Let us talk about investments which are made for each other. We obviously focus a lot on asset allocation, having a proper mix in terms of exposure to a particular asset but then if we talk about a combination of investments, which would be your first investment joda, if I can call that, made for each other?
Whenever I am starting to invest, the first thing we need to realize is that gold is one instrument that protects you from country risk. We often see some countries’ currencies being devalued, there is suddenly high inflation and things like that. Gold is one instrument that really protects you from all kinds of domestic political risk, anything going wrong within your country.
So gold is one that you should definitely have. And with gold, once one has invested in gold, you take exposure towards aspects that actually help you maximize your returns in terms of where your country is going. And how do you play the growth story of your country by investing in your country’s businesses? Gold is a great counterbalance; it is a great balancing force to equity and equity in gold is a perfect jodi.
When we talk about money, you cannot miss out on investment. When you talk about investment, you cannot miss out on the asset class. Let us talk about the kind of love and dedication and the faithfulness that you need to show to a particular asset class. Let us talk about showing love to gold in an investment form.
While Indians absolutely love gold, they do not know how to show it like a lot of Indian couples as well. The right way to show love to gold is via sovereign gold bonds. When you are buying physical gold, you pay a certain amount of GST. As far as I know, it is 3% on certain gold coins and bars and higher on jewellery and then you pay between 7% and 15% of making charges. So you end up paying 20% more from the actual price of gold.
Whereas when you are buying a sovereign gold bond, you do not pay any GST, you do not pay any making charges. Plus, if you are buying it through the secondary market, you can actually get it for up to 5-7% of discount. So effectively, when you compare it with when you are buying gold jewellery versus sovereign gold bonds, you can get a discount of up to 25% in gold. So gold is definitely a yes. But if you really want to show love to it and consider it as a good investment option, then sovereign gold bonds is the way to go.
Sovereign gold bonds have a lock-in for around eight years. What is the relationship duration that one should have with gold and what should be the exposure amount?
While theoretically sovereign gold bonds have a lock in of eight years, that is if you want to redeem it through RBI and gain all the tax exemptions. But if there is some kind of an emergency and you want to liquidate it earlier, you can any day sell it on the secondary market and there is absolutely no lock in for that. It is not that the lock-in is very strict. You only need to hold it for certain additional tax benefits, but you always have an exit option. So that also makes it a good investment plus 2.5% percent of interest on your invested amount makes it really good. Gold as an instrument is my favourite and Indians favourite holding period for gold is forever. Gold is the last thing we sell.
The minimum period that one need to hold gold for should be close to three years because three years is a time period wherein even if you bought gold at a slightly higher price and probably then it does not go anywhere for a few months or probably falls. Three-four years is a time period where it will be back to the levels where you bought, so there will not be capital losses. Most probably there is no guarantee, but if you are holding for three to four years, there should not be capital loss in terms of gold.
If it is a sovereign gold bond, you are anyway getting 2.5% interest savings accounts interest. That makes it a safe investment if your horizon is three years.
Can loving equity be risky? Is there a possibility or chance of a heartbreak?
Pranjal Kamra: Oh absolutely. If it is equity, there is no guarantee but this is where probably equity is different from choosing a life partner; you do not diversify; but in equity you need to diversify because a single equity might give you negative returns even if you hold for three years, five years, ten years and to counter that risk, you need to diversify.
In a direct stock portfolio, the minimum number of stocks that you are going to hold is around 15. So between 15 and 25-30 is the number of stocks you should go for so that you are not worried about some lemons in your portfolio because even the best stock pickers’ success rate is between 55-60%. So 40% of stocks even the best stock pickers pick actually do not perform.
That is why it is easy to diversify in equity and there are 5,000 options to choose from. It should not be difficult for you to keep a portfolio of 15 to 25 out of the 5,000 options available. Secondly, we also need to understand that in equity, there is a minimum threshold. You only invest in an amount that is not required for at least the next five years, but there is no maximum threshold.
If it is a good company that generates free cash flow, that is compounding its earnings and things like that, my favourite holding period is forever. So any money that you do not need for the next five years, please only invest that. Often what happens is market is doing well, we think why miss out, I need this money two years down the road, why not invest now in two years anyways it will double and then it crashes and I have to take my capital with a 50% reduction that is where the loss is which is not a loss induced by the market but that loss is actually induced by my lack of capacity to actually commit for the long run.
Now looking at the current scenario, the intensity of loving equity can slightly be diluted and shifedt towards debt. Can we do that?
Oh no, I think for retail investors I really do not like debt. I never recommend it.
Not even to take advantage of rising interest rates because fixed deposits are very interesting and with the kind of interest rate they are offering, even debt mutual funds, especially short to medium term, is a space where people can really park money these days?
Oh, FDs definitely yes. I mean, any money that you need in the next three years there is no investment option in terms of gold, equity or real estate if you need the money in the next one, two, three years. So yes park that safely in a FD or an auto sweep savings account.
But in terms of FDs also we are often blindsided when going with debt instruments or FDs and we pick them the same way we pick stocks.
In stocks we are attracted by higher past returns and among FDs, we like those that are offering higher returns. If a safer bank is offering 7%, I would be tempted to go with a small finance bank that is offering 8%, 8.5%. It is just the way we tell people to keep insurance and investments separate. There is also a sub-bifurcation we need to do, any amount that you need for the next one, two, three years and you want that this amount should not lose its value, you keep it in FDs. You are not going for returns. You are just looking to minimise the impact of inflation.
Any amount through which you want to compound wealth, you do not go to debt instruments. If you are looking for safety, go with gold. If you have a big-ticket size and you want extreme safety, go with a reputed builder and probably real estate, established real estate project. If you have a lower ticket size, you are okay with volatility, you are looking for highest possible returns, go with equity.
But what people do is instead of FDs, they are tempted to go for NCDs, corporate deposits, because it is offering 2% extra and I am not worried about credit rating as well because in the past two years, I probably got 9%. It will always happen and I am taking more and more risk, 9%, 10%. So with debt, risk and returns are always proportional. With equities, that is not the case. With equities, your returns rise when you control risk. But with debt, it is not going to happen. With debt, you are never going to outperform equity. So debt is a safety instrument. Go with the safest FDs, nothing else, nothing fancy.
Let us talk about crypto. This is not a particular asset class that I really want to establish over here because it is not legally called that. But a lot of investor interest is there in crypto. Should we consider crypto as a love that you should really not get into?
Oh break up with it, absolute crap, absolute junk category. I see no intrinsic value. For any asset class to be considered an investment, there has to be a basis of valuation. How do we value commercial real estate? It provides us rental yield. You do a mental calculation that this shop is worth Rs 1 crore. am getting Rs 50,000 a month of rent which means Rs 6 lakh in a year and it will take me 15 years to recover my cost. It is up to you whether it is justified or not, stocks earn, companies earn. So there is earning per share behind it. There is a basis of valuation.
But How do you value cryptos? They do not give dividends, there is no rental yield, there is no earning per share. They are nothing. They are pieces of token doing nothing and have no intrinsic value, no asset value. It was just herd mentality at display in the last couple of years and what has happened with crypto deserved to happen. If you are really bullish about it, probably 1% of your investable corpus just so you do not miss out. It is pure gambling, not an investment at all.
