Fintellect
By Capital, the Finance and Investments Club
An n ual Magazin e 20 21
Contents Table of Contents
Sr. No 1 Foreword
Title
Page No 3
1
Business Year
4
2
Global Macroeconomic Commentary
6
3
Indian Macroeconomic Commentary
7
4
Indian Equity Markets
8
5
Paradigm shift in Risk Tolerance in India – the Journey from Fixed Deposits to Crypto
10
6
Mutual Funds vs Model Portfolios
14
7
REIT here REIT now: India’s REIT story
16
8
Championing the Riskier Wave: Gold to Stocks to Crypto and Beyond
19
9
Social Media Activities
22
10
Finance Crossword Puzzle
27
11
Meet our team
28
2
Foreword An exciting debate in the world of finance today brings together two themes that are high on the minds of all investors. The first theme is that of sustainable investing, and the second one involves crypto currencies. Sustainable investing that seeks to integrate environmental, social, and governance (ESG) concerns into investment decisions has been receiving much attention in light of the recent events highlighting the disturbances caused by extensive exploitation of nature and the resulting climate change. Investors have a role to play in demanding from businesses affirmative actions for positive social impact and environmental protection. Efforts for building a resilient and sustainable future must go alongside the pursuit of competitive financial returns. While sustainable investing strategies have been around for a few decades now, relatively newer entrants to the world of finance are crypto currencies, which till recently have been considered a domain reserved for the nerds and the techies. However, since its introduction in 2008, the crypto market has witnessed a remarkable increase in investors and has gained acceptance in many organizations as an alternate mode for payment, with several companies accepting payments for their products in crypto currencies. The overall market capitalization of crypto currencies crossed US$ 3 trillion for the first time ever in November 2021. Are crypto currencies an antithesis for sustainable investing, or can they find a place in the ESG portfolio of investors? This is where the debate centers. One set of investors argue that the environmental costs of mining crypto currencies and their potential for use in illicit transactions rules them out from the portfolios of sustainability focused investors. The other set believe that crypto currencies can give the world a sustainable alternative to fiat currencies. As more crypto currencies declare their block chains as carbon-neutral and foster relationships with businesses to help improve their sustainability profiles, the role of crypto currencies in ESG portfolios needs to be discussed anew. The goal is to weave ESG concerns into purely financial considerations, to ensure that capital flows to businesses that also contribute to positive change.
Dr. Niti Nandini Chatnani Professor (Finance) IIFT, New Delhi
3
Business Year News round up for 2021 January 2- India approves two coronavirus vaccines, Bharat Biotech's "Covaxin" and the Oxford/AstraZeneca "Covishield", for emergency use. Experts raised questions over the efficacy of Covaxin and a lack of transparency in trials. January 4- Instant messaging app WhatsApp announced a new amendment in their privacy policies and data sharing norms. This led to massive outrage against the app and an exodus to alternative. January 20- Joe Biden is inaugurated as the 46th President of the United States. January 26- COVID-19 pandemic: The number of confirmed COVID-19 cases exceeds 100 million worldwide. March 23- Ever Given, one of the largest container ships in the world, runs aground and obstructs the Suez Canal, disrupting global trade. The ship is freed on March 29. April 15- Adani Ports & SEZ removed from S&P Dow Jones Sustainability Indices due to links and shared financial interests that group have with Tatmadaw that carried out 2021 Myanmar coup d'état. April 22- World leaders mark Earth Day by hosting a virtual summit on climate change, during which more ambitious targets for greenhouse gas emission reductions are proposed, including a 40% cut by 2030 for the United States. May 17- Discovery, Inc. agrees to buy media conglomerate Warner Media and all its subsidiaries, from AT&T for US $43 billion. The merger is set to be complete the following year. May 26- Shell becomes the first company to be legally mandated to align its carbon emissions with the Paris climate accord, following a landmark court ruling in the Netherlands. June 5- The G7 agrees on a global minimum corporate tax rate of 15% intended to prevent tax avoidance by some of the world's biggest multinationals. June 28- GameStop shares surge on first day of trade as large cap stock, AMC zooms 7% despite not making the cut. June 23- Enforcement Directorate transferred assets worth ₹8,441 crore to public sector banks. The banks suffered losses to the tune of ₹22,585 crore due to frauds committed by Vijay Mallya, Nirav Modi and Mehul Choksi. Thus, the total assets transferred to the bank worth ₹9,041 crore, representing 40% of the total loss to the banks. The total attachments and assets seized by Enforcement Directorate amounts to ₹18,170 crore which included assets of ₹969 crore located in foreign countries.
4
Business Year News round up for 2021 July 23- Indian Food delivery company Zomato Initial public offering list in stock market at a premium of 53% over issue price. August 23- Finance minister of India announced National Monetisation Pipeline (NMP) to sell assets worth Rs. 6 trillion in next four years. This includes Indian Railways assets worth Rs. 1.52 trillion, National highways assets worth ₹1.6 trillion, power transmission assets worth ₹45,000 crores, warehousing assets worth ₹28,900 crores etc. September 7- El Salvador becomes the first country in the world to accept Bitcoin as an official currency. September 16- Finance Minister announced a formal government guarantee on the securities receipts that the planned ‘Bad Bank’ will issue to banks as it takes on non-performing assets from their books. October 6- Moody's Investors Service on Tuesday changed its outlook on India's sovereign ratings to stable from negative. However, it retained the ratings, both on foreign and domestic currencies, at the lowest investment grade. October 8- Tata Group gets nod to acquire 100% stake of Air India from Government of India through it's subsidiary Talace Private Ltd, as part of Disinvestment of Public Sector Units in India. October 10- Almost eight states in India expect power outage due to reduced stocks of Coal as fuel to power the thermal power stations. October 11- Dish TV India Ltd’s largest shareholder Yes Bank plans to approach a company court if the satellite TV provider’s board fails to convene a special meeting of shareholders by October 13. October 19 - Cred, the fintech app founded by entrepreneur Kunal Shah, raised US $251 million in a Series E round co-led by Tiger Global Management and Falcon Edge Capital at a valuation of US $4.01 billion. October 28 - Acko became India’s latest unicorn after the digital insurer raised US $255 million at a valuation of US $1.1 billion in a fundraising round led by private equity firms General Atlantic and Multiples Private Equity. November 2 - Prime Minister Narendra Modi on Monday pledged to cut India’s net carbon emissions to zero by 2070, even as he exhorted developed countries to make available funds to the tune of US $1 trillion for climate adaptation and mitigation. November 12 - The Supreme Court on Thursday asked the Future Group to halt all proceedings related to its proposed ₹24,713 crore sale of retail assets to Reliance Industries Ltd till the legal dispute with Amazon.com Inc. is decided conclusively.
5
Global Macroeconomic Commentary Central Banks united in their opinion to end the ‘easy money’ era Tapering to commence due to rising inflationary pressures and rise in unemployment levels The Federal Reserve introduced bond buying programme at the beginning of the pandemic to ensure liquidity. These bond purchases added more than $4 trillion to the Federal Reserve’s balance sheet. However, due to enduring inflationary pressures, the Federal Reserve has decided to taper its bond buying programme systematically and slowly pull back the stimulus provided, by next June. Other central banks such as European Central Bank, Bank of England, Reserve Bank of Australia etc. have all released mixed guidance on the pace of bond purchases. Impact of these policy changes on the prices of various asset classes remains to be seen.
After booming across spectrum, commodity prices may stabilise this year Crude oil hit multi-year highs due to improved global demand outlook amid supply tightness The price of Brent has gained over 60% this year and hit a three-year high of $86.70 in October, supported by recovering demand and supply restraint by OPEC+. Oil prices have increased alongside a broader rally in commodities including natural gas and coal amid an energy crunch that is sweeping Europe and Asia. Supply pressures are expected to continue with OPEC+ to add only 400,000 barrels per day of crude oil to global supply. Gold witnessed a steady drop in prices due to improved risk appetite and dollar rally Gold demand (excluding OTC) fell 7% year-on-year to 831t in July to September quarter of 2021. This drop was almost exclusively driven by ETFs – which swung from very large inflows in Q3: 2020 to modest outflows this year – overshadowing strength in other sectors of demand during the quarter. Gold price averaged $1,790 an ounce throughout the third quarter compared to $1,900, a 6% drop year-on-year.
How is the “transitionary” inflation affecting global currencies? US Dollar Index After facing wild fluctuations in 2021, US dollar index has breached the 94.5 mark, levels not seen since July 2020. The latest uptick can be attributed to the fresh CPI figures which showed a more than expected rate of inflation of 6.2%, marking the highest reading since 1990 and raising expectations of earlier monetary tightening by the Federal Reserve. How is the Indian Rupee stacked up against other indices The Indian rupee traded around 74.4 against the US dollar, falling 0.7% from its 5-week high of 73.9 hit early in the week as the US dollar remains strong and amid weak inflows in Paytm, one of its largest IPOs. Heaving selling pressure from foreign institutional investors and a slight increase in global crude oil prices also pressured the rupee.
Will another Taper Tantrum hit the Fixed Income Markets? Rising Bond Yields in developed economies Markets have started to sense that the inflation may not be transitionary and may have some persistence in it. The US 10Y Bond yields have started to climb up due to the selling pressure created by inflation and taper talks by the Federal Reserve. Indian Bond Markets The yield on the 10-year government bonds in India stood at 6.3% in November, slightly below levels not seen since February of 2020, and tracking the US treasury yield, amid persistent inflationary pressure from surging crude oil prices and supply constraints. Meanwhile, the RBI has announced opening of the US $1.1 trillion sovereign bond market to retail investors through Prime Minister’s “RBI Retail Direct Scheme” 6
Indian Macroeconomic Commentary Indian economy on a path to recovery
-7.5
20.1
0.4
1.6
Q4-20
3.1
Q3-20
4.7
4.5
Q1-21
Q2-20
Q1-20
Q4-19
Q3-19
Q2-19
Q1-19
-23.9
PMI across months 55.4 55.5
55.3
52.3 53.7
55.9
Aug-21
Sep-21
Oct-21
48.1
Jul-21
May-21
Apr-21
Mar-21
Feb-21
50.8
Jun-21
57.5 57.5
13.1
12.1
11.2
11.4
10.7
6.3
6.3
5.6
5.3
4.4
Jun-21
Jul-21
Aug-21
Sep-21
10.7
May-21
Inflation levels 7.9 4.8 5.5
4.2 Apr-21
5.0
Mar-21
Inflation is expected to moderate on account of favorable base effect, easy of supply side disruptions and stabilisation of commodity prices Wholesale Price Index (WPI) remained in double digit in September, but at a six-month low at 10.7%. Inflation was primarily attributable to rise in prices of mineral oils, basic metals, crude petroleum, natural gas etc. Consumer Price Index (CPI) was recorded at 4.4% in September, lowest since April due to sharp easing in food prices.
5.0
Jan-21
Manufacturing sector grew at the fastest pace in 7 months The manufacturing PMI rose to 55.9 in October and the Index of Industrial Production (IIP) for August rose by 11.9%, indicating continued expansion in manufacturing activity. Companies scaled up production in line with a substantial uptake in new work intakes.
Quarter on quarter GDP growth (%)
Feb-21
GDP expanded by 20.1% year-on-year during Q1: 2021-22 The 20.1% year-on-year growth was second only to Turkey’s 21.7% growth, reflecting a strong rebound in consumer spending. Momentum is however, expected to slow down in the subsequent quarters due to impact of the second wave of the pandemic.
CPI (%)
WPI (%)
Central bank to provide support while keeping inflation in check Reserve Bank conducted open market operations aimed at tackling liquidity constraints and inflation RBI purchased government securities to the tune of ₹1.2 lakh crore under the G-sec Acquisition Programme (G-SAP 2.0) in Q2:2021-22 to support the market. The first purchase under this programme for an aggregate amount of ₹20,000 crore under G-SAP 2.0 was conducted in July 2021. However, due to rising inflationary pressures., RBI suspended G-SAP in October 2021. Support in terms of policy rates to continue The Monetary Policy Committee decided to continue with an accommodative stance to support sustainable growth of the economy and mitigate the impact of COVID-19 and maintained status quo in terms of policy rates. At the same time, RBI also announced measures to tackle liquidity management on a durable basis such as VRRR and other OMOs to keep inflation check.
Name Policy Repo Rate
Rate 4%
Reverse Repo Rate
3.35%
Marginal Standing Facility Rate
4.25%
Bank Rate
4.25% 7
Indian Equity Markets Evolving Equity Landscape India is currently the 6th largest equity market by capitalization among major markets with a market capitalization of US $3.5 trillion After nearly two years of enduring the coronavirus pandemic, a robust return to life aided by a mass vaccination drive, an accommodative central bank policy and expected economic growth of 9.5% this year are also fueling India’s stock market rally. With a significant amount of issuance getting added to the listed equity markets, a rapid rise in the size of the Indian capital market is expected in the coming years. Domestic benchmark equity indices touched new highs this year as buying continued across sectors, driven by falling retail inflation and prospects of better corporate earnings. Strong market resilience was seen despite selling by FIIs, reinforcing the dominance of retail investors.
Jul-21
Jun-21
May-21
Apr-21
Mar-21
Feb-21
Jan-21
Dec-20
Nov-20
Oct-20
Sep-20
6.2 6.5 5.3 5.5 5.7 6.0 4.5 4.7 4.8 4.9 5.0 5.2
Aug-20
14.6
16.5
Mar-21
Mar-19
1.3 Mar-18
6.4 0.8
10.8
Mar-20
Mobile data usage (Gb) in India (per month per user)
Mar-17
• Internet penetration in the remotest corners of the nation expanded online access to various asset classes • Empowerment of investors through robust, costefficient and easy to use online trading tools • The rise of social investing- New investment communities across social media platforms • Investment to augment financial situation post pandemic, fueled by record low interest rates
Total no. of demat accounts (in crores)
Mar-16
Increased retail participation in equity markets A record 14.2 million increase in retail investors was witnessed in FY 2021. The number of investor accounts with CDSL more than doubled from 2.12 crore in March 2020 to 4.64 crore in September 2021. Reasons for the same are:
Changing investor profile Increased millennial investors
Rise in Tier II, Tier III location investors
Proliferation of discount broking firms backed by rising significance of millennial investors One of the key factors for increased retail participation is the increase in discount broking firms. Discount brokers like Zerodha, Upstox and Groww etc managed to attract many new investors, especially millennials, on the back of low costs, a tech first approach and long-term engagement techniques such as gaming elements. They doubled their revenue market share to 27% for FY 2021, compared with 13% in FY 2019. This is further expected to grow to 37% by FY 2025.
Openness to new investment avenues
Paradigm shift in risk appetite
Market share of top brokers 19% 43% 14%
9% 7% Zerodha Angel Broking Groww
8% Upstox ICICI Securities Others
8
Indian Equity Markets Evolving Equity Landscape
Top performing sectors of 2021 Metal has been the most outperforming sector in last 12 months due to a strong demand and supply being limited by supply chain issues. Following metal, is the realty sector with the BSE Realty index gaining 71% YTD due to increasing liquidity and an impending realty upcycle. The third highest performing sector was the power sector. India is the fourth largest energy consumer in the world, with projected growth between 2019-2040 accounting for a whopping one-quarter in global power demands.
100
40
80
30
60
20
40
10
20 0
0 2016 2017 2018 2019 2020 2021 Amount (INR '000 Cr)
Number
PE exits via public market sales 177 142 78
2016
2017
2018
57
54
62
2019
2020
2021
Net FPI in 12 months ending August ($ billion) 25.3 19.1
Malaysia
Thailand
Phippenens
0.2 Indonesia
Record FPI flows in India The massive fiscal stimulus by governments and monetary stimulus by central banks has led to inflows into select emerging markets. India has been the biggest recipient of FPI flows in FY21 amongst emerging markets because of the stronger recovery in the economy and surprise in earnings growth. This massive inflow, however, has not been seen in other emerging markets, this clearly signals that foreign portfolio investors expected India’s economic recovery to be much sharper and faster than other emerging economies.
50
Brazil
PE exits via IPOs hit a record high in 2021 PE and VC investors sold shares worth US $2.6 billion in the nine months to end-September, the highest volume of exits through the IPO route so far. The momentum in such share sales was driven by historically low interest rates and a gush of liquidity that drove stock markets to record highs.
IPO trend over the past six years 120
India
Indian primary market on a roll in 2021 The cumulative quantum of fundraising through primary market issues has crossed ₹70,000 crore mark for the first time in any single calendar year. The recent rush of start-ups to raise money through primary market issues has been accentuated by an enabling regulatory environment: • Loss making companies can list in India (with the caveat that 75% needs to be held with the institutional investors) • Limit of 2 years for holding 25% of pre-issue capital by eligible investors reduced to 1 year
YTD returns of BSE Sector Indices 74%
71%
70% 54%
Metal
Realty
Power
Capital Goods
48%
Consumer Durables
India one of the first countries to move to a complete T+1 cycle by 2022 This would be beneficial to large volume investors like corporates, FIIs, DIIs, one day earlier settlement can provide liquidity and reduce margin requirement. Volatility in the market is expected to increase. 9
Paradigm shift in Risk Tolerance in India – the Journey from Fixed Deposits to Crypto -Team Phantom Troupe
Risk Tolerance - A Paradigm Shift or Only a By-Product? One of the pillars that determine the financial decisions in traditional economics is the ability to tolerate risks. Risk tolerance is of central importance when discussing the investment nature and preferences for different financial instruments by certain demographics. The investors of India have been observed to express a strong aversion for financial markets because of the higher risks. It is ascertained that they lack the mental readiness to overcome the psychological shocks of a volatile market. However, tracing the history of investments in India it is evident that the risk tolerance has seen a positive projectile over the years from extremely safe investments like fixed deposits to cryptocurrency today. From fixed depositing household savings to having the highest number of crypto owners in the world, there has been a radical shift in the arena of risk tolerance in India. This journey is of no lesser substance than to demonstrate the paradigm shift in behavioral biases among Indians, where better risk tolerance is only a by-product of a much larger change.
Analysis of Indicators in this Phenomenon - Testing Its Validity
Percentage of respondents
Several surveys and market reports can justify how the Indian population has accepted the cryptocurrency despite of its inherent risks and technological complexity, which theoretically speaking, should have served as dismissal grounds. Paxful.com, an online peer-to-peer exchanges published a survey in May 2021 which highlights several facts which assist to qualitatively analyze the current level of risk tolerance in India. The graph (Graph 1) below demonstrates the results of the survey on the primary reason for cryptocurrency adoption by the randomly sampled respondents. Graph 1: Reasons for adoption What respondents believed were the benefits 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%
75.80% 65.80%
64.80% 51.00%
3.60% Transfering is easy and fairly safe
Better privacy and security
Financial freedom
Access to everyone I don't know/There in every market are no benefits
Reasons
10
Paradigm shift in Risk Tolerance in India – the Journey from Fixed Deposits to Crypto Risk Tolerance—A Paradigm Shift or Only a By-Product? The percentage of respondents are of lesser importance as compared to the reasons stated. Bank investment options like fixed deposits and recurring deposits require tedious documentation and complex procedures, which offer several limits based on age and education. They also benchmark a minimum amount of investment to ensure institutional profits. Moreover, the liquidity of fixed deposits and other institutional financial instruments are a false façade as it levies a fine or penalty, a percentage of which often superimposes upon the principal amount, even after deduction of the calculated returns. Thus, any investor can agree on the rigidity of such investments, although they are generally safer. Cryptocurrencies, although offer a more volatile market condition, the combined benefit of no investment limits, better privacy and security in transactions, easy transfer and withdrawal and universal access far overshadows the risks involved. Furthermore, the risks can be considerably mitigated with proper knowledge about the markets. This rational conclusion is not a mere logical fabrication or a carefully constructed bias using cherry-picked data, but a reality which has clicked in the minds of young Indian investors. This has resulted in the vast acceptance of cryptocurrencies, and the inflated risk tolerance in India. Thus, logically speaking, at this point we can at least hypothesize the theory that risk tolerance has indeed developed in India. When we talk about the response obtained from a survey, it is more of subjective evidence. Objectivity is an indispensable attribute that must exist to test the validity of any hypothesis. Assuming their intrinsic validity, industry-related data and data provided by agencies on financial phenomena can provide concrete evidence of such a paradigm shift in risk tolerance. The report by Dune Analytics suggests that the decentralized exchange volume has hit a record high of $1.52 billion on June 2020 from May 2020 by up to 70%. This makes it clear that the market has a relatively positive outlook for decentralized instruments, of which bitcoins and other cryptocurrency are a major part. It also indicates economies accepting cryptos and adopting cryptofriendly mechanisms. The bitcoin trade volumes were as high as 9.923 million INR on May 2021. The higher the trade volumes, the greater number of investors and more risk tolerance their outlook is. WazirX, the largest cryptocurrency broker in the country has seen an increase by 337% users who are above 45 years of age. This clears the misconception that crypto is a millennial and Gen Z concept. Only certain demographics cannot influence the overall results of higher risk tolerance in India.
WazirX saw a 337% rise in users over 45 years in the past 3 months as of May 2021 Source: WazirX 4.20% 6.00% 9.90%
17.70%
Below 34 age 55-64 age
62.10%
35-44 age 65+ age
45-54 age
11
Paradigm shift in Risk Tolerance in India – the Journey from Fixed Deposits to Crypto Risk Tolerance—A Paradigm Shift or Only a By-Product?
Equities had never been a part of household assets. Most household assets were insurance, gold, real estate, bank deposits and liquid cash. However, a survey in December 2020 found that equities were already a part of household assets and accounted to about 4% of the total amount. The stock markets had always garnered the notorious sink with monopolies for the rich and where common people lose money. The increasing number of demat account registered over the years serves as the baseline which traces the slow but steady rise in risk tolerance in India.
Investors Demat Accounts Source: CDSL result presentation 35
28.9
30 No. of Demat Accounts in Millions
This observation confirms that the elder demographics also played a major role in this respect. These three conclusions serve as direct evidence of the hypothesis inferred earlier from the empirical survey.
25 20 15
14.8 12.3
21.2 20.9 18.517.4 19.6 17.0 14.8
10 5 0 FY17
FY18
FY19
FY20
FY21*
Fiscal Years *Compiled and Estimated by Business Standard Research Bureau NSDL CDSL
Although regulated, youngsters have always preferred it over more traditional assets like bank deposits because of its high returns. Furthermore, the markets can actually be analyzed and predicted to some extent, thus removing uncertainties surrounding it. This makes it an ideal choice for asset allocation.
External Factors Responsible for the Increased Risk Tolerance in India Five major factors that determine the level of risk tolerance according to behavioral finance include: Age, time available, level of comfort, portfolio size and financial goals. Each of these five factors have undergone dynamic socio-economic alterations to affect the risk tolerance levels of the general investor in India. It has become a common knowledge that India has a large percentage of young population. Several research studies have proved that younger individuals tend to take more risks than their older counterparts as they possess the time and passion to earn more money in the future. This shifts the average value of risk tolerance to the higher side. Graph 2: Number of households by gross annual income brackets across India in 2010 and 2016, with a forecast for 2025 Source : Statista No. of households in millions
160 140
140
120
121
100
102
80 60
61
40 20 0
90
4
7
16
2010 2016 2025 Elites
12
17
33
2010 2016 2025 Affluent
31
82 55
40
2010 2016 2025 Aspirers
2010 2016 2025 Next Billion
2010 2016 2025 Strugglers
12
Paradigm shift in Risk Tolerance in India – the Journey from Fixed Deposits to Crypto The above graph (Graph 1) shows the economic distribution of the population of India. Can you notice or Only By-Product? the higher Risk numberTolerance—A of individuals who Paradigm belong to the Shift “Next Billion” or, inaother words, the middle-class category? This skewed demography influences more than one factor. The middle-class is characterized with the intense desire to rise up the socio-economic ladder. Poor job and employability conditions in India has forced them to delve into the risky financial and cryptocurrency markets with hopes of easily increasing their wealth. Their general discomfort of not possessing “enough money” coupled with some queer social traits associated with the middle-class Indians has also made them quite comfortable to the regular exposure of the volatility of the markets. Thus, all these factors combined has also fueled the rising risk tolerance amongst our desi investors.
Conclusion Behavioral finance is still at its nascent stage in India, and there is a dearth of good research that can explore the territory of risk tolerance among the Indians. The demographic factors may have served as the background needed to evolve the financial risk bearing capacity of the Indian, but actually the technological innovations provided the spark to see tangible development in this respect. It is not too difficult to imagine the probable conditions without the ease of brokerage services as provided by the online discount brokers like Zerodha, or the tedious task of managing cryptocurrencies without mobile internet and smartphones. From fixed deposits being favored by the boomers in our country to the cool cryptocurrencies flashed by the millennials and Gen Z, perhaps the increase in general risk tolerance among Indians was not a paradigm shift, but a by-product of a generation-specific infatuation with new financial instruments prevalent in their respective times.
-Attiso Bhowmick University of Agricultural Sciences, Bangalore
13
Mutual Funds vs Model Portfolios IKEA effect states that "labour alone can be sufficient to induce greater liking for the fruits of one's labour:
even constructing a standardized bureau, an arduous, solitary task, can lead people to overvalue their (often poorly constructed) creations." The reason to quote this famous line from a Harvard research paper is to prove the point of growing interest among Indians to take control of their finances. Gone are the times when one needed to wait for days to get a physical shares certificate from the broker. You don't enable auto mandate for SIP just because some TV ad or your neighbourly uncle said Mutual Fund Sahi Hai. The advent of discount brokerage, the curated portfolio, work from home, and the historical underperformance of many mutual fund houses have propelled the millennials away from mutual funds. The taxation in the case of mutual funds seems attractive along with the indexation benefit, but the opaqueness in the asset allocations by the fund manager is a put-off. For the newer generation longing for instant gratification, the monthly disclosure is not enough. Along with that, a crisis like Franklin Templeton Saga has even made passive investors wary. Some recent examples where asset allocation does not purely reflect the fund objective are ICICI Dividend Yield Equity Fund, Edelweiss Balanced Advantage Fund, or SBI Debt Hybrid Fund applying for IPO allotment in anchor investors category. The emerging field of model portfolios is attracting new age investors with their weekly or monthly rebalance. The pros of funds never leaving your account and the ability to pledge it for more margin even to hedge your portfolio has made this option lucrative. The rise of basket offering using Smallcase hasn't gone unnoticed by even private investors like Amazon. These platforms make it easy for SEBI registered investment advisors to broadcast their portfolios to their clients directly. The ease of use in the case of consumers, along with transparent, fixed pricing, makes them more affordable. This even gives more time to the Smallcase publishers to focus on their research and let the platform do the marketing, acquiring, and handling of convenience. Apart from Smallcase, we also have similar services emerging in the market, such as WealthDesk and ICICI one-click-portfolio. These eventually give the impression of Model Portfolios being a cut above bet, and they're outperforming in the Indian market. On the contrary, this concept of a model portfolio is not very popular in the US due to the abundant number of index funds and ETFs. Considering the convenience, Mutual Fund Asset Management Companies (AMCs) take around 1-2.5% of all the equity assets they own. Even with no entry loads, fund houses are paying distributors commissions. These range from 0.5% to 1.5% upfront (as soon as the investment is made) and 0.5% trail (for every year). The AMC will keep it if the profits are not spent on distributors. The fund house expects to recover the payment in a year, as it can charge up to 2.5% as management and marketing fees. They take this out and work the accounting for a year. If you try to exit early, you get tacked on with a hefty exit load of 1.52%. Another key pitfall of Mutual Fund methodology is the disparity in the fee models between registering upfront and while signing up through distributing agents. On the contrary, SEBI has mandated an upfront fixed-fee model for the investment advisors with proper transparency showing all the levied charges in the whole process. These negative attributes are well reflected in the Mutual Fund statistics as the very people stay invested for a prolonged time. According to a recent report by Parag Parikh Mutual Fund & DSP Global Fund, the number of people who continued investing for 20 years is in the lower end of two digits. This is at odds with the primary purpose of Mutual Funds, which aim to provide substantial returns from compounding in an extended period. Studies have revealed that most Mutual Funds fail to beat even index-based ETFs on a long-term basis. Lately, numerous fund houses are going for impulsive trades to gain from narrative bias churning their turnover, which is against their long-term investment fundamentals.
14
Mutual Funds vs Model Portfolios But all that glitters is not gold. There are downsides to the model portfolios too. Chance of rigging or front running possesses a risk factor in such a system. Also, some of the low float stocks frequently hit circuits while rebalancing due to overcrowding of strategies like momentum. Both Mutual Funds and Model Portfolios have their pros and cons. Ultimately, it comes down to the investor's choice and whichever option can squeeze them significant returns. The article aims to give a brief analysis of both, and Model Portfolios do come out as the only course of action, enhancing the financial literacy among the masses, which is definitely a hot topic nowadays.
- Nitesh Patel NISER, Odisha
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REIT here REIT now: India’s REIT story -Isha Baheti Background Retail investment in capital markets has been rising since before the pandemic. However, the pandemic gave retail participation an additional boost due to the government’s expansionary monetary policy and an increased penetration of technology. A record 14.2 million increase in retail investors was witnessed in FY 2021. This increased participation has been accompanied by a change in the overall investment patterns as well. In addition to traditional investment avenues such as physical assets, equity markets, fixed income products etc, investors are also actively seeking novel and innovative investment products to develop a truly diversified portfolio which can help mitigate risks. One such product is Real Estate Investment Trusts (REITs). Investment in physical real estate has been a customary practice for Indian households since a very long time. However, such an investment comes with its own share of problems. Huge capital requirement, efforts in scouting the right property at a location which also aligns with the investment objectives and restricted exit opportunities are some of them. Furthermore, residential real estate segment has witnessed a slowdown in the past few years. According to NHB RESIDAX, a housing price index, in 50 Indian cities, housing prices have increased by a mere 4% annually between June 2013 to September 2020. On adjusting the inflationary pressure, these returns are practically negative. Here, REITs can come to the rescue by allowing Indian investors to participate in commercial real estate market without shelling out large sums of money.
Introduction to REITs REITs pool investors’ money and invest them in high yielding commercial properties, which may otherwise be inaccessible to a retail investor owing to lack of funds. They offer both fixed income gains (in the form of interest) and capital appreciation gains to investors along with an easy exit opportunity. REITs were first introduced in India in 2019 with the listing of Embassy Office Parks REIT on the stock exchange. This was followed by Mindspace Business Parks REIT in 2020 and Brookfield India REIT in 2021. REITs can be considered as an effective portfolio diversification option by retail investors. 1. Secure Investment Alternative Atleast 80% of the assets in a REIT’s portfolio in India are required to be completed and income generating. The underlying assets are usually Grade A office buildings which generate high rentals and witness high occupancy levels in a microenvironment. This reduces the default risk of REITs and the volatility of rental income, making them relatively safer investment avenues. Furthermore, REITs are mandated to pay out 90% of the distributable cash flows to the investors/ unitholders. In addition to dividends, these pay outs are in the form of periodic interest repayments, similar to any other fixed income product. 2. A comparison with other products As compared to other fixed income investment products such as fixed deposits, recurring deposits, government bonds etc, the pre-tax returns from REITs are much higher. This difference in return widens when tax impact is taken into consideration. While PPFs provide a higher pre-tax and post -tax return as compared to REITs, their unusually high lock in period makes them illiquid and hence, not a preferred investment alternative for the new class of investors. 16
REIT here REIT now: India’s REIT story REITs performed exceedingly well during the Pre-tax returns as multiple of REIT Yield Background pandemic and consistently gave better returns than 1.09 1 0.99 BSE Sensex and BSE Realty Index. Post pandemic 0.89 0.89 0.87 also, REITs continue to show promising growth. Since, returns from REITs are based on the 0.5 performance of the underlying commercial assets, they have low correlation with equity market returns. Therefore, they offer a distinct PPF REIT FD RD G Sec PO Savings diversification advantage in a multi-asset portfolio. Interest
3. Evolving framework around REITs and real estate
For individual investors Recently, the trading lot in REITs was reduced from 200 or more to 1, making REITs more affordable for individual investors. Additionally, the minimum application value was brought down from INR 50,000 to INR 10,000 – INR 15,000 to boost retail participation. REITs are subject to strict SEBI and RERA norms which can help instill public confidence in these products.
For real estate market Liberalised FDI policy has opened the real estate market to new and sustainable capital infusion. Furthermore, there has been a significant improvement in the ‘ease of doing business’ rankings of India which can attract new corporates.
India’s commercial real estate market While we have discussed the features of REITs which make them an attractive investment option, it is imperative to understand the overall sentiment of India’s real estate market to truly analyse the potential of REITs.
Opportunities • The real estate market in India is expected to contribute 13% towards India’s GDP by 2025. It is expected to grow to USD 1 trillion by 2030, as depicted in the graph.
Market size of real estate market (USD billion) 1000 650 120
180
2017
2020
2025
2030
• The commercial real estate space is expected to increase to reach 50 MSF, mainly driven by growth in IT and ITES, pharmaceuticals, engineering, and manufacturing sectors. Approximately 40-50% office absorption rate is of the IT and ITES sector which continues to experience a demand push. A strong anticipated orderbook has resulted into a hiring spree in this sector in the past few months. At the same time, employee growth and retention have gained a renewed importance. Bangalore, being the largest technology hub in India, is expected to be at the forefront of demand revival. • In furtherance to the above, the relaxed FDI norms in India are expected to attract new investments which would eventually fuel the real estate market as well. Demand for office spaces in Tier II cities is also expected to rise. A strong growth in the ecommerce and manufacturing sector is expected to drive demand for industrial and warehousing spaces, which is expected to grow by 83% to 47.7 MSF in 2021.
Demand for commercial real estate in top 8 cities (in MSF)
39.3
28
28
29
2015
2016
2017
33.2
33
2018
2019
2020
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REIT here REIT now: India’s REIT story Challenges
Absorption Trends (in MSF)
Background
• Since 2017, the office absorption has always exceeded the supply, however, in 2020 and 2021, the supply has outstripped absorption. Covid-19 has drastically impacted the supply and demand of commercial real estate due to which an increase in the supply of office real estate over the next few years could depress occupancy levels and lease rentals. • A slowdown in demand may be witnessed due to corporates opting for hybrid work models including work-from-home. A substantial impact on demand and lease rentals might be observed in such a scenario. However, due to reduced employee density per square feet, there could be an increase in space per employee by 15-20% which could boost overall demand.
60.8
46.1
44.8
47.2 39.5 33.7
33.8 29.3
27.6 19.8
15.0
2017 Supply
14.4
2018
14.0
2019 Gross Absorption
17.2
2020
18.5
3Q 2021 Vacancy (%)
Conclusion REITs can be considered as viable portfolio diversification avenues, given the current trend of increased volatility in stock markets. Government’s focus on improving the framework around REITs and the real estate market in general is expected to facilitate an enabling and thriving investing environment in India. As more REITs get listed on the stock exchange, investors will have even more options to choose from, which will render a positive outlook by itself. However, like any other investment product, REITs have their own strengths and shortcomings. Therefore, one should exercise due diligence before deciding on whether it will be a viable addition to his/her portfolio.
- Isha Baheti IIFT Delhi
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Championing the Riskier Wave: Gold to Stocks to Crypto and Beyond -- The Agrawals (Vedika Agrawal and Swaranjali Agrawal) Background “Some things benefit from shocks; they thrive and disorder and stressors, and love adventure, risk and phenomenon, there is no word for the exact opposite beyond resilience or robustness. The resilient resists better.”
grow when exposed to volatility, randomness, uncertainty. Yet, in spite of the ubiquity of the of fragile. Let us call it antifragile. Antifragility is shocks and stays the same; the antifragile gets
India has beautifully nested itself under ever evolving and sometimes contradictory traditional and modern values. As much as this pattern is explicitly visible in its culture, business, infrastructure, technology and development, it fairly manifests itself when it comes to people’s savings and investment habits. Recent trends have shown that people in India are moving away from traditional saving options towards modern investment options. This shift from saving to investment has been guided by various factors including age, income levels, access to technology and financial literacy. Moreover, the onset of COVID-19 and the global policy economic uncertainty has aided this shift by accelerating people’s investment in new-age financial assets with monetary and non-monetary benefits. Traditionally, the concept of saving, colloquially called bachat, had been synonymous with depositing money in post office savings accounts and schemes like Recurring Deposit (RD), Fixed Deposit (FD), Time Deposit (TD), Monthly Income Scheme (MIS), Senior Citizen Saving Scheme, endowment schemes Introduction to REITs etc. With reliable and risk-free ROI expectations between 4%-8% and tax benefits, such saving options have provided a sense of security popularly in the rural parts of India. However, with exposure to technology and access to financial literacy, the last decade saw a burst of interest in diversified financial assets like gold, mutual funds, mid and small cap stocks, IPOs and cryptocurrencies as they have become a popular investment vehicle which provides potentially higher returns in addition to being comparatively riskier. Households in India have historically been quite risk averse and wary of investing their savings into risky assets. A pursuit of safe bets has always driven India towards making investments in unproductive assets like gold. Although attached with status symbol and sentimental value, gold has been a store of value for Indian households to conveniently hedge it during times of financial crises. While safety and security have always had a stronghold in determining the direction of the investment for the mature Indian population, the hold is loosening lately for the younger age group. Gold investments have been found to be inconvenient for young retail investors as storing physical gold is often found to be a hassle for them. Hence, they seek out more convenient options which are accessible to them through their comfort of using technology more easily than their older peers.
Financial Instrument
Average Investor Age
Mutual Funds
32
Stock Markets
28
Cryptocurrencies
24
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Championing the Riskier Wave: Gold to Stocks to Crypto and Beyond With age on the side of young adult groups like millennials, Gen Zs and influx of cutting-edge analysis from fin-tech platforms like Zerodha Kite, Motilal Oswal, Upstox, Groww etc., their confidence and risk tolerance has increased manifold. This phenomenon is distinctly noticeable in the investment type accompanied by the average age of the investor. As per Groww database, "2020 witnessed a 226.12% increase in the number of first-time investors from the age group of 18-20 years, whereas in 2021 there has been an increase of 101.65% already and is growing. This has been the highest among all the other age groups, indicating that millennials and younger investors are taking interest in wealth creation at a younger age." An SBI Report shows that the retail participation in the Indian stock markets is rising, pointing out that around 4.4 million retail investors accounts had been added during the first two months of this fiscal year. Also, the share of individual investors in total turnover on the stock exchange has risen to 45% from 39% in Mar’20, as shown by NSE data.
Cryptocurrencies Coupled with age factors, financial literacy and penetration of technology, the onset of COVID-19 pandemic witnessed millions of young Indians taking to stock trading. The increase in retail participation in stock markets can be attributed to the declining attractiveness of traditional saving avenues owing to low interest rates regime, significant increase in global liquidity, people spending more time at their homes during the pandemic, and noticeable increase in market capitalization in stock markets in India (BSE Sensex has increased 1.8 times its value in a year). Another emerging financial instrument amongst the younger population is popularly known as Cryptocurrency. They are seeing it as a basket for their eggs which they would like to exploit to optimize their investments. Cryptocurrency in India has formed a peculiar community of investors who are Doing their Your Research (DYOR) as a euphoria in digital assets as well as helping each other out with the relevant information. India’s enterprising teen who is investing their pocket money is helping fuel the crypto investment, from $923 million in April 2020 to nearly $6.6 billion in May 2021. A survey conducted among 114,000 BuyUcoin users has revealed that the majority of ether investors are from the 18-34 years age group. The investment principle of risk-return trade-off states that great returns come at the cost of bigger risks. Notorious for its riskier profile, cryptocurrency like Bitcoins are five times more volatile than gold and 10 times as volatile as the US Dollar (DXY). Even though cryptocurrency is presently extremely volatile in nature, this novel asset class is a safe haven for the younger population for three reasons: Firstly, it has a very high return potential which is offsetting the risk and volatility it carries. A study substantiating this further states that the inclusion of more than one cryptocurrency optimizes the returns when included in a portfolio as compared to portfolio with just one or no cryptocurrency. Secondly, the younger groups are better aware that the reckless printing of money is going to drive Conclusion inflation higher, and gold prices might not even catch up to the high inflation numbers. Hence, they are finding it as a better hedging strategy against the looming inflation majorly due to the aftershocks of the pandemic. Thirdly, as the cryptocurrency market is not integrated with the global financial system and is relatively isolated from financial assets, investing in cryptocurrency contributes to diversification benefits and/or risk mitigation both within and across borders, proving to play a sheltering asset against traditional assets for the younger population 20
Championing the Riskier Wave: Gold to Stocks to Crypto and Beyond Conclusion From saving in traditional assets like FD, RD etc. to investing in fragile assets such as gold, stocks and mutual funds along with building up the risk appetite to lose in antifragile assets, the risk tolerance of the Indian population has clearly evolved. The recent trends in financial markets, as delineated above, show that the investor population would be in a better position to mitigate the incremental risks with the expertise of diversification and financial literacy.
-The Agrawals (Vedika Agrawal and Swaranjali Agrawal) IIFT Delhi
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Social Media Activities IPO Analysis
Investment Avenues
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Social Media Activities Concept Series
Major Events
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Finance Crossword Puzzle
ACROSS 3. Neutral options strategy that involves simultaneously buying a put option and a call option for the underlying security with the same strike price and the same expiration date 6. Statistical method that determines the strength and character of the relationship between one dependent variable and a series of other independent variables 8. Investment that is made with the intention of reducing the risk of adverse price movements in an asset 9. Fraudulent investing scheme promising high rates of return with little risk to investors 10. Companies that earn just enough money to continue operating and service debt but are unable to pay off their debt 11. Return measure for an investment over a set period of time, expressed as a percentage DOWN 1. Difference between two prices, rates, or yields 2. Use of debt to amplify returns from an investment or project 4. It occurs when a company issues new shares that result in a decrease in existing stockholders' ownership percentage of that company 5. Intangible asset that accounts for the excess purchase price of another company 7. Term used to describe an investment strategy's ability to beat the market
(Check out the answers on our Instagram page “capital_iiftdelhi" on 21 November 2021) 27
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