Seeking Alpha

InvestIndia's  Instablog

InvestIndia
Send Message
  • Why Invest In India?

    Why invest in India?

    While being Bill Gates may not be the goal in your life, having reasonable sum of money is a situation we all covet for. We try to find riches through switching jobs, migrating to better paying countries, buying lottery tickets or doing some sort of network marketing businesses. Empirical studies at various leading universities have found that the only section of the society who make a reasonable amount of money on a sustainable basis are

    · Very skillful people (executives getting stock options, actors, sportspeople, etc)

    · Owners of assets (real estate, business)

    The skillful guys make a lot of money while they are at the peak of their performance. After that, they better have some assets that can generate income. Similarly, for the majority who do not have such special skills, owning assets like stocks and real estate is the only way to create meaningful long term wealth. India's interesting demographics (majority of population is young and aspiring) offers a host of easy money making opportunities to investors. Below is the short summary of key reasons why you should invest in India, followed by detailed explanation.

    · Returns can be really astounding (India's huge young population will drive up asset prices as it gives vent to its aspiration)

    · Safe institutional structure (your ownership rights in stocks & real estate are well protected)

    · India is the country of last resort if your survival in foreign country depends on a visa

    Why can returns in India be astounding?
    Imagine what happens when the aspiration of a billion people come together? When 1 billion people demand better housing, better clothes, food products and services? We saw one such revolution from 1990-2010 when China transformed from a socialist economy to a consumption economy. In the process, the asset owners made a fortune - the real estate owners, companies with strong brands, and stock holders of such companies.

    Although India doesn't have the political will to replicate the Chinese success here, it has the quintessential ingredient for witnessing a long term growth phase - the young population capable of working! With bad political and institutional structure, we make take 20 years to reach China's current prosperity levels but the point is that WE WILL REACH there and asset owners in India will be very rich. Thus, you should own a pie here - either real estate or stocks.

    As an illustration, the cost of a 2BHK in the erstwhile sleepy town of Pune's Aundh area has gone up from INR 1 million to INR 10 million over the last ten years. Although the quality of life has surely not gone up 10 times, the real estate prices have! And the key reason is unlimited demand from the technology executives for living in the heart of the city. You will find similar stories across all major cities in India. Similarly, companies like L&T, ITC, Nestle, Lupin, Hawkins Cookers, etc have witnessed 10x to 15x jump in their earnings over the past 10 years and their share prices have gone up by much more. Simple point is that the young generation will give vent to their aspiration and will consume better products, driving up prices at pace that will be faster than your salaries.

    How safe is India's Institutional structure in protecting ownership rights?

    The institutional structure for ownership of assets have undergone drastic improvements over the past two decades - ownership records for stocks and bonds have been completely digitized and the clearing and settlement systems are as robust as the New York Stock Exchange. Chances of frauds are next to negligible. Buying and registering a property in urban areas, establishing ownership, availability of bank loans, etc have become much easier.

    Why will India always be the country of last resort for all Indians?

    Being an NRI working abroad, you run multiple risks - failure to find a sponsor for your visa, failure to re-new the visa, inability to get bank loans at competitive rates, ethnic violence, deportation in case of an accidental violation of law, etc. By the virtue of being an Indian, most of these fears are not applicable in your home country. Having an investment in your own country is extremely important today because any unforeseen event in your country will force you to go back to India and Indian assets will continue to become expensive over next twenty years.

    Where can you invest in India?

    The avenues are no different than the ones mentioned above. Given that you have a long earning life ahead, its prudent to allocate higher portion of your savings to real estate and stocks. A typical portfolio for an individual in his / her 30's should be a careful blend of stocks, fixed income instruments, real estate and gold. It is important to note that the returns mentioned in the table below are the long term post-tax returns generated by each of the asset class. Its a common perception that 'high returns involve high risks'. This statement is not entirely true. Digging a little harder can lead you to stocks / properties that may have low risk and high probability of long term success. Thats where we like to operate.

    Asset class

    Risk - reward

    Ease of liquidation

    Allocation (% of portfolio)

    Long term post tax returns

    Stocks

    Investing in companies that do well over time can generate annual returns in excess of 20% for a very long time
    Investing in companies that don't do well over time can generate losses to your investment as well

    High

    20%

    18%

    Debt - Bank FD

    No risk. Returns too are capped at lower levels

    High

    15%

    7%

    Debt - NCDs

    Little risk. Returns are better than bank FDs

    High

    15%

    9%

    Real estate

    Moderate risks. Finding the right location is paramount to the returns in generates over the long term

    Low

    40%

    15%

    Gold

    Moderate risk reward

    High

    10%

    8%

    Portfolio returns (if your networth is allocated as above)

    13%

    Inflation (rate of increase in expenses)

    9%

    One may note that the incremental returns of 6% points between a bank FD and a carefully designed portfolio can work wonders over the long term. Its nothing but a manifestation of the power of compounding. Remember that assets can compound over time; salaries and bank FDs merely make ends meet.

     

    After 5 yrs

    After 10 yrs

    After 15 yrs

    After 20 yrs

    INR100,000 invested at 13% (portfolio)

    184,244

    339,457

    625,427

    1,152,309

    INR100,000 invested at 7% (bank FDs)

    140,255

    196,715

    275,903

    386,968

    For materials on Indian debt and stock markets, you can also visit breathingstocks.com, which is an affiliate concern. Also, watch out for the next series on investing in India

    Part 1: Why can Investing in India change your fortunes?

    Part 2: How good are the dollar adjusted returns?

    Part 3: Getting started on your stock investments

    Part 4: Getting started on your real estate investments

    Part 5: Getting started on your fixed income investments

    Part 6: Effective management of your ESOPs / RSOs

    Feb 24 10:43 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.