index investing 2

Whenever I am asked for advice on investing, I recommend the broader index. I never suggest individual stocks to anyone. For the most, picking stocks is more of arrogance than of skill. Everyone is up to beating the index. Although many mutual fund managers in India have been able to beat the Nifty-50 index, they may not be able to sustain that performance over many years. Even otherwise, for individual investors a simple Nifty-50 index should be sufficient. 

Index funds have not been that popular in India mainly because at the moment many mutual funds have been able to beat the index. They aren't available at cost as low as they do in the US. Despite that I can argue, individual investors should do well if they stick to the index over the next decade or two, or more.

There are 3 things that one should check before one invests in the index. It should be liquid enough to be able to buy and sell at any time. For that to happen, the assets under management should be as high as possible. Their expense ratio should be as low as possible, and why not when there isn't much to do for the manager other than tracking the index? Finally, the tracking error of the fund should be low. The returns from the fund should be able to tell us how closely it is able to track the index. 

In India index investing comes in 2 forms: Index funds and Exchange traded funds (ETF). Index funds let you invest with the fund house, either directly or through brokers (regular plan). ETFs are like stocks traded on the index. You can buy or sell as low as one unit as you would buy or sell stocks. However, index funds usually have minimum amounts to be invested. 

I have listed down 4 ETFs and 4 index funds mainly based upon their assets size. 

These funds are compared with the Nifty-50 total return over the periods selected. Among ETFs, Niftybees offers better liquidity although SBI ETF Nifty 50 has much higher assets under management. Other than that all ETFs have given more than 15% over the 3-year period; more than 12% over the 5-year period; and Niftybees has given more than 16% over 10 years. More importantly, these ETFs aren't too bad in tracking the total return of the Nifty-50 index. The same is true with the index funds. 

Consider this: how many individual investors can boast of returns over 15% over the last 10 years? This boring strategy of picking the index and sticking to it has been quite good in the past decade. We cannot predict how much it will return in the next decade, but suffice to believe that the return should be quite satisfactory. 

What is imperative is to choose the index fund or ETF, and then stick to it for a very long time. Throw the money each month irrespective of the market levels. And this is the best part of the index investing: pe ratios or pb ratios don't matter; implied equity premiums don't matter; whether the market is overpriced or underpriced is irrelevant for the investor. As the investing horizon gets longer, the risk in expected returns gets lower.

Invest in the index, and move on with life. Do what you enjoy instead of fretting over expected returns. The index will take care of your financial needs. Isn't that cool?

biggest markets forecast

According to this report by Standard Chartered, emerging markets will flourish by 2030, and the US will be the third biggest in terms of GDP measured using the purchasing power parity.

As of now, China is the leading economy with $26 t GDP measured in terms of PPP, and the US comes second with $20 t. India is much ahead ($9.5 t) of Japan ($5.4 t). So the three leading economies will still likely be the same.

market exchange rates

The current GDP of the US is about $20 t, and it has never grown more than 3% since 2005. If we assume 2.5% growth rate, the GDP will be $26 t by 2030.

At the prevailing exchange rates, the Indian GDP is $2.6 t. If it grows at a respectable rate of 7.5%, it will barely reach $6 t by 2030. Even a 10% growth rate will not take the GDP to more than $8.5 t by that date.

Now for China, from the current $12 t, the GDP will grow to $21 t at a rate of 5% over the 12-year period. 

Based upon the market exchange rates, though, the US will still probably be the biggest economy followed by China and then India.

Someone said, it is difficult to forecast, especially about the future. Time will tell us the reality, but until then, what's the harm in fooling around?

indusind bank q3

IndusInd Bank has moved down more than 2% as I write this post subsequent to its December quarter reports. While I don't care much about the day-to-day market prices, let's us have a look at how the bank has performed during the quarter, and how I feel about the stock. 

With 602 m shares outstanding and the stock quoting at Rs.1601.75 as of yesterday, the market cap of the bank is Rs.964 b. It earned Rs.9.85 b during the quarter. The net interest margin of 3.83% has not changed much compared to the previous quarter; but it is way down from the March 2018 margin of 3.99%. The casa ratio of 44% has remained steady all through the quarters. The cost to income of 43.65% has improved; in March 2018, it was 45.65%. But the cost of funds has gone up to 5.81% from March 2018 (5.03%). 

The true test of banking business is its loan book, its growth rate, and quality of that book. IndusInd bank's advances have increased more than 19% from March 2018. That implies an annual growth rate of 25%. The bank had gross npa of 1.14% and net npa of 0.59% which is remarkable for the private lender considering the current circumstances. In fact, the net npa (percent) has remained quite steady during the last four quarters. Restructured advances were Rs.1.86 b as of December 2018. 

The book value per share stood at Rs.438.48. But that is not the correct measure of the bank's equity. After adjusting for all stressed assets, the book value is Rs.418.30 per share. Now to price the stock, we can pick a multiple; and the expected rate of return for the investor will depend upon that multiple. 

Let's keep the investment period of 3 years and annual loan growth rate of 20%. At a price-book multiple of 2, investment return over the 3-year period is going to be negative. The bank probably deserves a better rating considering its growth rate and quality of assets. At 2.50x, the expected rate of return is a little over 4% which is not much. At 3.5 times book, the expected rate of return is more than 16%, and at 4x, it is more than 21%. We can play with the multiple, but if we consider 3 times book as fair, the investors stand to make about 11% on the stock over a period of 3 years. Whether 11% is good or bad depends upon the individual investor's own opportunity costs. 

For any bank, capital is key to its growth expectations. Any increase in advances will have to be matched by increase in equity capital. IndusInd bank's Tier 1 capital is quite fine at 13.78%. A growth rate of 20% should not be too difficult for the bank considering the superior quality of its assets. The bank's return of assets and return on equity are pretty decent too. 

IndusInd is a well managed bank; but then to buy at its current price, the expected rate of return will have to be modest.