Compounding of Businesses - A practical case study

 Compounding of Businesses 

There are plethora of articles on the net and quotes regarding compounding and how it works magically or like wonder of the world. 

Just like compounding works organically for an individual. It works for a business also, and the process gets magnified and expedited if the processes and business practices are ethical and dependable.

I will relate once such business and the owner to you.

On 6 of June 2002 a youngster came for an appointment with me as a mutual fund advisor or distributor as an employee of a not a very well known brokerage firm. He arrived half an hour late by when I had decided to leave for some other place .

We met the next day and I told him that the first step of credibility is being punctual. He never gave me another chance to repeat myself.

I had already been investing in mutual funds for some years after my extended interaction with Mr. Shanbhag. But having found a new person closer home, I started challenging his intellect and observing his business practices.

It’s not that we would agree upon every fund that I invested in, but he always had a reason of suggesting a particular fund to me.

In a span of five years, he won my heart and mind so much so that I persuaded him to resign from his company and set up his own advisory plus distribution business.

In 2007 shortly after he went solo, the entry load on mutual fund was scrapped, which was a direct loss of about 2.25% for any distributor and soon after the brokerages for distributors were also reduced greatly to them below 0.3%. 

The very next year, there was a global meltdown because of American banking system, causing almost 0 inflows in equity.

In 2013 the Direct mode of MF purchase also affected business for distributors 

At times I felt guilty at suggesting him to go independent and offered to share his business and personal expenses, but he was not to be affected and he marched on.

It took roughly 11years to accumulate AUM of One hundred crores. The next hundred crores came in just 3 1/2 years. … and last week going on the reverse he was giving party to the mutual fund industry for reaching 300 crores in just two years.

At this point, it is important to note that a very small amount may have come by way of new and fresh investments from his clients and roughly 30% must have come by the incremental wealth of his clients. And that precisely is his tagline . He does not believe in churning funds for his clients but says that ,“The only way I can benefit is by increasing your own wealth”

His reliability is such that people would trust their WILLS with him rather than their own family members. While working on board, I would leave the entire checkbooks and transaction slips signed with him for regular bulk purchases in case the market went down.

Against my strong advice during the Covid lockdown, he would regularly take his aging clients to AIIMS and other hospitals. 

Not only my friends, colleagues and relatives he has helped me generate meaningful wealth, for my domestic helps and many other people from the economically challenged background.

One thing that he started very late for himself was investing for his and his own family, and I am very proud to say that I cajole , monitor and reprimand him for various of his choices.

He must be the only distributor and financial advisor who listens to his client for his own investments.

Now putting a name to this compounding, wonder- ladies and gentlemen, let me present Pankaj Jaiswal , a profile in moral courage , patience and credibility .

 

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THE STORY OF COMMISSIONS AND OMISSIONS

One of my hobbies is to collect, collate and interpret data to get some sort of a story or trend into which humanity is moving on short and long term basis.
Today after reading a news item in which the employers of banks, insurance companies and wealth management companies (but not mutual fund companies) are incentivizing the exclusive foreign travels of their distribution network and employees promoted me to extract the data of aum under each industry.

The article that I want to write was in fact about the commissions but I am also going to give you some eye openers about crores of people like you who are called retail investors in common parlance.

Size of Indian Budget that finances the entire country--- ₹47,65,768 cr

AUM of MF industry-                 ₹58,91,160 crore. (Of which 58.1% is in equity mutual funds).

AUM of ENTIRE Insurance sector. -         ₹54,63,414 cr

Total deposits in Indian Bank s- 201,00,000. Cr
( AS FRONT RUNNERS OF FUTURE INDIA YOU MUST GET INTO THE HABIT OF USING THE TERM TRILLION FOR ONE LAKH CRORE)

(Source: PRSIndia.org ; business- standard.com, RBI.org.in)

Did you know that 88% of the equity investments in mutual funds is done by retail investor which includes small individual investors like me and the HNIs like you.
This is as opposed to only 16% of institutional investment ( domestic and Foreign )in the equity mutual funds.
Now furthering the discussion... 58% of the mutual fund outlay means 34.16 lakh crores OR ₹Tr are in equity MFs.
Taking a median expense ratio of 1.0% between regular and direct investments 0.34Tr₹ is the size of expense ratio that the AMCs collectively charge and distribute about 0.15- 0.30% to its distributors (depending upon the Tier cities) .
Now consider 35% of first premium and  5-10% of successive( of 54.163₹Tr) that insurance companies charge you , what do they do with that?
You guessed it right!!! That is the reason your insurance broker has a bigger car than you while insuring your life!!!
The lure is so strong that there are Insurance companies which have doctors, teachers, bankers ,tailors and even petrol pump attendants on private basis on their payroll.
A Seafarer from another WhatsApp group  is so convinced with Ulips that he takes one policy every time he comes back from ship.
His insurance company has placed so much of trust in him that they have made him an insurance advisor. Now of course he is compensated handsomely for the premium that he pays for himself.
Now that you have understood about the insurance let us move over to banking which has almost double the amount of deposits then either insurance or MF sector.

We have been need to understand that our bank deposits and money from saving account goes to nation building And in return we get taxable and below inflation returns. The gratitude that the government shows to the depositors is so great that it even deducts the tax at source above the gigantic limit of rupees 2500.

What the bank does with this deposit of yours... I have already discussed this in my book And you can go over it again to refresh your information.

The whole idea of this small exercise of mine this morning is to make you understand how each and every person out there( and that may include mutual fund companies as well) Is out to lighten your weight of your hard earned money.

I don't think the article will have any convincing effect on most hardliners but at least I have done my job.

Before I leave I would like to mention that I have intentionally left out the topic of real estate and other government aided schemes which punish you equally for the money that you give to them for safe keeping.
 

The intoxication of Merchant Navy : The life within

The intoxication of merchant Navy: the life within

Somewhere in 1975 sitting on the wooden tiles of Fraser assembly hall of my school and watching some English movie on a 17 MM projector, I saw the vast expanse of the sea on the screen and somewhere from the back I heard the word Merchant Navy.

That was my first introduction to the world of Shipping. It was certainly not a career that I desired at any time during my school ,on the contrary I used to dislike it.

But destiny plays with us, and God does not gamble with us, but also throws the dice in the dark as Einstein said… I landed on a ship through the college.

From the very first moment when I saw the vast ocean from the tiny moving island that I was on, I could feel the freedom in form of the cool breeze on my face. It was a freedom bordering on liberation Which soon was to become my second nature.

It is almost unimaginable for a person who has not spent more than a week at sea that what this freedom means.It is not the freedom away from worry and responsibility of the world, but it is certainly the freedom from any laws of any country.

Even though technically, we follow the laws of the country that we arrive in , but practically we’re governed by the laws of the flag of the country that we fly, which is mostly in a nondescript country of West African Coast Also called Flag of convenience.

But as most would know that 90% of the time when we are out in the open sea, a sailor is governed by the laws of nature alone, and his survival depends on the cooperation and compassion of his fellow mates.As I have often said that having million dollars in cash at this point on ship would not even get you one square meal.

Your worry is not the world food problem or the Indian GDP but how much food do you have in the refrigerator rooms below the deck.

Apart from food and fuel for the ship, the Sailor is not worried about anything. He is beyond the executive order of even the most powerful man on earth, and probably at par with the richest man in the world as far as basic necessity of life goes.

This freedom or independence give him a certain amount of self dependence or Atmaram-nirbharta as the buzzword is going around in the country. Soon our friendly sailor realizes that the only thing that can happen is what he will do on his own, and the only helping hand is at the end of his own shoulder.

But to me early on in my career it dawned that not only in matter of philosophy, but also in matter of economics and finances, the Mariner is largely left to fend for himself.

His employer does not worry about his future , his health or his life.He has no pension or retirement benefits.His family thousands of miles away is left equally to the mercy of God and relatives both of whom seem to disappear at crucial moments. It is all this that continues to weigh on his mind and preventing him from becoming the enlightened one.

Due to lack of any guidance, he continues to put away his money or his savings in land or other avenues, which he cannot liquidate when needed. In Earlier times, his salary was certainly superior to the cost of living of India, and so the land that he could buy was not what other people on land could.

All these things used to bother me in no uncertain terms and continue to do today because not everyone has become financially savvy. Even today I find people being distracted and diverted from their core competence and delving in businesses which are not capable of giving them returns that simple investment in equity could with almost zero risk .

Coming back to the initial topic of the intoxication of  freedom … it is important that this quality be channelized creatively in restructuring their finances  , personal matters, expressing themselves as writers , artists, motivators and leaders.

What sea gives us is not easy to replicate but easy to distribute. 

Jai Varun Devta !!!

The New Problem- Problem of Plenty

 

The New Problem- Problem of Plenty

Before I start this article I must clarify at the outset that though all people have started seeking me for assistance in planning their finances, my specialisation or rather focus remains for Mariners .

It is not because there is any difference in the numbers or the kind of money being handled but because I understand (or at least SELF-claim to understand) the psychology of my junior colleagues, their life and challenges.

It is without unfailing regularity that at least one or two senior officers are reporting achieving their retirement corpus every month. This is become certainly faster than what was happening earlier and the credit that I give to is the aspect of time or duration of the investment . They have been investing for and have remained invested.

Most of these people are young Masters and Chief Engineers who have just got their promotion and in many cases they have not even reached that top rank.

The reason why they phone and I come to know that they have reached their corpus is because after having reached their milestone their next step is automatically in the form of the question,  "can I take up the shore job in the office of my company".

Last week itself there were three people within a span of 24 hours who phoned for this reason but I would consider that a coincidence or a one off thing.

This is certainly a very beautiful problem where the person has achieved to accumulate what is required to spend a comfortable life and from this stage onwards if he does not touch this amount and let it grow it is going to reach some dizzying heights.

Now to deal with the question of plenty...

Whether the person should take up a shore job or not?

I have already made a video on this for Merchant Navy Decoded (you tube channel) But let me deal with this in readable words.

Mostly my advice to them s to evaluate for themselves that do they need that job for a reason or are they considering it the next step in their professional career.

Is it because they feel that they will get more time with their family or is it because they have seen their contemporaries doing so. The sailing life has certainly become a lot more challenging (read as TOUGH) than before and almost certainly risky too with the fast changing Geo-political conditions.

But leaving a career or changing stream only for this cannot be a smart move. By moving to the shore management you will not be able to escape the ship visits even though the duration on ship may reduce but number of visits maybe more than before- taking the travelling time to be higher than before.

Another important aspect that one must consider ( and this is based on the first hand experience of my other contemporaries) that the nature of job ashore will not change with the new designations in form of promotions that you will get.

In line with the above statement my advice to those trying to change their career graph are two:

1. If you stay in shipping career (even though ashore)- Keep your licenses and documents valid and not let them expire.
2. Use your time ashore by gaining extra qualification - preferably in non shipping stream. You may gain the qualification within the shipping stream but try to get the best higher education.

Now suppose after reading above you decide that you do not wish to leave shipping to settle for a shore based career for whatever reason it may be. Then please do not suddenly go off track and lose control on yourself and start splurging your resources, and by this I don't only mean spending on expensive things but also by starting a business in unrelated areas simply on the behest of your good friends or gooder relatives.

The risk that I have pointed out in " The Seafarer's Story " in the begining of my book - still lurks stronger now because you have the resources now which act like honey for the bees.

You maybe inclined to try your hand at business- but it maybe a good idea to do it without your own money or learning about it by working for someone in that field. Entrepreneurship certainly does not mean burning your on money. In fact as I understand- it is all about finding ​***atic who can lend it to you for burning.

These are things that I have warned you against not doing but it will be unfair if I quit without pointing out where you should or could find your bearings.

You can certainly start by doing the things which you could not because you did not have sufficient time or maybe not resources to buy the necessary equipment. You could start by writing that book or making that long travelogue.

Discovering yourself by looking inwards Through various meditation techniques could certainly help you in focusing or other than spreading yourself very thin.

You could certainly start studying for a different courier all together as a lot of people have done earlier. Engineers have become lawyers and navigators have become company owners and educationists. There is certainly no limit today and the limit can only be because of your imagination.

So please solve your problem of plenty in a holistic way which can benefit you , your family and certainly the society which has helped you become what you are.

 

Debt and its relation to economy and the bank rates

  Debt and its relation to economy and the bank rates

Even though the entire focus of the public is always on equity, it is the debt market, which actually keeps the economy moving.

In simple terms, Debt is the money that is given by individual or an organization to another organization or the government.

This is termed in different ways, depending who the debt is been given to.

A private organization may take it form of commercial paper, debentures, or fix deposits, the government on the other hand may take it form of tax-free bonds, bank deposits, post office, schemes, PPF and it’s debt papers.

For the government, the papers, and the market is also referred to as GILT( at least in Indian context).

Needless to say, government or sovereign papers, have the highest safety, and while investing in the debt, it is the safety of capital that should be given the highest priority, instead of simply the returns.

We have seen with the case of Franklin india liquid fund and ultra short term fund. What happens in case of a default when we chase returns and ignore the quality of the debt papers.

Another very,Important aspect of debt, and its relation to the bank rates is, it’s inversely proportionality. Which means when the bank rates go up the return on the debt papers or the debt mutual funds falls.

As a corollary when bank rates fall down, the return on debt papers goes up.

THE IDEA OF WRITING THIS ARTICLE IS TO ELUCIDATE THIS IMPORTANT FUNCTIONALITY FOR NEAR FUTURE.

Even though the RBI has said that there is no indication of reducing the rates, but if the industry has to prosper, the bank rates and other connected rates like repo and reverse repo, will definitely come down, but when we cannot say.

Should this happen the returns from all the debt funds, including the GILT funds, will go up.

So what should be our strategy keeping this in view?

I have always maintained a ratio of 25% of the corpus in debt funds at all times. WheneverMy exposure to equity used to go above 75% are used to invest my salary in the debt funds.

Since it was very difficult for me to predict, what kind of debt funds will benefit, I used to spread my debt investments across ultra short term funds, credit risk funds, GILT funds and dynamic bond funds.

Invariably always I benefited immensely from the interest rate cycle.

Therefore, for those who have sufficient equity exposure, and are still earning, this could be a good time to start investing in the debt funds of the above categories or different categories as they feel comfortable.

Once again, I will request you to kindly do not fall for the highest return funds, but instead check the quality of the fund by checking the holding of the securities that they have. The papers or securities being held by the fund must be AAA RATING OR SOVEREIGN RATING (MEANS BE GOVERNMENT BACKED).

There is no need to shift your NRE fixed deposits to debt funds, and you should only invest the fresh earnings or proceeds from the sale of other assets. 

THE TAXATION ON DEBT FUNDS HAS CHANGED FROM FIRST APRIL 2023, AND AS SUCH DOES NOT COMPETE WITH THE RETURNS FROM RRE FIXED DEPOSITS, DUE TO THE TAX NATURE OF THE LATTER.

As I suggested in the opening lines, the industry depends upon debt, and therefore lower the rate of interest more profitable. It is for the industry and government to borrow money from the public.

So certainly when the interest rates will go down the stock market will also get a boost because of projected company profitability, and they will be in the equity returns also.

Therefore, it makes sense that you do not sell any equity to switch into the debt funds.

From the author : this article may be forwarded to your other colleagues on board  on leave or other friends and relatives, working assureso that everyone may benefit.

Horses and Investing - Lessons from history

In the olden times when it was required to move with speed and strength, a single horse would not do, and in order to harness the power off multiple horses chariot was designed.

In the chariot, the slowest of the horses were kept in the middle, and the fastest at the back . so that the slowest of the horses were edged to move faster, but overall power delivered to the chariot was enormous. It is possible that the fastest of the horses would not have had the stamina which the slower horses did.

Modern mutual funds are almost like that horses .

Six to eight horses are sufficient to give you that chariot for financial journey .

These horses should not be the same type in stamina or speed. They have to be different.

So, just having small cap horse will not be enough,They may be having a good speed, but the stamina is very less.Similarly all the horses cannot be large cap as they would have the stamina, but much less speed to cover the distance in less time. Apart from the desi horses, you may also need some Overseas horses from foreign world etc

But when they would start running, and if the fastest of the horses got tired, the slower ones would still be able to pull them along.

It is possible along the way one of the horses become sick, so you can always remove it and run with less horses, or include another horse who can be young and experienced, and also have the stamina.

In the initial times, you will need to move up the hill for accumulation of assets, and would need the horses which have stamina and speed, but but towards the later part of the journey when you will reach the top of the hill, and the road would become with less gradient, and you would have already covered a lot of mileage….  your Horses, even if they were moving slow would be able to cover your distance and take you to your destination. 

At that stage, if you feel necessary, you may change your horses to more sturdy ones or continue with your existing ones. It all depends upon you because by then you would be an experienced charioteer …

Admission of Omission

@240124 

 A lot of you have pointed out that makes me think that I did everything right with my financial management.

Nothing can be far from truth, because what I pass on to you, are the lessons, more from my mistakes rather than my minuscule achievements.

I may be from the generation when equity investment was synonymous with gambling and speculation and information for investing was non-existent.

Therefore, we made our share of mistakes and getting up and starting to walk again.

But what we want to pass on to all of you is the essence of all those mistakes so that you don’t have to make any of your own.

You will never find any database, stronger and more objective than the collective feedback of my generation, which is represented on this group also.

Balancing out with the mistakes that we made in our attempt to become matured investors is a challenge that the present generation of seafarers is facing .

That is the elevated age of juniors entering shipping as officers.

The loss of 5 to 6 years to join as junior officer from our time to today is indeed a great loss from the point of journey of financial freedom.

Therefore, I implore you again, and again that if you are on this group, then please start your investment immediately, if you have already started investment, make sure the amount you invest per month is at least 35% of your annual income.

If you are already doing it, then ensure that you stay on the path and guide others on board who may not be on this group.