to eye popping levels. For instance, the IPO puts the valuation of Zomato at around $9 billion, making it one of the highly valued companies in the space. More companies will follow suit to unlock their value and that means, the market is going to be highly active and attractive to all kinds of investors. The future is going to be in those highly efficient NAT companies.

More industries to join the bandwagon - Currently there 3-4 areas of interest in the NAT space in this country. The list could expand in the coming years as more and more businesses join the NAT club. The pace of digitization is going to accelerate the trend towards NAT models. And that will certainly create a huge space for NAT companies in the coming years. For instance, there are lots of Fintech companies which are operating and they could potentially grow to bigger and better in the coming years. The space currently is evolving and in the coming years NAT space could well become an important ingredient in the major indexes in the country.

Cons -

Business models are unusually risky - Unlike the conventional companies which have the preference to generate cash flows and profits, most NAT companies run on huge losses and ever growing thirst to burn cash to sustain and expand their operations. This could well be a valuation nightmare compared to the conventional models. For eg., Zomato is currently running on losses, though it has minimized in the last few quarters. Investors should be able to clearly understand the business dynamics of such companies before committing themselves to these companies. Presently the euphoria around the NAT companies are generating huge interests among the investors. But euphoria should not be a deciding factor for such investments.

Exit options for early stage investors (ESI) - Many such companies in the past, more particularly in the other markets have witnessed this trend. IPOs largely serve the purpose for ESIs who get an opportunity to offload their stakes which they acquired several years back on the hopes of better returns. And the current lot of investors are the ones who are going to snap it from those ESIs. Investors have to be extremely cautious while betting on such companies which have a line of investors exiting via IPOs.

Lack of benchmarks for evaluation - NAT being a relatively new segment for the investors, there are no proper benchmarks to evaluate the likely performance and operating matrix of these companies. The usual benchmark matrix followed for the other industries may not be relevant for the simple reason that these companies have unique models beyond common man's comprehension. A lot of caution is thus required before making investment decisions on these companies. Perhaps over the period we might get some benchmarks, but right now this segment is all about euphoria and enthusiasm.

While many investors in Zomato are angling at listing gains, which means they expect the share prices to zoom past the IPO price, the overall approach must be taken with a long term view. Very little information, particularly on the financials are available in the public domain about NAT companies. Investors can always decide to invest once the listing happens and more clarity emerges on such companies during the course of their business operations. Apply caution while investing in NAT companies!

[personaleconomist]

Flexi Cap Funds - Pros and Cons

Mutual funds as a platform for equity investing, have innovative investment solutions for all kinds of investors. Major mental block for the investors about equities is about choosing the right segment and stocks for various investment time horizons. That’s when the importance of mutual funds arises. In general, equities or stocks when classified based on market capitalization are called Large Cap, Mid Cap and Small Cap stocks. Market Capitalization is nothing but the total number of stocks of a particular share multiplied by its market price.

Large Caps are the companies which are matured, grown up companies and they offer a steady state of returns for the investors over a longer period of time. They also provide a cushion on the market downside. Mid Cap companies are fast growing and are on the path of achieving glory in their segment and they could be called tomorrow's blue chips. Small Cap companies are infants in the businesses and they are super aggressive in business growth.They can either grow superbly or falter along the way and disappear.

Needless to say, the Large Cap stocks are least risky, followed by Mid Cap which are high risk and Small Cap stocks have the highest amount of risk in all. That said, investors may find it difficult to gauge the equity landscape given their preoccupation on many other things. Mutual funds have a solution called Flexi Cap funds which typically invests in stocks across various market caps, namely Large, Mid and Small Caps.

Now let's see the pros and cons of the Flexi Cap funds -

Pros

Flexible investment strategy - As the name suggests, Flexi Cap funds invest across various market cap stocks. Fund managers based on their wisdom adopt a flexible approach on stock picking giving weightage to the ones which can outperform in given market conditions. That may allow fund managers to have a higher pie on one specific cap, let's say Mid Caps if they feel they will outperform the rest in the current scenario. That gives a definite edge to one's portfolio when the strategy pays off as per the investment plans.

Across all caps - Though the weightage of Market Caps varies based on the investment strategy, fund managers will be invested across all market caps giving the much needed diversification within the equity space. That allows the portfolios to have a slice in every market cap based on the current market conditions.

Stability, returns and rewards - Large Caps give stability to the portfolios. Mid Caps have the potential to give fabulous returns and the small caps have the potential to offer superior rewards if they are positioned accordingly in a portfolio. One must understand that higher risk in the markets has the potential for higher rewards, provided if the investment strategy is well calibrated in its approach. Flexi Cap funds have the blend of stability, returns and rewards as the basic premise of the investment strategy.

Cons -

Flawed investment strategy - The assumption of better returns is all about getting the right strategy in the first place. If the fund managers get the combination right, the rewards could be handsome for the investors. In case, if the assumption gets flawed, the returns could not be along the expected lines. It all depends on the skills of the fund managers to get the right combination for the investment success. In the Flexi Cap funds, the investors must be in the right trend prevalent in the markets.

Unaware of the risks - Flexi Cap funds by design invest across various market caps. And the funds are risky to that extent since the funds will also invest in high risk Mid Caps and super risk Small Caps. If the investors do not fully realize the risks involved in this strategy, they may be in for some surprises along the way. Investors should bear in mind that these funds have the higher potential of returns because of their high risk nature. Be aware.

Three is not one - In a given market condition, if one category of funds, say Mid Caps register a roaring performance, flexi cap funds may underperform them since these funds have only a slice in the Mid Caps. In that sense, these funds cannot match with the stand alone performances of category funds when they outperform in the markets. Let's assume if markets sharply correct and in such a scenario, large caps correct lesser than mid and small caps. In case if the flexible funds are high on mid and small cap, these funds will underperform the large cap funds. Nevertheless, investing in Flexi Cap funds will be a good idea to have a slice in all the market caps at one go. It will be impossible for the individual investors to get the combination right in any market conditions. Fund managers through these funds are better equipped to handle the scenario better than you and me. So go for it..

V Gopalakrishnan

[personaleconomist]

Mental traps of stock investing

Equity investors are evolving, with the times. Unlike in the past, many investors have matured and have been successful in the stock markets. Having said that, there are scores of new or relatively new investors who came into the markets having the age old mental traps of an equity investor. Investing in stock markets is more to do with the mind than the money. Many of the successful investors have started small but came with a great mindset of making money from the stock markets. No wonder they are indeed successful largely because of their minds rather than their money. Many have turned unsuccessful despite bringing in tons of money into the markets. It is not the quantum of money which matters, but the mind and skill set which matter the most for a successful investing experience.

What are the age-old mental traps of an equity investor?

Buy high vs sell low - Investors tend to buy when the stock valuations are high and sell when the stock valuations plummet during the course of the investment. This behaviour is quite natural and has been repeating since the time immemorial. Basic reason is the irrational exuberance which causes people to buy at peaks and irrational fears which causes them to sell in a panic on the downside. Both the traits are quite lethal for an equity investor. Even assuming someone buys at the right price and sells out in panic on the downside, it does the damage to his/her investment portfolio. Buying at a relatively ideal value is the best case scenario for an investor. Even if he/she buys at an inappropriate price, one should wait and not react in a panicky manner. 

Long term vs short term - Many investors confuse themselves on the long and short term of the markets.People buy stocks thinking they would hold them for the long term, but when the market slides, panic sets in and sell off in the short or medium term. Any investor who has a short list of stocks for the long term, should hold them for the tenure unless there is something serious about the company which necessitates exiting the stock. Investors should hold their views on the correct measurement, be it long or short term. On the other hand, if the stocks are chosen on the short term views and in case they go wrong, the investors either have to exit them or hold on to them compulsorily for the long term. Investors should have a clear definition about long and short term in equity investing.

Investing vs trading - This I feel is the most common trap most of the investors have. They get confused between investing and trading, most of the time. For long term investing, fundamentals of the stock and the company matter the most, while in the short term, the technical behaviour of the stocks determine its journey. The former is a strategy to be followed by an investor, the latter one to be followed by a trader for the immediate or short term. Any mismatch on the views could land investors on the wrong side of their investments. Investors, therefore, must train themselves to take appropriate views while investing and trading in the stock markets. Views vs news - Views and news are another example of the mental traps formed by the stock market participants. Views are taken for investing in stocks for a varied range of time frame. News are followed for the trading in the short term. Interchanging the two may not work along the expected lines. For example, long term investors shouldn't be investing based on news in the short term. Short term traders shouldn't take opinions/views in the short or immediate term, during which time the stock prices may fluctuate in a swift manner. Take the views for long term investing and follow the news for the short term actions on the stocks. 

Stock investing, though tough in the beginning to practice, can be perfected by having a disciplined & process driven approach. There are scores of investors, who double up as long term investors and short term traders. It is all about having a clear understanding of what we want from the stock markets. Getting the right mix of process and approach is very important for a successful stock market investing!

V Gopalakrishnan

[personaleconomist]

Are you happy?!

What makes a person really happy, is a 'billion' dollar question which drove many researchers and scholars to dive deeper into the subject of happiness. When the question was asked to many participants of such studies, invariably most of them preferred various other factors over money. Is money, the only source of happiness, as many perceive in the modern world? The answer is a big NO.  I am in the field of financial markets. And I have thought about this intriguing question over the times. And that led to many sources to find the answers.

Even our scriptures like Bhagawad Gita and various other holy texts have unequivocally declared that money and material things do not bring in the real happiness, but on the contrary they may be the source of our miseries and problems in life. In fact, the eastern thought, driven by ancient Indian civilization laid emphasis on happiness sans greed & materialistic lives. Money, it argued, can bring in temporary happiness to fulfill the materialistic desires. 

But there are various other factors which are found to bring in real sense of happiness. While I work with lots of people on their personal financial management, I also observe many of them undergo different set of challenges in their lives, which cannot be solved with money alone. In fact, many of their problems derive from money factor. The realization that money is not everything has dawned on many of them.

What should people do to get enlightened in life, beyond money and material things?

Realize money is not everything - Money is needed for our live's well being, but money is not everything in the life. That realization will bring in lot of clarity on the mission and purpose of our lives. Money is a means to carry on with our day to day lives and for securing our future lives. But money alone doesn't bring in eternal happiness in our lives, which is vouched by scores of people. No wonder many of the world's richest people are on the path of philanthropy by giving away billions of dollars towards charity and to support humanitarian causes. 

Do your duty - The essence of Bhagawad Gita is to do one's duty without likes and dislikes, without preferences and choices. Money or other material things should not be the goal while performing one's duties. Keep doing your duties irrespective of the success or the failure they get you in the process. Bhagawad Gita declares one should not be attached to success and failures, or with the outcomes of such actions and duties. Keep doing your duty. Be a karma yogi.

Look outwards - Being focused on money makes us think inwards. But look outwards. Look around the World and see the humanity. The process of money making makes people forget the humanity and about other fellow human beings, which is a natural tendency. By looking outwards, the importance of money becomes lesser and the power of humanity takes over. Look around you.

Share your bit - Sharing is caring. Many of the billionaires have found little happiness with their money; perhaps that is driving them to contribute more and more to the society and to the fellow beings, who are less privileged compard to them. For many such billionaires, the law of diminishing utility very much applies in the money. Money is all about sharing and that is caring. 

Do what gives you happiness - The previous generations were happy with whatever they earned and led happy & contended lives. But the current generation have forgotten the sense of basic and simple happiness in their lives. In the pursuit of chasing money and associated ambitions, the happiness factor is hugely missing in the lives of the individuals. Happiness is all about doing things which makes one happy.

Care for your people - Care for the people around you. Your blood ones, friends, acquaintances and other people around you. Money making should not become an activity which makes people forget about their loved ones. Many families have become unhappy, disoriented and disenchanted as people get excessively focused on money and career causing disintegration of lives. Care for the people around you. And money alone will not be sufficient to handle it.

Practice gratitude - Thanking the almighty for whatever is being provided in your life and thanking whoever played a role in your life for your success is something which goes a long way in attaining happiness. Eventually we succeed, but the success comes because of various factors in our lives. Practice gratitude. Keep thanking your stars in your lives.

Remember, many of the followers of the Godmen these days are super rich and powerful people. Many of the millionaires have their personal Gurus to be their guiding light in their lives. If they are happy with their millions & billions, why would they need a godman to guide them. And that goes on to say such people find no or little happiness with their endless streams of money and wealth. It is true that the priorities in lives change based on the flow of the lives. In the initial phases and in the early points of careers, people tend to think more on money and career, over the other factors. As people grow old and wiser, their source of happiness shifts away from money to other things. We must all remember that money is one of the factors and one of sources of happiness and not the only source! Chase happiness and be happy! 

V Gopalakrishnan 

Your Personal Economist!