Choosing a fund?? Why not Multicaps!!

When people think of investing in an equity mutual fund, the most commonly asked question by them is which is the best fund to invest. Actually the first question should be which category is most appropriate to choose the fund from – whether it should be large cap, midcap, small cap, multicap, or sectoral fund category. Each such category has its own advantages - while large-cap funds can ensure stability in the portfolio, midcap and small cap funds can potentially provide exceptionally high returns, sectoral funds can provide a kicker to the returns if the going is good for the sector.

 Nevertheless among all these categories the one that stands out due to its considerable flexibility to invest anywhere is multicap category. Multicap funds are diversified mutual funds that can invest in companies across market capitalization. In other words, they are market capitalization agnostic and invest across the breadth of the equity market. Thus multicap funds are able to take advantage of the opportunities across market cap for the investment. The funds in other categories have restricted mandate and are constrained to stick to the companies that are defined by their defined market capitalization segment. For example a large cap fund will not be able to invest into mid and small cap stocks even if the valuations in these market cap segments become very compelling. Similarly a midcap fund is forced to remain invested in mid and small cap stocks even during severe bearish markets when shares of mid and small cap companies usually have a free fall.

In such a scenario a multicap fund having an astute fund manager can easily contain the downside by realigning market cap allocation as per the market situations. In a robust economic environment, the fund manager of a multicap fund can increase his bets on mid and small sized companies to benefit from earnings upgrades. And he moves his money from shares of mid cap companies to large cap companies to take a shelter, if he is expects prolonged bearish periods. Also a multicap fund is able to take advantage of both growth and value style of investment as their investment universe is very large.

Therefore in the long run multicap funds are usually better wealth creators than other categories as they can take advantage of investment opportunities across market caps. This fact is also supported by analysing the long term performance data of all categories. As per mutual fund performance data available as on 29 July, 2015 the large cap category has provided a return of 14.93% and 15.19% respectively during the past 10 year and 15 year periods, midcap category has provided a return of 18.05% and 19.32% respectively and multicap category has provided a return of 16.37% and 20.24% respectively over the same periods. Thus returns from multicap category are comparable to midcap category over the long term but come with lesser volatility. When compared with large cap category it has clearly beaten them during both 10 year and 15 year periods.

After asset allocation at broad level of debt-vs-equity, the second level of asset allocation that an equity portion of the portfolio requires is at the market capitalization level. But an average investor finds it difficult to assess which segment of the market will outperform – will it be large cap or midcap or small cap. Thus by investing in a good multicap fund they can benefit in any market condition as market capitalization decisions are taken care of by the fund manager who has necessary skills-set. But it is noteworthy that since a multicap fund has a much larger universe to invest, therefore risk levels of a multicap fund can quickly change. Thus the capability of the fund manager becomes a crucial thing for the success of a multicap fund. The fund manager should be able to read market conditions correctly and change the portfolio allocation of the fund as and when required.

            Therefore while selecting a multicap fund you should carefully check the past track records of both the fund and its fund manager. In short, it is beneficial for the retail investors that they select multicap funds as their core holding and do not get carried away by themes and mid-small-large cap schemes. It is especially useful for those investors who do not understand asset allocation and do not have a large portfolio.

Gain Analysis, 9 months holding...

SCRIP	PURCHASE PRICE	PRICE as on 17 July 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	719.00	309	75
EVEREADY IND	110	366.55	256.55	233
CENTURY PLYBOARDS	183	193.00	10	5
GRANULES	76	98.05	22.05	29
LLOYD ELECTRIC	180	232.10	52.1	29
NUCLEUS SOFTWARE	223	317.00	94	42
R S SOFTWARE	283	162.80	-120.2	-42
SUVEN LIFE SCIENCES	122	268.05	146.05	120
T V TODAY NETWORK	170	205.95	35.95	21
CHOLAMANDALAM FINANCE	610	693.35	83.35	14
ZICOM SECURITY	173	162.25	-10.75	-6
BAJAJ FINSERVE	1450	1719.85	269.85	19
overall gain	IN ONLY 274 DAYS			44.88%

Investment stress???, ways to tackle it....

Oh, yes! Investment-related stress is as real as any other kind of stress. And probably just like physical stress or emotional stress, it creeps into you unnoticed. But stress, of any kind, is never as innocuous as it seems.
What investment-related stress does is that it makes you take financial decisions injudiciously. It makes you take knee jerk reactions that might seem sound at that time, but would be detrimental to your overall investments.So, yes, investment-related stress is real. That's the bad news. The good news is that there are real ways to beat this stress as well.
Clear out the junk
Many investors believe that they need a large number of funds to build a diversified portfolio. This is not true. You can get adequate diversification even with a few number of funds. Different strategies, different fund managers, different exposures, is all you need and what you can get without piling on fund after fund. So, clear the junk and build a portfolio that's easier to manage and track.
Keep a scrapbook
Maybe not exactly a scrapbook, but at least an account statement of your investments. Very often, we come across cases where investors know they've put their money in something, but have no idea about what that something is. That is a situation everyone needs to eschew. Keep a record of your investments as well as your insurance policies, and keep them handy so you don't waste time searching for them when you need them.
Take a walk
Literally, take a walk. When you look at the markets falling and think about redeeming your long-term fund investments, take a walk. When you see the markets rising and think about betting on a particular stock a friend tipped you about, take a walk. Basically, take a walk before you jump into any investment decision. A walk will clear your head and you'll make sure you don't end up with a regrettable decision.
Eat small meals often
Meals, here, means SIPs. The best way to invest in mutual funds is by putting in a small amount regularly, rather than a big amount in one go. Systematic investment plans have proven to be extremely rewarding in the long run because they average out your investment cause and allow you to buy units across various market conditions. And over and above that, SIPs become a habit that's worth holding onto.

Dont you invest, trade or spend on borrowed capital " THE GREEK WAY"

The rise of social media has meant that even somewhat esoteric jokes about financial events get passed around. During the global financial crisis, someone sent me this one: 1st guy: 'The financial crisis is making me really pessimistic. I'm starting to buy gold'. Second guy: 'That makes you an optimist. I'm buying rice.' Obviously, the Greece crisis has led to a flood of jokes. There's the one about the difference between 'Going Dutch' to share a restaurant bill and 'Going Greek' to not pay the bill at all. And there are any number about the Greek government eagerly awaiting replies to the Nigerian emails that they have responded to.



These Greek jokes are funny because they transfer the problems being faced by a country's economy to those of an individual or a business. However, in much the same way, Greece's problems are also a lesson in personal or corporate finance. At its simplest, Greece is an example of living beyond one's means, of spending like a much richer person than you are. In Greece's case, much of that amounted to the usual socialist folly of a bloated, overpaid and underperforming state sector.

However, what makes it relevant to individuals and businesses is the enormous role played by lenders who lent to Greece while winking at the Greek government's fudging of revenue and deficit figures. In India, we find no shortage of people and companies who have borrowed far beyond their means, simply because they could do so. Making big plans and spending money feels good and in all that excitement, it's easy to forget all the repayment and whether the borrowing is adding any real value to your future.

Borrowing for consumption is seen as completely normal--even desirable behaviour today. And yet, almost by definition, it implies zero savings, and nothing damages people's future more than that.

Portfolio Readjustment dated 3 July 2015

I have exited Fedders Lloyd and Infinite Computer solutions on 3 July. The funds have been utilized for purchasing Century Plyboards & Cholamandalam Investment.

New Multibagger purchases on 29 June 2015

We have added Century Plyboards and Cholamandlam Investment & Finance co at 183 & 623 respectively on 29th June 2015

Gain Analysis 8 months holding....

SCRIP	PURCHASE PRICE	PRICE as on 17 Jun 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	603.80	193.8	47
EVEREADY IND	110	303.10	193.1	176
FEDDERS LLOYD	85	71.05	-13.95	-16
GRANULES	76	85.15	9.15	12
LLOYD ELECTRIC	180	191.70	11.7	6
NUCLEUS SOFTWARE	223	250.95	27.95	13
R S SOFTWARE	283	155.75	-127.25	-45
SUVEN LIFE SCIENCES	122	249.35	127.35	104
T V TODAY NETWORK	170	176.40	6.4	4
Infinite Computer Solutions	200	153.25	-46.75	-23
Zicom Security Systems	173	142.15	-30.85	-18
Bajaj Finserve	1450	1500.3	50.3	3
	IN ONLY 244 DAYS			21.91%

The healing and not hurting cut by RBI

That was a predictable 'Monetary Policy Tuesday'. Raghuram Rajan maintained his reputation as a hard-headed inflation fighter. The stock markets nose-dived while punters and other stock market types, along with sundry list of business executives lamented that Rajan was killing growth. Obviously, executive branch of the government did not officially complain but there were plenty of media persons who claimed that someone or the other from the government had whispered into their frustration with Rajan into the ears of some chosen ones. All in all, just another no-surprises day.

The only thing that is actually frustrating here is this extraordinary focus that we have on the immediate impact of the current rate cut, the reduced expectation of future rate cuts and its impact on the fate of people's equity investments. Sensible, steady investors, like those who might be running equity fund SIPs over the long-term, would look at the RBI's actions, see the 400 point crash of the Sensex in a matter of hours, and conclude that the RBI Governor has done something terrible to the future of their investments.

Yet, nothing could be further from the truth. The markets' reaction to the rate cut delivered by the RBI Governor--and his comments--was short-termist to the extreme. It was the starkest example of a situation where the interests of the short-term traders and long-term investors were not just divergent, but were completely opposed to each other. The punters wanted a stream of sharp rate cuts because they had all convinced themselves that uninterrupted sharper cuts were coming and anything less would result in dropping stock prices.

In sharp contrast, the interests of the long-term equity investor is best served by an environment where the RBI is focussed on delivering a low-inflation environment while giving a balanced set of rate reductions whenever possible and necessary. Unlike what the stock markets seem to imagine, the RBI's role is not to be a steady supplier of inputs that can be used to talk up stocks. It is, instead, the default supplier of confidence that no matter what, we will have a sensible monetary policy that will peg away relentlessly at inflation but still be responsive to poor growth.

And as for the government and businesses, they want lower rates because they are the big borrowers in the system. Asking them about interest rates is like asking a buyer of any product about what the price of that product should be. It goes without saying that buyers want lower prices. In fact, a large chunk of Indian financial system boils down to the government borrowing from small savers and depositors. This ranges from direct borrowing (post office deposits, for instance) to banks buying treasuries out of the SLR. The immediate and certain effect of lower interest rates will be that effectively, the government will pay households less for these borrowings. The higher growth that is supposed to come from lower rates may or may not come because of other factors, but lower real returns for households' deposits will definitely arrive.

One of the lines of argument that the commentariat often takes against the RBI is that Indian inflation is largely structural and doesn't respond to high interest rates. The argument is that high rates won't easily control inflation so you might as well lower them and look after growth. This may or may not have any truth in it but from the point of the view of the small saver (which is not well-represented in the media) this is a poisonous argument. Deposit rates must offer a real rate of return and thus must remain higher than inflation. Otherwise, the depositor's wealth is being robbed by lenders like businesses and the government.

It thus follows that no matter what happens to growth in the economy, rates drops must follow inflation drops, and not precede them. Clearly, unlike many others, Governor Rajan understands this very well.

DK

Some mutual funds schemes still missing?

          Every bull market seems to compel the mutual fund industry to go into a NFO overdrive and this one has been no exception. But going by the over 50 NFOs launched in 2014, the industry is running out of new ideas. Most of the new schemes with vague labels like 'equity oriented fund' and 'equity focussed fund', were mere clones of established open end schemes, with a close ended twist.

          Instead of resurrecting long-dead categories of schemes, why don't fund houses reach out to their two crore investors to find out what types of funds they would really like to have? From my chats with investors, here are three kinds of funds that investors want. Can the industry oblige?

An inflation hedge fund

          One basic objective that most Indian investors would like to meet, but fail miserably in meeting, is to hedge against inflation.

          Equity gurus will tell you that if you hold equity oriented funds for the really long term, they will certainly beat inflation. But the flat equity markets between 2008 and 2013 showed us that equity funds can lag inflation or 'shorter terms' like 5 years. Options like bank deposits and post office schemes, once you account for taxes, regularly fall two steps behind inflation. So, if I want my investments to beat inflation from year to year, where do I go?

            The fund industry must devise a solution for this. Maybe such a fund can construct a portfolio of high yielding bonds and bluechip equities to meet this objective. Or it can use a mix of gilts and high dividend yielding stocks (which are available aplenty during market lows). Or it can be fashioned out of commodity stocks or even commodities that make up big weights in the inflation index.

          Generating inflation beating returns isn't a tall order. The maximum CPI inflation rate recorded in India in the last ten years was about 15 per cent, the minimum was about 3 per cent. Given that mutual funds have access to a far wider basket of investment options than the retail investor - gilts, wholesale bank deposits, corporate bonds, commodities, derivatives - they are surely better placed than us to devise an inflation-beating portfolio.

A fixed dividend fund

           It's quite surprising isn't it, that despite the stunning variety of debt, hybrid and monthly income funds that the industry has devised for us, we don't have a fund that can deliver predictable annual income?

           Yes, monthly income plans have this mandate. But given their equity component, they are liable to skip dividends for a month or two if equity markets misbehave. Equity funds do declare dividends, but they are hardly the ideal products for predictability.

          Of all the scheme categories, debt mutual funds alone have portfolios that are designed to generate regular accrual income. But with the category going in for 'active management' and all kinds for specialisations - short term/long term, corporate/gilt, fixed/floating- fund houses seem to be trying too hard to deliver capital appreciation to debt investors.

           Instead of frenetically churning the portfolio to make the most of gyrations in interest rates, investors would probably appreciate it, if the debt fund industry came up with a debt scheme that simply declared fixed dividends every year, like clockwork. The dividends need not be double digit, but need to be predictable. Investors may be quite willing to accept a close end fund with this mandate.

A capital gain REIT

          Most Indian investors would like a real estate component to their portfolio. And investing in real-life property is no joke requiring huge commitments, leverage and dealing with interminable delays and risks that a builder may foist upon you. REITs were supposed to solve this problem.

           But Indian REIT regulations, in their current form, are a clone of the global model. They are mandated to invest mainly in commercial property, rely on meagre rental 'income' for returns and pay out a chunk of their 'gains' as dividends. Instead, how about desi REITs which can focus on residential property and land and deliver, not dividend income, but hefty NAV- based capital gains to investors if held for 8-10 years? This can deliver decent property linked returns to investors without the concentration risks and hassles of actually managing pieces of property.

Managing your finances, the mother's way

The world celebrated Mother's Day last Sunday, with almost everyone heralding mothers as the most important person in their lives. And rightfully so. Despite being a father, and a very good one at that, if I might say so myself, I truly believe that mothers are the best. They care for us from the day we are born, through the rest of our lives. And not only are mother selfless, they teach us a lot. My mother has taught me a lot about life and the world, and not only that, I've also learned a lot about managing my finances from her. That mothers are called the Home Minister of a household is a clichéd joke, but mine is also the Finance Minister of ours. The way she manages our home is commendable and what I have seen her do has also helped me handle my finances better. Here are two of them:

Keeping a tab on expenses

From the 10 rupees she might give someone as a tip for handling her grocery bags to the 1,000 rupees she might pay for those groceries, my mom writes every expense down in a dairy. Having seen her do that since I was kid, I got into the habit as well after I started making a living. This habit has helped me immensely in figuring out areas where I need to be frugal rather than frivolous with my expenses. A rupee saved is a rupee earned, after all. And that same rupee when invested is more than one rupee earned.

Budgeting your expenses

And once you know where you're spending more than you should, you can easily set a budget so that you limit that expense. My mom has a set budget for every household expense that needs to be made. The fact that she has a clear idea of how much of what has to be bought allows her to make sure that nothing goes amiss. I do the same. The first budget I have set aside is for my mutual fund investments. Once that's out of the way, the necessity expenses are taken care of and only then a budget is set of entertainment or such expenses.

Both of these things are such basic elements of managing one's finances that we often overlook them while we end up focusing on the more complex issues. But that is another thing that my mom has taught me - get done of the simpler things first before you move onto the tougher tasks. Drink milk before you fill up with something else, or finish studying the easier bits of your syllabus before you move to the tougher sections, she always taught me to focus on the basics and get the foundation strong.

'It's elementary, my dear son,' she'd say. 'Thanks, mom,' is what I now say.

Gain Analysis for 7 months holding...

We have purchased following shares at various times as reported in our previous posts. For an average holding period of 7 months, net appreciation is as under:-

SCRIP	PURCHASE PRICE	PRICE as on 11 May 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	681.65	271.65	66
EVEREADY IND	110	271.15	161.15	147
FEDDERS LLOYD	85	81.95	-3.05	-4
GRANULES	76	88.85	12.85	17
LLOYD ELECTRIC	180	184.35	4.35	2
NUCLEUS SOFTWARE	223	264.20	41.2	18
R S SOFTWARE	283	173.65	-109.35	-39
SUVEN LIFE SCIENCES	122	291.05	169.05	139
T V TODAY NETWORK	170	237.50	67.5	40
Infinite Computer Solutions	200	231.85	31.85	16
Zicom Security Systems	173	140.65	-32.35	-19
Bajaj Finserve	1450	1442.15	-7.85	-1
	IN ONLY 207 DAYS			31.94%

Disastrous obstacles ahead...

The Titanic, accelerated to 22 knots, full speed ahead, just before it hit the iceberg. Besides all the other factors, the speed at which it was going, gave it little chance of avoiding disaster, and of surviving the damage after it was hit.

This is a very appropriate metaphor for the dilemmas facing India just now. We have a 'Titanic' mentality, a flawed belief in our own invincibility. One part of this Modi Mania says, 'we have Modi', implying he will get us out of any hole, even change the Laws of Physics/ Economics.

To change the metaphor I have used above to describe macro-economic management just now, 'steering the economy' is very similar to driving a car. You don't accelerate a car as you drive through a crowded village, you slow down till you reach an empty stretch again. Or better still, you don't accelerate on a flat tyre, you wait for 'stability' before you try accelerating again.

The world economy is seeing great uncertainty and increased volatility in many markets. Some of the areas are as follows:

• Deflation/ depression possibilities in Europe, as the region nears its third recession in 6 years.
• Fallen oil prices, which will seriously affect major oil producers, including major emerging markets. These economies will see sharp spending cuts, or huge Budget Deficits and hence, falling currencies.
• A general commodity bust, consequent to a slowdown in China, which could tip into a serious crisis.
• A rickety Japan, which has a number of problems, and has still to see the after-effects of an unprecedented last ditch attempt at speeding up a sputtering economy. This could end in a Greek-style blowout.
• A potential currency war, which could be triggered by any of Japan, China or Germany devaluing suddenly and trying to garner export competitiveness. This triggers an upward Dollar spiral, with disastrous consequences for everyone.

Hardly a time for a still-stable Indian economy to try and wring out additional decimal points in growth, by shifting Monetary Policy from its focus on stability. Which makes me want to wade into this 'debate' between Mr. Jaitley and the RBI on Interest Rates.

This chorus for an Interest Rate drop is rather like a bunch of kids sitting in the backseat of a car, screaming 'faster!!! Faster!!!', with no idea of what the driver is dealing with. I don't understand this obsession with growth, in an economy that is one of the fastest growing in the world anyway.....it certainly has the highest growth momentum in the world. It's not like we are teetering on the verge of recession, like Europe, or trying to fight chronic deflation like Japan. I can understand an obsession with growth in those economies.

India is the only major economy still battling inflation. And we are just coming back from a near Currency Crisis.....shouldn't we be focussed on stability, especially given the rocky seas clearly visible ahead. How have we quickly created a consensus that all is well and we are ready to jump off a cliff with an umbrella?

Most of the underlying factors are still in the red zone. The fiscal deficit, for one: we are going to overshoot yet again, a modest target that still brackets us with France, that basket case of a no-hope economy that sits at the heart of the Eurozone crisis. The CAD is back above the 2% red line, in an era when the falling Euro and JPY is going to increase your trade deficit. If you look at the trade-weighted REER in nominal terms, you will find the Rupee has got overvalued, which is not going to be good news for your CAD.

If the CAD also represents your savings deficit, then any further uptick in the Investment Cycle will only bring more bad news on that front. So why not keep high real interest rates to push up domestic savings? A drop in the credit offtake could mean a cyclical deleveraging effect. This can be made up with other reforms that improve corporate profitability, like labour and land (acquisition) reforms, which bring down the cost of other inputs. Tinkering with Monetary Policy to bring down the cost of capital, is just lazy government, taking the easy way out.

The steep drop in oil prices has been a good stimulus for the economy, but this decline could have been used to bring down the fiscal deficit with some temporary taxes. Such initiatives could also cross-subsidise energy efficiency programmes and VGF funding for Solar.

With all this talk about the Modi Wave, real change of macro-fundamentals has been zero, and we are already talking about going to 'loose money' again, even as liquidity is already flooding in. This will only feed inflationary pressures, leading to a two-steps-forward-and-one-step- back policy that will only promote volatility in monetary policy.

I mean, why do we always to look to Monetary Policy to bail us out of a slowdown? Is it because everything else is more difficult, or is it because Markets are most sensitive to money flows, and they have a disproportionate voice in the mainstream media? Are the profit priorities of just a few rich and influential individuals, going to be allowed to destabilise the country's most important economic objective.....to provide stability first, and then create the right environment for growth to find its natural level.

Shouldn't the Govt's targets be first an inflation target, a fiscal deficit target, a Public Debt target, a Primary Surplus target.....and then a growth target, which follows as a result of the enabling environment that is so created. A driver is first meant to ensure that a car is stable, there are no accidents and the wheels are not flying off, before he listens to the kids screaming in the backseat. In India, you find very little debate on the rest of the variables that drive stable growth, and all the conversation is just about growth at all costs. This only promotes cyclicality and volatility, with its own economic costs.....most important, these costs (i.e. inflation, debt defaults, spikes in unemployment etc) are borne by the poor and the middle class, while the short-term benefits of incremental growth are eaten away by the elite.

A Modi government that is looking at the long-term is better served by a sharper focus on stability, and creating the right environment for sustainable growth, rather than a blind rush for growth. I sincerely hope that a Raghuram Rajan who has set himself the target for a 'bullet-proof' Balance Sheet, will not be swayed by this cacophony of voices that are looking for growth on steroids.

If at all interest costs need to be lowered, the Govt can give an Interest Subvention of, say, 4% for Solar investments. This will have the effect of reducing the cost of capital for solar investments, helping promote investments. Except that the cost wuld show up in the government's fiscal deficit, even if it is as a capital subsidy. But at least it will discipline the government, which will have to find other spending cuts. The net effect of a further solar subsidy (over and above the VGF of `1 cr per MW), will be to reduce imports (of coking coal and oil) and the cost of energy. Energy independence will give a fillip to agriculture and water management, which is just where growth momentum should be promoted.

To summarise, the government should focus on promoting asset profitability, rather than reduce the cost of liabilities. With rose-tinted profit outlook being posted by every analyst worth his salt, why should we resort to rate cuts: instead, keep real interest rates high, even as you reduce the cost of other inputs, especially land, raw materials and management value-add. This will bring in foreign investment, which will help kick off your Investment Cycle with equity rather than debt. That will kick off a virtuous cycle, bringing in FDI, besides promoting domestic savings. It will also silence industry lobbies that are behind this cacophony for lowering interest rates.

Lowering the cost of capital often results in misallocation of investments, even as we are suffering the after-effects of the rate-lowering spree and spraying of cash, after 2008. The chorus for a rate cut could hardly be wanting to go into another cycle of misallocation (of investments), even as we have still to write of the NPAs of the last cycle.

Demographic decline and increasing cost of capital

A fertility rate of 2.1 per woman is the minimum needed to stabilise a society's population. Anything below that will cause population to decline within a generation. Europe is at 1.55, Japan is at 1.3 and most of the important countries of Europe are around 1.3. Germany, Italy and Russia are at the bottom of the heap. Even China is at 1.6. More importantly, there is no historic precedent for a country to increase a declining birth rate except through immigration. The US is doing that, raising its birth rate for white Caucasians from 1.9 to a national birth rate of 2.1, just enough to maintain population. The difference is made up by the higher fertility of African- Americans and Hispanics.

Why does this happen? In low-income societies, children are seen as an earning asset and a support system in old age. In developed societies, children are a drain on parental resources, and increasingly, not much of a support in old age. We have seen this spectacularly in urban India which has moved from the joint family system to nuclear and even individual family units in a single generation. There is a direct correlation between urbanisation, per capita GDP and a drop in fertility rates.

Throughout my generation, we have rued a high population growth and celebrated low (population) growth rates. But the deflation/depression that pervades societies in long-term demographic decline is visible in Japan for the last 25 years and is now being anticipated in almost the entire developed world. It creates an 'inverted pyramid', where a small number of workers have to support a large number of dependents. This increasing dependence ratio creates stresses in society, especially when the government debt (and social obligations) of earlier generations has to be paid off. That is why the current deflation/depression scenario could prove to be especially burdensome on the coming generation.

At an individual (country) level, immigration and productivity growth could mitigate the effect of the debt hangover. Japan has seen very high productivity growth in a deflationary economy, which is why at an individual level we have not seen the kind of misery that one would expect, say, in a depression. The per capital GDP has stayed buoyant, in a zero-inflation economy, leading to better living standards despite a high dependence ratio. High savings and a persistent current account surplus have ensured that Japan remains a creditor nation. In a perverse way, the new Abenomics philosophy to print money and service debt will eventually lead to inflation, but if it happens after the ageing 65+ segment has been seen off, there will be much less misery than if they had taken any other course. Once the 'geriatric hump' has been seen off, a sharp inflationary shock that demonetises the Yen and reissues a new currency would settle the bankruptcy problem once and for all. This has been done before (in Germany in 1920). In a country with a low dependency ratio, wages will catch up with inflation, provided productivity remains buoyant. Higher productivity produces a higher stock of capital, especially over a longer period of time. As population drops and debt gets paid off, a society gets richer in real terms, not poorer. Throughout history, population has been rising and so has debt, resulting in lower equity per person (aka wealth). Now, as the equation reverses, a dropping absolute number of people with a rising cumulative stock of capital (i.e., wealth) will result in higher equity per person. This will reduce leverage ratios and lead to higher consumption, which is a must if all that higher productivity is to find an outlet. For the first time in history, higher wealth will come with a falling population. That will make labour more scarce than capital, and I don't know how society will handle that. Certainly, the elitist mindsets that wear the suits in finance and industry today would be caught unprepared, I am sure. Politicians also will be blindsided. All this will take a good half-century to play out but will be seen at different stages in different societies. India will have time to learn from others because it will be the last to enter this stage.

There are two jokers in this pack. One, productivity rises so fast that it renders labour surplus faster than the population can reduce. The magic number is 2.5 per cent because the decline in most country populations will be about 1 per cent in the worst of cases. This does not look impossible, given the twin booms in energy and robotic automation that seem to be round the corner. Two, they find breakthroughs in cloning or some method of asexual reproduction, which allow specific countries or ethnic groups to reverse their declining demography. At the moment, it looks like Japan and Germany will do something drastic to arrest their demographic decline.

Of the four inputs to production - land, labour, organisation and capital - only two would be left valuable. In a zero-cost energy society, also facing declining population, the real cost of land would drop to nothing. We can see that spectacularly in Japan, where real estate is still 80 per cent below 1989 levels. That should be a lesson to those readers who look to real estate as the most durable legacy they want to leave behind for the next generation.

Organisation is just a higher form of labour, which in a falling population would tip the scales in its favour, vis-á-vis capital. This would increase the per capita GDP. Intelligent readers can draw some serious long-term direction from this if they want to draw conclusions for planning their children's careers. If I know crowds well, most people will be caught in the middle of a real estate crisis before they start to question the existing wisdom of 'real estate being the safest investment'. Bond market bears who are perpetually betting on a sharp rise in interest rates may find themselves waiting for Godot.

That brings us to our final conclusion. With demographic decline, you get a falling cost of capital, as opposed to the cost of labour. That reduces the opportunity cost for investors, even as it reduces corporate profitability because of wage inflation. So countries in demographic decline, which include Japan, most of Europe, even China, are going to see this scenario. These countries will also see rising wealth and savings, even as they see falling investment opportunities. This is already visible in some countries and will become visible in others (for example, China).

Countries that are laggards in this (demographic) trend, like the US and, of course, India, will have a higher cost of capital and lower wage costs. They will see better investment opportunities and, of course, will be net capital importers. From a currency standpoint, it makes sense to 'carry trade' from poor demography countries and invest into better demographies. We know that carry trades work but only over the long-term. This would be particularly true over periods of sharp demographic change like the ones we are going to see over the next 15 years.

For Indian investors, who are heavily loaded up with real estate, the path forward is clear. A worldwide drop in the cost of capital will see disinflationary trends drop the cost of capital, although we will not step into deflation. This will reduce returns from real estate. They would do well to borrow in currencies that are facing demographic decline and find pockets in Indian markets, where you get healthy differential returns. The actual methods may look a little complex because they may have many legs, but the underlying philosophy is recounted above. Remember one very important principle of investing: Go where you can see predictability. Any investment hypothesis that is based on something as unchangeable as demographics has to be very robust. And this single hypothesis could help you generate outsize returns for a very long time in the future.

A case for rural employment in agrarian/rural industry and ofcourse other than agriculture

The Ministry of Statistics and Programme Implementation recently revised the way it calculates the gross domestic product (GDP) of India. As per this new way of calculating the GDP, agriculture, forestry and fishing form around 18 per cent of the total economic output of the country.

As per the old way of calculating the GDP, agriculture, forestry and fishing formed around 16 per cent of the GDP of the country (based on April to September 2014 GDP at current prices). Hence, as per the new method, there has been a small improvement in the share of agriculture in the total economic output.

Nevertheless, once one takes into account the total number of Indians dependent on agriculture for a living, the real picture starts to come out. Data from the India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry, points out that agriculture 'employs just a little less than 50 per cent of the country's workforce.'

If nearly 50 per cent of country's workforce is engaged in an activity which produces only 18 per cent of its economic output, there is something that is not quite right about the entire scenario. There are way too many Indians dependent on agriculture to make a living. The situation gets even worse once you take into account the fact that most people who work on farms don't totally depend on income from the farm.

As Mihir Sharma writes in Restart: The Last Chance for the Indian Economy, 'This is one of the few occasions where the statistics are so obvious that they're worth quoting. Here is the most relevant statistic: If farming households were forced to live on their agricultural income alone, then more than 60 percent of them would be below India's poverty line.'

Those working on the farm are aware of this. 'This is why, at last count, only 17 per cent of them - less than one in five! - subsisted entirely on money from their farms. The remainder all did some extra work off it,' writes Sharma.

So, nearly 50 per cent of the country's workforce works towards generating only 18 per cent of its economic output. The trouble with Indian politicians has been that they have worked towards trying to improve the second number. 'Many people have been convinced that if there was just some way to increase agriculture's share of output... things would be better,' writes Sharma.

But that is easier said than done. A major reason for the same is the fact that the average size of an Indian farm has been falling over the years. The State of the Indian Agricultural Report for 2012-2013 points out that: 'As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small and marginal, medium, and large) has declined over the years, and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.'

This is something that cannot be reversed. The size of farms has been growing smaller because over the generations the number of people dependent on agriculture for their income has grown. This is despite the fact that at 157.35 million hectares, India has the second largest agricultural land in the world. Only the United States has more land than what India has.

The agricultural output can be improved. 'The efficacy of other agricultural inputs such as fertilizers, pesticides and irrigation is largely determined by the quality of the seed used. It is estimated that quality of seeds accounts for 20-25 per cent of productivity. Hence, timely availability of quality seeds at affordable prices to farmers is necessary for achieving higher agricultural productivity and production,' the State of the Indian Agriculture Report further points out.

Nevertheless, there are way too many Indians dependent on agriculture and that needs to change. That will only change if the country as a whole generates enough semi-skilled jobs where people can be employed. But the job growth in India has been abysmal over the years. 'In the years from 1972 to 1983 - not celebrated as a time of overwhelming prosperity - the total number of jobs in the economy nevertheless grew by 2.3 per cent. In the years between liberalisation and today, jobs have grown at an average of only 1.6 per cent per year,' points out Sharma.

If India's young who are entering the workforce need to be absorbed, jobs need to grow at 3 per cent per year. Add to this the massive number of people who need to be moved from agriculture to other areas, the rate of growth has to be even faster. The matter is further exacerbated when we think about the population growth rate India has.

There are no easy answers here and this is something that the Narendra Modi government will have to address in the next Union Budget as well as years to come.

Coincidences, Corelations, investing!!!

I am sure all of us fondly remember the time when we got hiccups as kids and then being told by our grannies it`s a sign that someone is remembering us. Or the time when crows caw-cawed at the top of their voices in our balconies. For many, it was a signal that some close relatives are likely to pay us a visit soon. Of course, as time passed, most of these beliefs have come to be known as nothing but mere superstitions. But wouldn`t it be interesting to find out how did they originate in the first place?

Well, the answer lies in the most gifted yet somewhat eccentric human organ ever created. Our brains that is. You see, our brains try to make sense of the things around us by resorting to causal stories all the time. In other words, if an event A has happened, we find hard to believe that sheer chance or luck caused it. We immediately start to rationalize that some other event B caused event A to happen. Even if it is something as unrelated as our hiccups being caused by someone near and dear remembering us. Our brains just refuse to accept the fact that there are thousands of possibilities out there. And therefore it could just be coincidence that when B happens, A also happens.

Putting it differently, what essentially happens is that we often confuse correlation for causality. And no one has made more fun of this apparent shortfall of our brains than a gentleman who answers to the name of Tyler Vigen. On his eponymous website, there are some really bizarre conclusions that he has arrived at. For e.g. did you know that the more cheese of a particular variety called mozzarella the people of US consume, the more civil engineering doctorates come out of US universities! Or for that matter the more chicken the US eats, the more crude oil it imports.

Well, if you are scratching your heads trying to find out the link between these events that seem so highly interdependent, let us tell you to relax. Please note that no such links exist. It`s just that there`s high correlation between these events but absolutely no evidence of causality. Actually, the wiring in our brains is at fault here. Whenever two variables show some trend of moving together, our brains automatically assume that one causes another. But as Tyler Vigen has shown, this could prove to be ridiculously wrong at times.

Unfortunately, we carry this bias over into the field of investing as well. You see, success in investing is all about trying to predict where stock prices are going to be in the future. And therefore we start to look for factors that have a high degree of causality with them. However, often times we zero in on parameters that have high correlation but are not necessarily the cause of higher stock prices.

What makes matters worse, especially in the short term, is that these high correlation but low causality factors do tend to dictate stock prices.

For e.g. things like interest rates, inflation, currency movements or commodity price movements do end up showing high correlation with stock prices in the near term. But do these cause the stock prices to move in the long term? Absolutely not. Long term, it is things like business fundamentals and the quality of the management that drive stock prices. And therefore, it is these causal factors that investors need to rely on if they need to succeed doing long term investing.

Trust us, what causes most people earn poor returns while investing is the inability to distinguish between these two parameters. And also the difficulty in sticking with the right ones over a long period of time.

So the next time you are attempting investing, ask yourself whether the parameters you are looking at will predict stock prices accurately over the short term or the long term.

If it is the latter, you are on the right path even though you could face some hiccups in the near term. However, if it is the former, you could do well to abandon them even though your near term results are good.