• How does an increase in bond rates impact banks?
• What happened to Silicon Valley Bank or SVB?
• How safe are Indian banks?

Finally, the most important question is Can the 2023 US Banking Crisis lead to 2008 like situation for equities?

So without much ado, let’s begin.

How does an increase in bond rates impact banks?

Let’s understand this with a straightforward Indian FD example.

I have one lakh rupees, and I go to my HDFC bank and deposit the 1 lakh Rupees at six per cent FD rates.

So I deposit the money, and they give me back a certificate worth 1.2 lakh rupees or six per cent for three years, it comes down to 1.2 lakhs. So I take that certificate go home, and sleep well.

I know my amount is secure HDFC bank is very secure, and there is nothing wrong with it.

Now three or four months down the line, RBI has increased rates, so the FD rates in India increased to nine per cent.

So the banks are now giving more rates on FDs. It doesn’t matter because I can get 1.2 lakh Rupees at the end of a three-year tenure.

Suddenly there is some emergency, and I require money.

In India, if an individual requires money, he can break their FD with the Bank, but in the case of government bonds, you can’t break the bond.

You can’t return the bond certificate to the government and ask for money. So what happens is you have to sell it in the market.

So we will use a similar example for our FD. Now I need to find a third party ready to purchase this certificate.

He will tell you that though you have a certificate of 1.2 lakh rupees, it doesn’t matter what you have invested in, but if I go to an HDFC bank today and deposit 92,000 rupees, I will get a 1.2 lakh rupees certificate.

The reason is that now the interest rate is nine per cent.

So I will not buy this 1.2 lakh rupees certificate for 1 lakh rupees, but I am ready to buy it for 90,000 or 88,000.

I invested one lakh rupees, and now if I want to sell that certificate, I’m getting 90,000 or less depending on the demand.

Now, I have to take a loss of 10,000 rupees or 12,000 rupees.

If I am not booking it, this loss is notional, but if I need the money, I must book it.

Remember, there is no issue with the deposit quality; people will get the money at the end of the tenure.

So because the same amount of money in the future can be achieved with less capital, the increase in bond rates decreases the value of a bond held by banks.

What happened to Silicon Valley Bank?

Let us understand what happened or Silicon Valley Bank and why it is being termed a US banking crisis.

Banks typically work in such a way that they lend for the longer term by taking short-term deposits.

In a Bank, depositors deposit money for the short term, including bank accounts. Then, the Bank lends that money out for a long and keeps a certain amount of cash for day-to-day transactions.

Let’s say I deposit 10,000 rupees in my savings account; the Bank uses the money for lending. So if it is given as a home loan to a person, I can still withdraw the amount as well.

So a bank keeps a certain amount of money for day-to-day transactions.

What happens if everyone comes and tries to withdraw the money?

In such a situation, any bank can have a problem, however, if the Bank is well-capitalised for day-to-day activities. So even if 10 to 15% of the people withdraw the money and everyone gets paid, the nerves automatically settle down.

The Silicon Valley Bank targeted startups as their customers. As a result, they offered higher interest rates for bank deposits.

Startups were funded with enormous sums of money and did not need the total cash. So they preferred SVB bank because of the higher interest rate.

A win-win situation for both.

Because the bond rate was rising, the startups were not getting new funding.

So startup’s balance was depleting. So Silicon Valley Bank was losing the adequate ratio to keep withdrawals processed.

Now, the SVB bank decided to sell the bonds and book the national loss. First, however, they had to raise the capital because the balance sheet was reduced for the loss booked.

Once they wanted to raise the capital, everyone thought they had booked a loss and wanted to raise capital, so now the Bank is not well capitalized, and everyone went to the Bank to withdraw the money.

This is how the Bank collapsed.

US Banking Crisis

Once a large bank collapsed, everyone understood how a bank could collapse.

The working of a bank has to be in such a way that they should have adequate Cash Cash levels for day-to-day operations.

Every publicly listed Bank’s balance sheet is open, so once the Bank doesn’t have a good amount of cash, everyone starts withdrawing money from such smaller banks.

Then, FED calmed the depositors by making them as safe. Once the nerves calm down, people will not withdraw money from the Bank.

There is one more piece of news: Some planes have landed in Omaha, and Bank CEOs will meet on the weekend of the 19th of March with Warren Buffett.

Once he comes into the picture in any bank, the sentiments will improve

How safe are Indian Banks?

Indian banks are very safe. We don’t function like a U.S Bank.

RBI doesn’t allow a bank to fail, but FED say that only the depositors are safe; the investors in the Bank are not safe.

In India, we had an issue with YES Bank. The depositors were safe, but the shareholders were also safe.

I mean that RBI will not pay you ₹300 or 400 as the share price of YES Bank, but the Bank didn’t go out of business. The Bank continues its business; you can get out of the stock.

Indian banks operate in a very safe environment, so there are no issues with any Bank whatsoever in IndiaHowever, the share price of Indian banks is falling, which is just a Sentimental effect.

Also read:

Business Analysis of Divis Lab and Why Share Price Keeps Falling

The business analysis of Divis Lab in a 3-step process and understand why the share price of Divis Lab keeps falling.

Can US Banking Crisis lead to 2008 like situation for equities?

The current news flow doesn’t suggest anything like it was in 2008.

2008 was a domino effect, and we still don’t see any domino effect coming up. Even a fall of such a large bank as Credit Suisse had a little ripple effect.

No one knows about the future, but right at this point, we don’t see any domino effect.

Moreover, if Warren Buffett invests in one or two banks, that can lead to a different scenario.

I hope this helps you understand the US banking crisis. Let me know your views and thoughts in the comments below.

I have also shared the complete business analysis of

• PI Industries
• Fine Organics
• TTK Prestige

Investing in any listed company, including Divi’s Lab, is not recommended. I am not a SEBI registered broker to recommend any stock. I have chosen Divi’s Lab to help you understand how to analyse a business.

Still, I will not talk about price information. Instead, I will share information to analyse the underlying business in Divi’s Lab. Everything I am sharing is available in the public domain.

So now, without much ado, let’s begin.

Step 1: Ratio Analysis

The first step to becoming a good investor is to analyse a business and reject the company for investment without too much effort.

More than 3000 companies are trading on NSE and BSE. If you analyse each of them, revisiting a stock investment can take a long time. So if I can reject the wrong businesses to invest in, it can save me a lot of time and energy to spend on good companies.

So the first set of rules that I use for rejecting a business is using the financial ratios and investment checklist.

• ROCE of consistently above 15%
• Debt to Equity ratio of under 0.5
• Operating Profit Margin or OPM in at least double-digit.
• Consistent EPS Growth for 3,5, and 10 years.
• Promoter Holding depends on how large a company is.
• What is the Cash Flow to Net Profit Ratio?

Initially, I was pretty rigid on the financial ratios. I learned it by missing the investment opportunity of Avenue Supermart or DMart. It has a low OPM of under 10%, which made me pass on the investment opportunity back then.

However, I realised some businesses compromise on the margin for very high growth. So, now I am also ready to compromise on some parameters for higher growth.

However, I never take debt lightly.

Step 2: Sector Analysis

The Pharma Industry has three major types of companies.

Innovators

Companies that spend time and money to research and development create pathbreaking drugs. Then take a patent to protect the drug for 20 years. No one else can copy it during this time.

Non-Innovators

Companies who are not innovators but they wait for patents of popular drugs to expire. Then they launch a drug with the same ingredient but package it differently. These will be cheaper drugs that the masses will consume.

Many Pharma companies in India go this route.

A report shows that over $20 Billion in patents are going off-patent in the next few years.

Contract Manufacturers

Every pharma company needs the drug’s essential molecule, active pharmaceutical ingredients (APIs). For example, the medicine Dola 650 and Calpol 650 both contain the same Paracetamol.

Check it out on 1MG, and you will see the salt composition for each is the same.

The contract manufacturers are the one that manufactures the paracetamol ingredient.

Step 3: Business Analysis of Divis Lab

Finally, we will do the actual Business Analysis of Divis Lab. The critical aspect is understanding the company’s growth, debt, and competition because I prefer to invest in a unique business with very little competition.

So I look for the following in Divi’s Lab.

• Unique Business
• Selection of API and Divi’s DNA
• Growth Outlook
• Sector Leadership

Anything and everything that can help me understand the business.

Now, let me share how I have analysed each point for Divi’s lab, which has helped me to analyse the business better.

Unique Business

I have been invested in Divi’s lab since 2017, and I invested in it because of an import alert for Divis by USFDA. The price was corrected by more than 50%, but I was shocked that some drugs were exempted from the alert.

Import alert means that the products manufactured at the plant cannot be sold in the US. The USFDA however, has exempted a few drugs from the alert which include Levetiracetam, Gabapentin, Lamotrigine, Capecitabine, Naproxen Sodium and Raltegravir.

Excerpt from the news on NDTV.com

It meant the company was manufacturing APIs that no one else could manufacture and that the US didn’t have an alternative to these APIs

The Divis DNA

Murali Divi, keenly interested in mastering chemistry in 1990, started the company as Divi’s Research Centre. It then changed to Divi’s Laboratories Limited in 1994 to signal its intent to enter the API and intermediates manufacturing industry.

In 1995, the company established its first Manufacturing facility at Choutuppal, Telangana. However, it was a pretty late entrant into API manufacturing.

Still, Divi’s began with an ingredient called Naproxen — a popular anti-inflammatory drug. Then, Divi’s found a very efficient way to manufacture it. It used enzymes instead of chemicals to induce a reaction from the drug faster.

As Murali Divi had a keen interest in chemistry, he could manufacture drugs using the custom synthesis process for the API. So Despite starting in the 90s, Pharma innovators realised that the Divi was onto something.

Slowly, Divis Lab became the manufacturing partner to many companies.

Divi’s lab was slowly into Nutraceuticals, which means they were now using food or part of foods or dietary supplements that may provide medical or health benefits.

So this leads to three main products for Divi’s Lab.

• Active pharmaceutical ingredients (APIs)
• Custom synthesis
• Nutraceuticals

So Divis lab selects an API with a vast market and then dominates it by developing better manufacturing processes.

Growth Drivers

Divis lab has five main growth drivers.

1. Growth in Dominating APIs – Divis’ APIs, where the company has a market share of over 60% or more, are expected to grow double-digit. Divis will continue to maintain the market share and increase a little as well.
2. Increase Market Share in Non-Dominant APIs –  The company is building the capacity for APIs where it is still not a dominant player and has around 30% or less market share. It plans to achieve a 60-70% market share through capacity expansion.
3. SARTANs API Based on the technical advantage towards areas of impurities in the Sartans, Divis plans to enter areas of Sartans (for API).
4. Off-Patent of APIs in 2023-25 – Over $20 Billion of patented drugs are going off-patent in the next few years (2023 to 2025). So many new non-innovators will start manufacturing these drugs, and so will require APIs from Divis.
5. GEO-Mix – 44% of Divis revenue comes from America, and India is only 10%. So they can grow in India and Asia as well.

Why the Stock Price Keeps Falling

I see it because the company’s EPS jumped from ₹50 to ₹111 in a couple of years. It isn’t easy to continue performing YoY at such a high base. So each time we see disappointing results, the stock price has a steep cut.

And I think the same may continue for one to two more quarters.

Final Thoughts

The reason for the success of Divis Lab has been it is a

• Low-Cost Producers because of expertise in chemistry
• Careful selection of APIs and focuses only on a few APIs that they can make by the use of better chemistry
• Sector leader in every API

What are your views about the company?

The answer is YES, and I will share the same with you here.

Let me help you with a Google sheet for it.

I am sharing a Google sheet, and do not ask for its edit permission. Instead, please copy the above sheet and use it as you like.

I am returning to the original question about how one can calculate the fair price of a share. The critical aspect is the reasonable price of the stock you should invest in.

Understand the Google Sheet

Earnings are one of the common factors to consider in valuations. A common consensus is to use the earnings per share or EPS and price-to-earnings or PE ratio of the companies to determine whether the stock is overvalued or undervalued.

So we will use some of the same to find a fair price.

Warren Buffett mentions cash flow and not earnings or EPS because profits can be manipulated, but cash flow is challenging.

However, we use the business checklist to eliminate companies that can potentially manipulate earnings. So for our calculation’s sake, we can use the earnings or EPS.

• The current EPS – Available on websites like screener and from the company’s quarterly and yearly results.
• Growth (Expected) – What will the expected growth be? We will use the past 10, 5 and 3 years’ profit growth to estimate future growth.
• Expected Return in % – What do I expect from this investment? I like to have a 26% CAGR return which means double every three years or 10x in 10 years.
• Expected PE Ratio in Future – At what price-to-earnings ratio can I sell the stock after ten years?
• The margin of safety in % – Because we are predicting future growth, we also need some margin safety percentage. Again, we will see examples of how to use it.

So using the above values, we derive an earnings and share price chart in excel as follows:

• We apply the compound interest formula for the earnings or EPS to keep growing for the next ten years.
• Then, we apply the back calculation for the share price. So, in the 11th year, we assume the price to be the then EPS times the expected PE ratio.
• Now we apply the back calculation of reverse CAGR on the share price at the expected return to get fair value in the current year.
• Then we apply the margin of safety on the above price to get a fair price.

If it is too much to understand, the examples below will help you.

Asian Paints Example

So, now we have the Google sheet, and all we need to do is put in the parameters from the screener.

• The current EPS is 31.59 for the past year.
• Growth (Expected) – Based on the past growth, we can safely assume the company will be able to grow at 12%CAGR
• Expected PE Ratio in Future – I hope to sell the stock at 90 times its earnings in 2033.
• The margin of safety in % – 20% margin of safety is good enough for my estimates.

When we add the current EPS and expected growth, we get to the EPS the company would do in the next ten years.

When we put in the expected PE ratio in the future, we get the then price and its back calculation to date.

Then we apply the margin of safety on the above price.

And Voila, we have a fair price for Asian Paints.

Pidilite Example

Pidilite has been one of my portfolio stocks since 2017. So I am putting parameters a little backdated.

• The current EPS was 15.66 for the year in March 2016.
• Growth (Expected) – Based on the past growth, we can safely assume the company will be able to grow at 12%CAGR
• Expected PE Ratio in Future – 100 is a promising future PE.
• The margin of safety in % – 10%.

Now we have the EPS of Pidilite in 2026 will be 48.64, and the price at which one should have invested in 2016ish time was around ₹700.

Final Thoughts

Do you invest in stocks at a fair price? What is your preferred margin of safety percentage? Share your thoughts in the comments below.

You may assume it has to be a debt-to-equity ratio, but it is not in the top three.

So now, without much ado, let’s look at the three most crucial ratios to consider when investing.

ROCE

The most important of all ratios is ROCE, or return of capital employed.

Every business needs capital to expand and grow. So if a company can generate returns better than the fixed deposit rates in the market, it makes sense to invest in that business.

For example, I tell you to give me 10L Rupees at 4% annualised returns. But, you will ask, why should I give it to you when a bank offers me 8%?

The same applies when partnering with anyone in the stock market. If a business cannot generate returns better than a certain level, there is no point in investing in that business.

I prefer ROCE to be above 15 or 20 per cent, and you will seldom find a company where I have invested has a ROCE of under 10.

There are one or two exceptions that I have invested in my open portfolio, and generally, it has been invested with the viewpoint that the ROCE is improving.

However, if it is not improving, either I am out of it or, in some cases, I have very little exposure to the other ratios being very, very good for it, and ROCE will improve over a more extended period.

OPM

The second most important ratio I look for is the operating profit margin or OPM.

You know that I prefer to invest in companies that have little to no competition. So, they are unique businesses.

Once the businesses are unique, they can demand much better-operating profit margins because they can sell the product at a much higher price than the cost of the product itself.

OPM helps me understand how good is the pricing power for the business, the competitive landscape, as well as the domain expertise of the team.

Again, you seldom find companies in my portfolio with a single-digit OPM.

Again, every rule has an exception, with one or two exceptions. The reason is that the OPM is set to increase in the near future as the management focuses on increasing the OPM.

Companies are in the early growth stage of the business. So they may have to take a hit on the OPM, but once they start to optimise their business processes, the OPM will increase.

Also read:

9 Investment Checklist I Follow Before Investing In Any Stock

Here is my ultimate checklist that I always follow before considering any business for investing.

Future Growth

The third and most important ratio I consider when investing in a company is the past 5 and 10 years’ growth and what growth I expect in the next ten years.

I am a growth investor and not a value investor.

What I mean is I invest in high-growth companies available at a reasonable price than looking for value companies available at a discounted price.

In other words, I don’t look for companies available at a very low price-to-earnings ratio. So I don’t expect the price-to-earnings ratio to expand.

Instead, the companies keep growing, and even if the PE Ratio comes down, I still make decent CAGR returns.

So, I am looking for companies that can do profit growth of at least 25 to 26 percent if the company has been doing it in the past and can keep doing it in the future (organic or inorganic).

So, once I expect the profit to continue growing at 26 percent, the share price will have a decent CAGR even if the PE contracts to half or one-fourth.

Final Thoughts

If I have to choose the fourth and fifth one, it will be free cash flow and the debt-to-equity ratio.

I know free cash flow is also important, but cash flows are generally good when a company has a ROCE of 15 to 25 percent.

So these are some crucial ratios I look for before analysing any business. What are your most important ratios when investing in a business? Please share them in the comments below.

Let’s understand each scenario, but if you want a short answer then it is NO; you shouldn’t be doing a blind switch or redeeming. Let me explain.

If You Have an On-Going SIP

If you have an existing SIP in a fund that is not one of the better funds to invest in in 2023, and more importantly, you believe that the other fund will do better.

Then stop the SIP in your existing fund and start SIP in another fund.

This will help you analyse both funds parallelly. Also, with time, you will know if you were correct in your predictions.

If you find the fund you expected to perform well is doing well and the fund you had in your portfolio before isn’t performing well, then it’s high time you should consider switching.

Switch but without Paying Taxes

When switching, your gains may be taxable, so your benefits of moving from a non-performing fund may be paid in taxes. So one should be careful in switching between funds.

Here is an excellent way to change as well as save on taxes.

Any gains on units held for more than a year in an equity-related mutual fund are long-term. So you pay a 10% tax on the gains if they are more than one lakh in a fiscal.

All you have to do is ensure your total long-term gains in equity investments (Mutual funds + stocks) are under 1L.

Remember, if you are doing a SIP, those units held for a year are long-term, and others are for the short term.

• If you had a SIP for three years, hence for the units bought two years ago are held for over one year. So the gains on those units are LTCG tax at 10 per cent after the first 1L of tax heaven.
• If you follow the FIFO (First In, First Out) accounting method, the first invested units will be withdrawn, and those will be under the LTCG.

You now need to calculate how much your gains are on the units and redeem partially if the profits are above one lakh rupees.

If the one-year time frame has not passed, then they would be on STCG, which is 15 per cent. However, you should also redeem if those units have no profit.

However, you should only redeem those units under LTCG and not STCG or those where you don’t have too much profit under STCG.

Wait for Change in Fiscal

If your invested units give you gains of more than one lakhs, like maybe two or three lakh rupees, then you only redeem half of it in Jan, Feb, and March of 2023.

Then wait for the fiscal to change and redeem the other half in the next fiscal year. This way, you utilise your tax heaven on LTCG, move out of low-performing funds, and invest in high-performing funds.

Switch the non-performing SIPs, start in better-performing funds, and look for opportunities for saving tax.

Withdraw the excess amount that is not performing as well as it should and invest it in the fund that is performing well. This will help reduce taxes and move bad investments into good ones.

Also read:

Best Mid Cap Fund to invest in 2023

How to find the best mid-cap fund to invest in 2023 in minutes without using Excel files and using only online tools.

What if the Best Fund Doesn’t Perform

We stopped the SIP in fund A and started in Fund B to compare them.

So if we found that the best-performing fund isn’t performing anymore compared to the non-performing fund.

We tend to think that one of the funds has given a 36 per cent return and my fund has a 12 per cent return only; hence I should move to the funds with more returns. However, it is possible in the future that the 36 per cent return does not perform at 12 per cent, but the non-performing fund is now performing.

So when you can compare, you will know that your fund has performed well and Shabbir’s best fund hasn’t, so you don’t lose much but only the return on the last few month’s SIP.

Also read:

The Best Small Cap Fund To Invest In 2023

How can retail investors find which is the best small-cap fund to invest in 2023? Let me share the process & come up with the best small-cap fund for 2023

Final Thoughts

Never invest because someone has recommended it to you. The funds that I am suggesting are not because I recommend those funds. It is the process that I am trying to help you with.

I share the complete process to find the best-performing funds. Feel free to apply your choice of criteria that gives you comfort while investing.

We will do some fundamental analysis of such businesses using annual reports to uncover their hidden PE.

Screener Query

Let’s start with the screener.in query!

Let me explain the query in brief first.

• Sales growth 10Years > 10 AND
• Market Capitalization < 1000 AND
• Average return on capital employed 10Years > 10 AND
• Debt to equity < 0.25 AND
• Promoter holding > 25 AND
• OPM last year > 10 AND
• Earnings yield > 10 AND
• Investments > 100

Sales growth of the past ten years should be above 10 per cent CAGR. So we don’t want to consider companies that aren’t growing.

Then, we want to focus on companies with a market cap of under 1000 crores. We keep the market cap under 1000 crores because we wish investments to exceed 100 crores. Hence at least 10 to 15 per cent of the company’s market cap is in some investment. This will help us in finding the hidden PE.

The average return on capital employed for the past ten years should be above 10. In general, 15 is more favourable, but we are also considering the companies with scope for improvement in ROCE because we are looking at smaller companies.

Then we have some basic eliminators like the low debt-to-equity ratio, higher promoter holding, and sound operating profit margin.

Additionally, we have an essential factor called earnings yield.

Earning yield has to be more than 10. Hence we will remove companies with high PE ratios because if this increases, the earning yields decrease.

In brief, if the earning yields are higher, the company is available at a lower PE ratio than its growth.

And finally, the following parameter is investments to be above 100 crores.

Let’s analyse each of them individually to see their hidden PE ratio.

Super Sales India Ltd

Super Sales India Ltd has a market cap of 247 crores, with the stock trading at just under 6 PE.

The balance sheet shows a startling figure of 284 crores of investment with a cash equivalent of 36 crores. This adds up to 320 Cr.

Don’t get over-excited here. First, we need to look at the details of the investments to see if it is equal to cash.

On the balance sheet page inside the annual reports of March 2022, the investment is 221 crores. Therefore, the annual report shows approximately 221 crores in Lakshmi Machine Works Ltd.

As per Screener, Lakshmi Machine Works Ltd has 12,204 crores of market cap with 2.15 per cent investment. This means the company has an investment of 262 crores at the current price.

But can Super sales India liquidate them?

I don’t think so because they are not investors but promoters of the company. So you have to consider this investment with a margin of safety.

In conclusion, the company has a good amount of cash and investment and is available at under 1, 2, or 3 PE, depending on how much value you put into the investment.

And we have to analyse the business further and understand why the company’s net profit jumps from 9 crores in march 2021 to 48 crores in march 2022.

Further, how one business will change when there is an adverse condition for the other business must be considered.

DHP India Ltd

Next, we’ll look at DHP India. This company has a market cap of 310 crores, with the stock trading at a PE multiple of just under 8.

The balance sheet shows an investment of 106 crores as of September 2022 with cash and cash equivalent of 4 crores, making it a total of 110 crores in investment and cash equivalent.

So, at an 8 PE, this company becomes a PE multiple of 5 as we only pay 200 crores for the business, and the rest is the cash with the company.

Still, let’s look at its investments of 106 crores in September 2022 but 87 crores in March 2022.

Looking at the balance sheet inside the annual reports, we see that this company has investments in mutual funds, most of which are equity-oriented mutual funds.

So, DHP India’s investment is very liquid compared to Super Sales India.

Sree Rayalaseema Hi-Strength Hypo Ltd

Next, we have Sree Rayalaseema Hi-Strength Hypo Ltd is available at a market cap of 900 crores.

Looking at its balance sheet, it has an investment of 306 crores and 157 cash equivalents as of September 2022. So it already has 450-460 crores in cash/ cash equivalent.

The company trades at a PE multiple of 7+ but with investments and a cash equivalent of 450 crores. So if we remove it from the market cap, the company is available at 3.5, 3.6 PE, which is still under 4 PE but not 1 PE.

Now, I will leave it to you to go through the annual reports and balance sheet and share the details of its investments in the comments section.

Final Thoughts

The stocks discussed are not a recommendation for you to invest. On the contrary, I strongly recommend against it. The reason being these are small companies and have meagre trading volume.

So, if you act, you may inflate the price of these stocks.

I have shared the complete process to find the stocks at a meager and cheap PE ratio which Mohnish Pabrai prefers.

Feel free to apply your choice of criteria that gives you comfort while investing.

Make sure you learn to invest and not look for silver bullets to find readymade investments.

Only a few people on this planet want you to make money. One is, of course, you and the others are your immediate family (father, mother, wife, brother etc.) members. Everyone else is trying to make money for themselves, even at the cost of using you in any which way possible. So if you find someone who will do it for you, you are on the wrong planet or in the wrong era.

So don’t invest because someone has recommended it to you, including me. Instead, build your investment logic and iterate over time to improve each time. I prefer doing it that way and want you to follow the same.

Let me share the complete process and answer to that question to help you find the best small-cap fund to invest in 2023 using ValueResearchOnline and CRISIL.

Before going to the list, first, let me define what small-cap funds are, according to SEBI.

The top 100 market cap companies are large caps. The following 150 companies are based on the Market cap in the mid-cap universe. They are ranked from 101 to 250. I also have the Best Mid Cap Fund to invest in 2023

Then the companies from 251 to 500 based on the market cap are small caps. They are making it 250 companies in the small-cap index. The definition helps us compare the fund’s returns based on the benchmark.

Top Small Cap Funds For 2023

We will use the process to come to the best small-cap fund for 2023 from the 3, 4, and 5-star rated direct small-cap funds by ValueResearchOnline, and sort them based on 1-year return.

There are multiple funds with assets under management (AUMs) with more than ten thousand crores, including SBI small cap fund, Nippon India small cap fund, Axis small cap fund, HDFC small cap fund, etc. These funds are to be avoided as they have a vast AUM.

In a small-cap fund, if you have significant assets to manage, it can be tough to switch stocks and sectors. Similarly, too few assets can mean a higher expense ratio. Hence both large and small AUMs are to be avoided. So we will consider only AUM between 1000 to 10000 crores.

Let’s go through each of the remaining funds to understand if a fund can outperform consistently or not.

The following three direct funds do not have a more extended performance history.

• TATA small cap fund
• Canara Robeco small cap fund
• Invesco India small cap fund

So we avoid them as well.

Quant small-cap funds have a stellar performance and outperformance on a seven-year, five-year, three-year and one-year basis.

ICICI Prudential fund, DSP small fund caps, and HSBC small caps fund have similar outperformance. Kotak Mahindra, a small caps fund, is also outperforming, though with a negative return on a smaller time frame, but still, it is better than small-cap S&P BSE 250. So we are keeping these funds.

Best Small Cap Funds 2023

Now we have to select these funds based on CRISIL ranking.

As per CRISIL, Quant and Canara Robeco, small-cap funds are ranked first. And we have Quant small cap fund in our list as well.

ICICI Prudential small cap fund is ranked a little lower on CRISIL but is ranked 02 and on our list.

Further drill down of this list is impossible, so now we will be seeing the portfolio of each of the funds in our inventory to avoid some of the funds.

We see that only two funds, ICICI Prudential and DSP Small Cap Funds, that have a decent asset under management, and good consistent returns over time, invest predominantly in the small-cap companies.

Considering the expense ratio, we have ICICI Prudential as the best small-cap fund to invest in 2023. However, the DSP Small Cap fund is also good.

Final Thoughts

This review is neither a sponsored one nor an endorsement that you should invest only in the funds mentioned above.

I have shared the complete process to find the best-performing small-cap fund for 2023. Feel free to apply your choice of criteria that gives you comfort while investing.

Make sure to invest in direct funds. And finally, don’t invest in mutual funds because someone has recommended it to you, including me. Instead, always apply your investment logic to each of your investments.

Using the above tools has dual advantages.

1. I don’t need to be doing all the calculations in Excel
2. In a few minutes, anyone can find the best mid-cap Fund to invest in in 2023.

Before we begin, let’s define Mid-cap as a category from SEBI.

The top 100 market cap companies are large caps. The following 150 companies are based on the Market cap in the mid-cap universe. They are ranked from 101 to 250.

Top Mid-Cap Funds for 2023

From the 4-Star and 5-star rated mid-cap Funds by ValueResearchOnline, we will compare the performance of each Fund to its benchmark for the past 7 Yrs,5 Yrs,3 Yrs and one year.

So now we see how each of the Fund has been doing. So, for example, the Quant Mid Cap Fund – Direct Plan has staggering returns in the past each time frame.

And We have similar pictures for PGIM as well as many other funds.

However, Axis Midcap Fund has underperformed, and Axis as a fund house has seen a deterioration in performance, and mainly I can attribute it to the front running case only. However, I did warn my readers to book out of Axis fund at that time only.

In the past year, the S&P BSE 150 mid-cap has given a return of 4.5 per cent, so any fund that has not outperformed in the past year is an avoid.

*Underperformance is in some timeframes

The Best Mid-Cap Funds for 2023

Now we are left with four funds

1. Quant Mid Cap
2. PGIM Ind Midcap Opp
3. Motilal Oswal Midcap
4. Edelweiss Mid Cap

Now we have to select these funds based on CRISIL ranking.

Quant Mid Cap Fund and PGIM Ind Midcap Opp are the best Funds by CRISIL.

We have those two funds in our selection of the best fund. Motilal Oswal and Edelweiss Mid Cap Fund are ranked two and three. So now the funds that we have are the best as per CRISIL.

So we aren’t able to trickle down any further.

Let’s look at Fund’s portfolio section at Value Research Online.

Now I will select a combination of two funds as the best mid-cap funds.

Quant Mid Cap and Motilal Oswal Midcap because that way, you have a bland of growth and value and handle the market corrections much better.

Further, we are well-diversified sectors of the midcap universe as well.

Final Thoughts

This review is neither a sponsored one nor an endorsement that you should invest only in the funds mentioned above.

I have shared the complete process to find the best-performing large-cap Fund for 2023. Feel free to apply your choice of criteria that gives you comfort while investing.

Make sure to invest in direct funds. And finally, don’t invest in mutual funds because someone has recommended it to you, including me. Instead, always apply your investment logic to each of your investments.

Before we answer whether we should invest in an ETF or a large-cap fund, let’s first find the best large-cap fund and compare its performance to the benchmark indices.

It will give us a clear answer. So let’s begin.

The Top Large-Cap Funds for 2022

We will use the process to come to the best large-cap fund for 2023 from the 3, 4, and 5-star rated direct large-cap funds by ValueResearchOnline, and sort them based on 1-year return.

In the last year, Nifty has given a return of 7%. So let the funds that have been able to outperform the Nifty.

We see Nippon India Large Cap Fund, ICICI Pru Blue Chip Fund, Quant focused Fund and Baroda BNP Paribas Large cap fund.

The other funds you can see in the above screenshots are index ETFs. So we are not considering them for now.

Now for Nippon India large-cap fund, we see this table if you go to the funds returns tabs.

So on a seven-year basis, the fund’s return is in line with S&P BSE 100 TRI, the benchmark index for the Large Cap fund.

In the last five years, the return has been 13 per cent. In the previous three years, the return was close to 17 or 18 per cent, and in the last year, the fund has outperformed, and the return is almost doubled to 13 per cent as compared to the benchmark return of 7%.

So the fund, on a longer-term basis, is in line performing with the S&P BSE 100 TRI, but it is outperforming majorly on a one-year and three-year basis.

If you look at the second fund, ICICI Prudential BlueChip fund and go to its return tab, this is what we see.

A pretty similar picture in seven-year and five years, it is in line with the S&P BSE 100 index, but on three years and one-year basis, it has outperformed.

Quant Focused fund has outperformed on a seven-year basis, five-year basis, three-year basis and one-year basis.

So this fund is continuously outperforming the benchmark.

Baroda BNP Paribas has underperformed on a seven-year basis, but it is in line with the index for five years, three years and one year.

Best Large-Cap Funds for 2022

Only one fund has been able to outperform continuously.

However, most of the funds have outperformed in some periods, but the average over a long-term time is in inline with the benchmark indices.

So if you have to choose one fund to invest in, it must be Quant-focused.

Large Cap Fund or Index ETFs

We have to answer whether we should invest in an index ETF or a large-cap fund.

First, understand that Nifty ETFs are for the top 50 companies.

So if you have to choose an ETF over a large-cap fund, you must select two. The first is the Nifty 50 ETF and the second is the Nifty Next 50 ETF.

If you combine both, the investment will be in the same top 100 companies that are part of the large-cap fund universe.

So the return from both ETFs will be in line with the large-cap fund.

However, if you can choose a better large-cap fund like we have Quant Focused Fund now, you can outperform the index but not otherwise.

There are high chances that you will underperform because once the fund outperforms in some period, it has to underperform in another period for the average to be in line with the benchmark.

It is one of the main reasons why Warren Buffet suggests an index ETF over an actively managed fund.

So in a mutual fund, if you invest for a decade, it can so happen that it can outperform for the next three years but then underperform for the next seven years to give you an inline return in the longer term.

So follow Warren Buffett and invest in two ETFs; that way, you don’t underperform the large-cap fund.

Final Thoughts

This review is neither a sponsored one nor an endorsement that you should invest only in the funds mentioned above.

I have shared the complete process to find the best-performing large-cap fund for 2023. Feel free to apply your choice of criteria that gives you comfort while investing.

Make sure to invest in direct funds. And finally, don’t invest in mutual funds because someone has recommended it to you, including me. Instead, always apply your investment logic to each of your investments.

You may find the title click-baiting but believe me, and it’s not. I don’t need to invest any fresh capital into the ELSS mutual fund now, and still, a completely legal and ethical way to get the total tax saving for me.

Let me explain how I do it.

Total Tax Saving Without Investing Fresh Capital

In 2019 I invested in fund one ₹1.5L. So check out the Best ELSS fund for 2019.

In 2020 I invested in fund two ₹1.5L. So check out the Best ELSS fund for 2020.

In 2021 I invested in fund three ₹1.5L. Check out the Best ELSS fund for 2021.

Now in 2022, I don’t need to invest any fresh capital.

I can withdraw the money from fund 1 (because it is available for redemption after the lock-in period of 3 years) that I invested in 2019 and invest 1.5 lakh in, say, fund 4.

My total invested amount in 2022 is 4.5 lakhs.

I can withdraw fund one and invest in the current year to get the tax benefit for this year.

Further, the invested amount of 1.5 lakhs can become two or even 2.5 lakhs. And if there aren’t any other long-term capital gains profit, I don’t need to pay any tax either. However, I may have to pay the tax if there is.

Further, I can withdraw up to 1.5Lakhs only from the first fund one and invest in the current year.

Why I Do it Like This and When You Should too?

I know this is not a very efficient way of investing in the market, but if I can beat returns from mutual funds, I will not be investing in them.

So if you can get better than ELSS returns, you should do the same, but not otherwise.

So my purpose in investing in an ELSS fund is to keep it for three years, get the tax benefit, and then take the money out. Then plough that money into the following year’s ELSS fund and keep the rest with me.

The same 4.5 Lakhs gives me benefits yearly because of some appreciation, and the capital remains invested in the market for tax benefits.

Do I need a separate fund each year?

No, you don’t.

You can do it in the same fund as well.

In the same funds, you will only have units available to withdraw that were invested three years back.

So once the 365 times three number of days pass, only those units become free to redeem.

However, I choose the same or different one depending on the best fund I find for that year to invest in.

It can be the same fund or a different one as well. For example, Mirae Asset Tax Saver Fund was one of my best fun in one or two years, so it has more than one year of investment.

So you don’t need to have three different funds. You can have the same fund as well. But generally, I prefer to use a different one, but there is no General rule that you should use a separate fund for my process and not invest any fresh capital.

The Top ELSS Mutual Funds for 2023

I am a very lazy investor, so if I have a tool that allows me to sort the mutual fund based on specific parameters or provides me with a ranking of mutual funds, I tend to use it and don’t reinvent the wheel.

We start with ValueResearchOnline’s four and 5-star rated direct ELSS funds. Arrange them in decreasing order of the expense ratio. Now we have the ELSS tax-saving funds as follows:

You will find that the screenshot doesn’t match the video because the screenshot was taken on a weekend when I was writing the article, but the video was shot over the weekdays.

Best Tax Saving ELSS Mutual funds for 2023

We see that the Mirae Asset Tax server direct fund has an expense ratio of only 0.5 per cent, and it has a good asset under management, but its past year performance is not very good.

Quant Tax Plan

The quant tax plan has a meagre expense ratio and has generated 20 per cent returns in the last year.

It was my best tax saving fund for 2022 and had been performing well for the past year.

The performance has been stellar in one year, and I think this will continue in the challenging times ahead.

The AUM for this fund is increasing daily and has gone up from 500 Crores to over 2000 Crores. 4x in one year, and it is pretty impressive.

So it’s one it’s the better funds to invest in 2023 for sure.

Kotak Tax Saver

IDFC tax advantage fund and Kotak Tax Saver Fund have also generated good returns for the past year. So these two funds are also the best mutual fund to invest in 2023.

When we check CRISIL, they are ranked as the best funds.

Final Thoughts

This review is neither a sponsored one nor an endorsement that you should invest only in the funds mentioned above.

I have shared the complete process to find the best-performing ELSS tax saving fund for 2023. Feel free to apply your choice of criteria that gives you comfort while investing, like using three or 5-year returns to judge a better-performing fund.

Make sure to invest in direct funds. And finally, don’t invest in mutual funds because someone has recommended it to you, including me. Instead, always apply your investment logic to each of your investments.

After the Jun-Sep 2022 results season and Nifty hitting the all-time high, my view has changed slightly.

So I thought I would share it in a video and the blog article here.

How Has Been Jun-Sep’22 Results Season?

The EPS of Nifty hasn’t moved much after the current results season.

Source TrendLyne.

Let me explain the above EPS chart. The more pinkish line that you are seeing is the Nifty EPS.

In December 2021, the Nifty EPS was around 725 ish, and Nifty was trading at about 17,500.

In March 2022, the Nifty EPS Rose to 777. Then in June 2022 the EPS the Nifty EPS Rose to 808, and it was constantly on the rise.

When I made that video, the EPS of nifty was around 837.

So my understanding was the Nifty EPS would reach 900 by the end of the current financial year, and in the next financial year, it would be around 1000.

So in June, when Nifty was at 15k, one year forward earnings of 1000 means a 15 PE ratio of nifty, which was a good time to invest.

What Changed in The Current Results Season?

Nifty EPS has not moved much in the current results season. From 837, it has only gone up to 840 levels and then back to 832.

It is one of the main reasons for me to change my view.

I am neither bearish nor bullish on the market to invest at the current levels.

The Indian market has outperformed the world. It is in the green for the year-to-date or one-year time frame, whereas many markets are down even 30 per cent year-to-date.

In the current result season, we see that there is not much movement in the Nifty EPS.

Most nifty 50 companies couldn’t increase their profit despite good sales growth. As we don’t have good earnings growth year on year, the Nifty EPS didn’t move much.

Nifty All time High and My view of the Market

Now Nifty EPS should reach ₹900 in the current season for the higher Indian valuation to sustain.

The following quarterly result has to do some wonders, and I think it is also highly possible.

The world is going into a recession so commodity prices will cool off.

The sales growth in the current quarter has been good, and companies will focus on improving profit margins giving them higher profitability which can make the EPS jump higher.

However, till February, I don’t have any view on the market. AKA, neither bearish nor bullish, but we will wait for the EPS to rise.

If the EPS doesn’t rise in February, the one-year forward earnings forecast will be between ₹900 to 1000.

Depending on the earnings growth forecast, the view on the market will vary. For example, closer to ₹900 and 18k is 20 times earnings. At the same time, closer to ₹1000 and 18k is 18 times earnings.

Conclusion

If you want to invest in the market, choose companies from your portfolio that have done good profit growth.

Because in this challenging environment, if they have good profit growth, you should consider them for investing because once the scenario improves, they will do even better.

Do you invest based on the macro analysis?

Macro analysis is when you are not analysing the business itself but the environment. If you aren’t, this is the time you should start considering it because it will help you give the bird’s view of the companies that will do better and the companies that will not do as well as the others.

Suppose you ask a predominantly an equity investor. In that case, the answer can be biased, but today I will do some number crunching to help you understand which is more beneficial and when one should consider what.

So without much ado, let’s begin. You can watch the video or read the answer as text.

Real Estate and Time to Double

The key to investing is always the returns. So the data I have seen in my area, it takes a decade for the property prices to double.

Further, residential property rent is between 3% to 4% annually. So on a property of 1 Crore, you get a rental income of 3Lacs to 4Lacs per year.

However, commercial property rent is close to 5% to 6% annually. So for the same 1 Crore, you get a rental income of 5Lacs to 6Lacs per year.

So if you add the rental income for a decade, the amount becomes close to 70 Lacs.

However, some expenses come along with property. So first, let’s look at those.

Major Expenses with Real Estate

So when you want to invest in property, you have to consider the following expenses that come along with it.

• Initial Registration Cost – The property registration cost is close to 10%. Depending on your state, there are 5 to 7% Government Fees. Then we have lawyer fees and other expenses (Municipal Registration, Electricity Transfer, etc.) that add up to 10%.
• Property Tax – Each year, one has to pay a property tax.
• Maintenance – The association for the building will charge maintenance fees for paying the gatekeepers and maintaining the lifts, garden, GYM etc.
• Brokerage and Rental Agreement – If you want to rent out, you must pay the brokers. Further, a rental agreement costs money.
• Painting and Other Misc Expenses – If you want to rent out, your flat has to be painted every few years. Moreover, the association may ask you to pay for external painting once every few years.

Real Estate Returns

Considering the above expenses, Let’s deduct ₹20 Lac from the rental income of close to 70 Lacs that we had for the property of 1Crore.

So if the property value doubles after a decade, we make 2.5x returns on the initial investment.

Using the online CAGR Calculator, we see the return is close to 10% or 9.6%.

Long Term Returns from Nifty

For equity investments, let’s use Nifty for the sake of calculations.

Nifty has given an average return of 12% to 15% for a decade. Here is a beautiful chart of Nifty’s rolling return since 2008 from Kunal Desai’s Blog

Nifty in the 17-year timeframe, the ten-year rolling return of 10% or less has been five times. Similarly, there were five occasions when the returns were 15% or more.

On average, Nifty becomes 3.5o 4x in 10 years, clearly beating real estate returns by a significant margin.

When Real Estate Investment in Beneficial

Absolute return from real estate is significantly lower than Nifty. Further, one also has mutual funds that even outperform the Nifty.

So if you only consider returns, equity wins all out. However, in some cases, real estate becomes beneficial as well.

Let me share 3 cases when real estate investment makes sense.

1. Passive income – Rental income is passive. So you don’t have to work very actively to generate a regular monthly income. The dividend is either annually or at the most quarterly, but it is never monthly.
2. Diversification – When you have significant equity exposure and want to diversify, real estate is a better choice to diversify your asset allocation.
3. Rent as SIP in Equity – We saw the return from equity much higher than real estate. However, one can generate an income every month from real estate and use that income as SIP to ETF or mutual funds and start generating returns.

Final Thoughts

The best part about real estate returns is that you can start earning rental income right away.

So finally, I have to ask, What is your preferred investment choice? Are you focusing on return or like rental income to use as SIP?

Share your thoughts in the comments below.

Five key points help me know when I should be selling the stock.

You can watch the video or read the article. So without much ado, let’s begin.

Initial Decision was Wrong

The number one reason I sell a stock is if my initial motivation to invest has been proved wrong, so I come out of that investment.

The time I may need can span a few years before I realise my initial investment decision was wrong.

Let me help you understand this with an example.

I prefer investing in solvable problems. So a business is going through some issues, and I like to invest if I am convinced these problems are temporary and the management can solve them moving forward. However, the issues can also take two to three years to solve.

I invested in Lupin in December 2017 at around 800ish because the stock fell from the high of 2100.

The fall was also justified because most of Lupin’s business was in the US. The USFDA stricter guidelines made the life of every Pharma company difficult, and Lupin was also part of the same issue.

My understanding was in a couple of years, Lupin should be able to fix the USFDA issues. And once the company can do that, the business can again be where it was.

However, Lupin couldn’t do it, and the USFDA problems persisted, and other issues (litigations and pricing control in the US) started coming up.

So after three years, I came out of stock at just under ₹1000.

My initial understanding was wrong: the problem is not too big for Lupin and will be solved. So I made little profit but nothing significant when you see my holding period, but still, I was out of my investment.

Story has Changed

The second most important reason for me to sell a stock is when the story has changed.

You invest in a company based on a specific theory or being a leader in a sector, and suddenly you see the company going in a different direction.

Generally, I tend to invest in a business with good growth and has some monopoly. So companies seldom change direction.

Still, let me explain this with an example of Exide Industries. We know the company manufacturers batteries for cars.

However, they forayed into the insurance business. For me, it’s a classic case where the story has changed, so I like to sell the stock.

I Find Better Opportunity

The third most important reason to sell a stock is if I find a much better opportunity to invest in the market.

There is a limited number of stocks that I keep in my portfolio. The number ranges from 15 to 20. I’m not particularly eager to go below 15 or above 20. So the maximum that I had in my portfolio was 21.

It also helps me compare the new opportunity with all my current options for fundamental analysis, investment and business checklist.

So if I finally have a better investment opportunity that I want to add to my portfolio, I have to sell one.

Further, as I am always fully invested, I may not have the funds to invest in the new business I want to add.

The two examples I want to share are Marico and TTK Prestige, which I sold at different times to invest in what I saw may have better growth and provide me better returns on my investment.

There is nothing wrong with either TTK Prestige or Marico. However, if I have to bet my complete net worth on someone, no one will be better than TT Jagannathan or Harsh Mariwala.

I am a big fan of both of them and follow them. Both the companies are doing great business, but I think I found a better opportunity and need the money to invest in them.

Change In Business Environment

The next important reason for me to sell a stock is when there is a change in the business environment.

So if I see a big competitor entering the market or a technological change happening in the sector, I am out.

The example that I want to share is Amara Raja Batteries.

I moved out of the stock when Tesla entered the Indian market. Once Tesla was in the Indian market, I knew there would be substantial technological changes in the automobile and EV ecosystem.

I need Money

Last and the final reason for me to sell a stock is when I need money. I must sell a stock if I need a large sum of money.

I may sell a stock depending on which of the above four parameters match.

It can be that I sell the slow grower, or I may book profit and only invest some part of it in the new opportunity because I need funds.

One more point I will like to emphasise is that if I see a stock that has run up too fast too soon and may now consolidate for some time, then I book out of it and then use the money and start accumulating the stock again.

Final Thoughts

When do you sell a stock from your investment portfolio? Please share them in the comments below.

So let me answer the question for you.

Why is the market Falling?

The market is falling because, in India, FIIs sell almost 4k crore of equity daily. It started in November of 2021 and has been the trend for the past few months.

The reason we see such a massive sell from FII is because of many global factors like:

• Quantitative Tightening in the US
• The rise in interest rates in India and the US
• The High Inflation Globally
• Russia Ukraine War

Some may even consider the US recession as one of the reasons. However, I can’t entirely agree with this point because each time there has been a recession in the US, the Indian market has rallied in the following year.

The reason is that when the US is in recession, OIL and other commodities cool off, which helps India.

Why are FIIs selling India?

US interest rates are one of the reasons for FIIs to sell India.

I think FIIs may have leveraged positions at significantly cheaper rates. What it means is they have taken loans and moved the funds to India for better returns.

When the rates rise, their loan EMIs will increase. So they are selling to reduce their liabilities.

As I see it, the second reason to sell India is valuation from return. Investing in equity is not very lucrative compared to US bond market returns. So when FIIs can get similar returns investing in US bonds, they prefer US bonds.

You may argue 3% return in the US bonds and 12 to 15% return from investing in Indian equity, and why will FII prefer US bonds.

FIIs are interested in dollar denomination returns. So when they bring dollars in India and when they take out, the differential in the USD INR must be kept in mind.

From 2010 to 2020, USD INR has moved from 45 to 75 or roughly 6% CAGR.

So 3% returns in the US are better because of USDINR hedging. So when India has overvalued them, selling made sense for FIIs, but it should stop sooner than later.

Should I Buy into the Fall?

The right question is, which of the above negatives will continue for the next 3 to 5 years?

So now ask yourself these questions and see what your answers to each of them are?

1. Will FII sell 4k crore in the equity market daily for the next three years?
2. Will Quantitative Tightening suck up every dollar printed in COVID times?
3. Is inflation out of control no matter what we do?
4. Will the rise in interest rates continue for eternity?
5. Will Russia continue to fight with Ukraine for years?

If all the answers are NO for you, the time is right for you to accumulate great companies. Companies will continue to grow their earnings for the next three years, but the share prices may not rise as much as earnings because of selling pressure from FIIs.

When will FIIs selling STOP?

NIFTY around 15k, and with TTM earnings of ₹800, it is trading at a trailing PE of ~18.75.

Indian GDP is expected to grow at 8%, so a 10% increase in earnings next year is a very conservative target.

So the Nifty is trading at ~17 times one year forward earnings.

Historically 17 times one year forward earnings are considered a reasonable valuation for investing in India. So FII will not continue to sell India for very long.

Overvaluation in India means FIIS will not make many returns in dollar terms. However, when the returns increase to 15% in India, FIIs will surely return.

Indian markets are coming off from overvaluation. So, I think the selling from FII is likely stop sooner than later.

The Nifty bottom may not be far from the current levels of 15k.

The question – What to Buy and When to Buy?

I think NIFTY at around 15k is a great investment opportunity.

Companies that will continue to grow their earnings for the next three years are the right stock to invest in.

If you are unsure if you can judge the right stock, then opt for a NIFTY ETF fund or a large-cap fund. However, if you are ok with little more volatility, you can even opt for a mid-cap fund.

I think the next six months should be a great time to invest.

So whatever fund you are left with or want to invest, divide it into five parts and put them in the market for every 3 to 5% fall in NIFTY.

Final Thoughts

Finally, I have to ask. Where are you investing? Share your thoughts in the comments

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Hi everyone, today we have a special guest. He has been a Software Engineer(Freelancer), content creator & active investor for the past several years. We welcome Mr Shabbir Bhimani to this Podcast.

Moderator: We would like to start this Podcast by understanding how you began as an investor. Also, I would like to know how long have you been in the market.

Shabbir: I have been in the markets since 2007, before the financial crisis. Like everybody else, I also invested in the market and suddenly made ₹1000 on the first day. I thought this could easily substitute my salary, but the reality check came in much sooner, and I lost 50 to 70% of the invested amount.

One thing I understood that day was the power of markets.

I saw more people getting into the market and was convinced that this could grow much more. Of course, it didn’t work for me in the early days, but I understood the reason for it being something I didn’t know that others knew.

Also, I saw MBA finance graduates getting placed with very high salaries, reinstating the belief that there is more to learn in the markets. This made me jump into the markets again, and I started trying out things for the first 3 to 4 years and found a way that worked for me, and this is how my investing journey started.

Moderator: Now, I can’t help but ask this question. You have been in the markets before the 2008 financial crisis, and now we are going through another crisis. People entered the market during covid with huge expectations and made a good profit last year only to realise losses this year. This is something that happened in 2008 as well. How do you draw parallels between both these events?

Shabbir: Always remember, there are two types of people in the market. One who is in it to make quick money. Quick money makers will leave the market very soon, and the others will learn the difficult way that fast money can’t be made and will go through a phase of struggle and survival and will learn to find their way in the market. I am not saying they will become big investors, but they will understand how to treat the markets and might start doing Mutual Funds or ETFs, whatever suits them.

First, you must be convinced that markets work, which can differ for each individual. For me, it’s investing in stocks, but for you, it could be ETFs, and for somebody else, it could be a mutual fund, depending on how much time and energy you want to give in.

Moderator: Since you have mentioned patience and conviction in the markets, I genuinely believe these are the essential qualities one needs to become a great investor in the long term. Speaking of a long time, currently, markets are experiencing pressure, which would impact in the long term. In addition, interest rates are set to rise in the short term, which would affect the market and other asset classes. What are your thoughts on the long term?

Shabbir: We have a very different or wrong approach to the definition of long-term & short-term. Short term means anything under one year, the traditional definition. But for people, short term means one day, two days, one week, one month or six months, and long term means one year, two years or three years.

My definition of short-term starts with one year. My definition of the long term means ten years. In the short term, there is a lot of noise in the market like interest rates, policies etc. but what is more important is whether the earnings of the company that you have invested in will grow or not?

So now, rates rise, rates fall, governments come, governments go, governors change, policies change, and these are just the noise.

For investing, you don’t need to know all this.

Let me give an example: Do you think ICICI Bank or Asian Paints will make more money or less money in the next ten years? More is good enough; even if the rates rise, some will be affected while others will not. So, you must check for companies with good competitive advantage before investing.

Now, coming to the interest rates, this will impact companies with massive debt. I don’t invest in companies with enormous debt. So, this would be an excellent opportunity for investors to pick good stocks.

Moderator: Basically, you are asking investors to focus on companies with huge earnings potential in the future. Right Sir?

Shabbir: Yes, In the long term, nothing else matters. The noises will be there and will peak and trough as we go forward, but if the earnings are solid, not even these noises can stop the company’s value from increasing. More importantly, if the earnings keep growing, the rest is taken care of in the long term.

Moderator: Fine, Sir. Even though earnings are significant, the new people who come to market seem not to understand all these relations and factors which have an impact. They are very fearful of what happens in the short term. For someone new to the markets, if we make an analogy with swimming, people first start by testing the water and try to remove the fear of water, and I believe it’s the same for markets as well. The market is just like an ocean current with n factors affecting it. New investors are easily confused with all this information overload. What do you think new investors do when they come to market?

Shabbir: See, there are three ways to approach this. First, my suggestion would be if you are approaching the market, then don’t do it by investing for the short term. So let’s say Rs 500 a day or Rs 1000 a day or something even higher a month. I suggest not to do this. You should approach the market in a way you are a business partner of the companies you want to invest in. That’s the most efficient way.

I am yet to see a single trader consistently make a billion dollars in the market. You might see some traders making money here and there but won’t be able to make money every year consistently. This happens once in a while. That’s fine, but it happens only sometimes and not every time.

However, my approach is to become a partner in the business. Let’s say today you and I are starting a business. Will you say RBI is increasing the rates, so let’s postpone the business?

Moderator: Never, never.

Shabbir: Or let’s say, we don’t approach like the US is getting into recession so let’s stop business. So, once we are starting a business, all this doesn’t matter.

I am saying that if you approach investing as a partner in the business, your view changes.

You could argue that you don’t have time to analyse the company.

Then you have to select – Nifty. They have the best in the business.

Investing in the market via an ETF or Index fund would help you grow your money over time.

Then you are investing in India, and you are partnering in the country’s growth.

Let’s think that you don’t understand ETFs and are very tech-savvy, but you might have seen the “Mutual Funds Sahi Hai” ads.

So then go for the mutual fund. Now, if you say I don’t know mutual funds, what if I invest in the worst possible fund? Then, you don’t need to know anything about mutual funds.

Just start, and you don’t need a PhD in mutual funds, and you can learn the process as you move forward.

Once you can put Rs 10,000/- per month by the year-end, you will have enough time to understand investing in mutual funds.

Moderator: Sir, coming to mutual funds & ETFs, can you please tell us how to analyse these instruments? While checking, we have seen that most of the theme-based mutual funds have somewhat the same kind of constituents, and the difference is minor. Would that affect our investment, or what parameters should we check before investing in mutual funds?

Shabbir: When investing in mutual funds, there is only one parameter that we should check: the expense ratio. So, let me give a brief idea about the expense ratio.

Suppose you put 1 lakh into a fund. One fund has a 2% expense ratio while the other has a 1% ratio. So what does it mean? Let’s say 1 lakh at the end of the year is 1.1 lakh. There was a 10% gain. Now, one company will charge 2% of this amount, roughly Rs 2,200. The other company charges 1%, and we will have to give Rs 1,100.

So, the expense ratio is the most important aspect to track when investing in mutual funds.

That’s why ETFs are always better than mutual funds; they have a 0.1% expense ratio and are better any day than mutual funds.

There will be people who argue that returns from mutual funds are better than ETFs, but there is a catch to it. Like, what used to happen is mutual funds had the power to invest outside the recommended zone.

So, what had happened is large-cap funds had to invest 70% in large-cap and 30% they can do in small and mid-cap. Then, since they had 30% exposure to a category which gave better returns, the overall returns used to be better.

Now what has happened is that SEBI has said that if you are a fund in a specific category, you have to invest only in that category. So, the returns from mutual funds currently are at par with ETFs.

Moderator: Moving on to our next question, we would like to know the ideal asset allocation for beginners? How do you look at asset allocation?

Shabbir: So, I am not a financial advisor. I am more into equity investing, and I don’t consider asset allocation. In my opinion, asset allocation is for losers. This is how it works for me. I have a gold investment for my wife. It’s something that we use.

As for debt, I Believe I am too young to consider debt. I am fine losing my capital rather than getting 8% on it. So, I purely invest in equities and don’t invest in real estate. The only real estate investment I have is my home.

I don’t invest in gold bonds, sovereign bonds or anything related to gold. So, I am more into equity, and it may be good or bad, but since I know what I am doing, I am okay with it.

Moderator: Understood, Sir. So, I think this is the best advice in this entire Podcast. We see that financial professionals learn that, in theory, asset allocation has immense importance but coming into the practical world, most of us have seen people with the highest exposure to fewer stocks are the ones who reap the largest benefit from the market. I think that stands true for you as well, and people with exposure to other asset classes for actual use cases are the ones who are weighing heavily on equities and winning in the long term. Am I right, Sir?

Shabbir: Yes, let me give an example of why asset allocation is for losers.

Let’s say you have an asset allocation of 50:50.

Just an example. This is into equity and gold. The book teaches us that once equity goes higher, you invest more into gold. So let’s say equity went up to 60%, and now you sell off equity to rebalance the portfolio. This is what a financial advisor will teach you, but this is like selling what is working and investing that amount into something that is not working. That’s never intelligent, and I can’t swallow it, so I don’t do it.

Moderator: Speaking of investments, what are your sector priorities?

Shabbir: I don’t have any sector priorities either. I want businesses which can generate lots and lots of cash.

I do avoid certain businesses, though.

So, let me help you understand. Some sectors require a lot of cash to do business, and others require cash initially but do not require much cash for an extended period.

Suppose you put up a steel plant. It will require a lot of cash. I like businesses where the capex is low so that faster capacity addition can be done and more cash can be generated.

That doesn’t mean I don’t like commodity businesses. Companies like Shree cement have proven that their cash flow is robust, and the behaviour is not similar to that of a typical commodity business. It is not only about what the companies do and which sectors they belong to but what matters is how efficiently they are doing business.

Moderator: Understood. Coming to equities, we saw your article about the P/E ratio and why it is not a good valuation indicator. Could you share why you think so and what, according to you, would be the right approach in valuing a company?

Shabbir: I have a book, The Right Stock at the Right Price and the Right Time. Right stock is the one which you understand well. The right price is an important part of the equation.

Let’s say you are focused on the P/E ratio. Let me ask who are you and me to decide that Asian paints should trade at 60x P/E and Daawat Foods should trade at less than 10X P/E?

So P/E ratio is nothing but a peer-to-peer comparison. Now, I can’t compare apples with oranges.

We can only compare two apples.

Similarly, the P/E ratio can only be used for comparing similar companies, but when the company is unique, there is no peer, and the ratio becomes useless.

Now, people will say that every company has competition, but uniqueness does not mean there is no competition the way you operate can also be unique.

For example, Zydus Wellness makes Sugar free, and they command 90% of the market share. This is not a recommendation and is only for education. I might have holdings in the company.

Moderator: Moving from valuation, we would like to understand your view on something that has been going on in the market for the last decade. We have seen a surge in new generation tech-led businesses. We call them startups, and they are getting listed now. We are seeing IPOs happening at huge prices, and many investors are getting trapped in these companies at high prices, and seasoned investors are fearful of these companies. What’s your view on this trend?

Shabbir: So I have 3 or 4 views here.

First, the IPO is never the right time to buy. Someone is selling you his business, and he is offering shares for a premium. The business is coming to market when it thinks it is the right time. IPOs are like a lottery. It has to be avoided.

Second, for new-age companies like Zomato, I am not sure how they will make money in the future. The model of Zomato is not sustainable. You might order from Zomato, but you lose out on going out, and this model will never work.

You look at Burger King, Domino’s, and Mcdonald’s. There is no USP with Zomato; if Swiggy starts burning money, the market share will move towards Swiggy.

Even Paytm has the same problem. They don’t have a moat, and nothing stops me from making payments from Amazon, Whatsapp or Google.

Moderator: The next question, I believe I already know your answer to this question. How do you see cryptocurrency as an alternative investment asset? Do you think it should be part of our portfolio?

Shabbir: I don’t have it. I don’t recommend having it in the portfolio. You can put maybe Rs 5,000 in it to understand the blockchain technology but not gain from the crypto. I believe that blockchain can transform the world but not cryptocurrencies. If RBI uses blockchain technology to launch a cryptocurrency and then paper currency goes away, that can be very good. I don’t invest in crypto and also not in currencies. But, you can use some money to invest and understand crypto and the system.

Moderator: We have reached the last question of this Podcast. This is related to markets and life. We would like to know one thing that you have learned from the market that you applied in life and one thing that you learned from life that you applied in your investment journey.

Shabbir: There are two things. In life, I have learned a lot of things that I apply in business.

I have become a better investor because I do business. When I do business, I always think about how I can create a moat around my business which I have learned from investing in the markets. When investing, I think about how I can do this business differently.

In my personal life, I learned patience. You need the patience to stay in the market, to hold cash, and you need the patience to find your love of life. You might fall in love or be attracted to some girl, but after marriage, you need the patience to move together for decades.

Very famous Warren Buffet quote says,” If you want baby, you have to wait for nine months, you can’t get a baby in a month by making nine women pregnant”. I have learned this from my life, and I use it in markets and vice-versa.

Moderator: With that, we come to the end of this Podcast. It was nice having you with us, Sir and thank you for letting us in on your thoughts. Thank you so much, Sir and all the best to you.

Disclaimer: Whatever is discussed in the Podcast is purely for educational purposes and is not recommended. We request you approach your financial advisor before making any financial decisions. Bipzz or our Guests(speakers) will not be responsible for any losses due to trades taken by listeners by taking information from our podcast series. Bipzz is not a SEBI registered investment advisor and has given the data from documents available in public sources. Bipzz has not independently verified the information presented in the document.