Institutional Buyout - IBO 

When an institutional investor, such as a private equity firm or a venture capitalist firm, acquires a controlling interest in a separate company. Institutional buyouts are the opposite of management buyouts (MBO), in which a business’s current management acquires a large part of the company. Typically, the investor in an IBO will look to dispose of its stake in the company within a certain time frame
 
Source: www.investopedia.com

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“Change is the law of life and those who look only to the past or present are certain to miss the future” as said by John Kennedy.

 We have been listening to the same thing wrapped up with different words that is- change is inevitable, change should be constant, change is a must and the list goes on. In a nutshell, change is the spice of life and it should be welcomed.

Every time it is observed that with a certain change earlier people are reluctant to accept it but then after knowing that they have no way out, they tend to learn it and get quite comfortable with it.

We humans have really come a long way from the “I-Age” to “I-Age”. Confused??  From the “Ice Age” to the “Internet Age”

Internet had been introduced in the year 1994 and after that there was no looking back for the business sector to make the efficient and effective use of this ‘it’ thing till today. Earlier when computer had been introduced in the late 1980s, people were hesitant to learn to operate on computers with a fear that handling a mouse or working on computer is not their cup of tea. But now the scenario has changed commendably.

All over the globe, the usage of social networking sites has increased immensely. Businesses were running as usual until they realized that there is a vast scope in reaching out to their customers through the medium of Internet via social networking sites. The organizations are facing many competitions and they cannot afford to follow the ancestral practices in satisfying their customers. They have to change and bring in innovative ideas to sustain their customers and also attract new customers.

They say, “Out of mind is out of Sight”, truly this saying goes for the organizations that have to sustain and grow in this cut throat competitive market. In order to reach out to their target audiences many organizations have planned out different tactics like reaching out to them through the medium of advertisements, radio announcements, hoardings, bill-boards, etc. But innovation is the spice of life and now the marketers have come up with an idea of reaching their customers through social media.

But it is easier said than done. It took radio 38 years to reach an audience of 50 million; television, 13 years; Internet, 4 years and the iPod, just three years. Hence, if the companies are found unaware of the plan on how to reach out on to their target audience then that is understandable because the social media sites themselves are not quite sure of their potentials.

So, how does Social Network Marketing can grow your business marketing profits?
Social Media Marketing creates opportunities to:
• Add a human element (You) to your business or product
• Engage with customers directly but informally while hanging out online
• It is fun and simple to do once you know how
• Get traffic to your website
• Create buzz around your website, product or service
• Create inbound links to your website for the search engine ranking benefit
• Creates loyalty and trust
Everybody wants to be there but yet nobody has found out the sure-shot
‘win-win’ strategy. They wait for the miracle to happen.

To list a few famous networking sites are- Facebook, LinkedIn, MySpace, ibibo, Twitter, Orkut, MyBlogLog and YouTube (which is not a social networking site but visited by innumerable of visitors daily). The other site which is well-known is Blogspot. These are online communities & websites where friends can interact and share information with each other. The naturally viral nature of these online networks can be used to your business’s profit.

For any service or the organization, the best of all and at the same time, the cheapest of all the marketing strategies is the 3 Golden letters ‘W-O-M’ meaning “word of mouth” publicity. The speed with which w-o-m can travel on social media has led to the term being rephrased as ‘world of mouth’.

A CEO of a company that helps businesses manage their online reputation propagates social media is much like running a marathon- it needs to be effectively fast paced. It is not only important to respond, but to respond intelligently and quickly.

A delay in responding to grievance, failure to come up with a solution in a transparent manner can negatively impact a brand today in ways that were never possible before.

It is observed on the existing social networking sites, that the communities of specified brands are not run by the company’s persons but by the fans of that particular brand. This again shows a brand loyalist is bound to keep pace with the regular updates posted by the companies on such sites.

The estimated number of fans of the popular Indian brands on Facebook are
Vodafone ZooZoos: 6,09,169 ; Fast track:3,01,680 ; Café Coffee Day :1,60,227 ;
Kingfisher: 1,01,828 ( as on July 8 )

The various brands that have started advertising on the social networking sites are Puma, Vodafone, Red Bull, Cadbury Dairy Milk, Tata Tea, Fast track, Shoppers’ Stop and so on. They have their own forums on such sites where they inform their customers about their recent developments and also provide links which directs the customer to their respected sites for more information. The other examples for such an approach are the Recipes’ Videos of Ching’s Secret, Chinese food condiment maker, uploaded on YouTube and Sanjeev Kapoor’s Khana Khazana episodes which are either uploaded by fans or by the channel itself, but surely their number of viewers and customers are increasing by this mean.

Being available at the click of the mouse has enormous advantages attached to it like the client’s query can be answered to instantly, complaints can be worked upon, being open for feedback whether good or bad but promising the customer to improvise on the current state.

Till now we have been discussing about the Big Daddies of their sectors who already have a strong market position and only using social media would mean earning an extra piece of pie (reward) for them. So is it as economical and fruitful to a small scale businessman???

Why not?

He has access to the above mentioned networking sites at his convenience. Especially Blogspot can be accessed by anyone even a small scale business person. It is a good place for a new market entrant who does not have a strong source of finance by which he can open his own website but yet intends to hold one. Hence, this blogspot satisfies the need to hold a site in ones own name. This site enables the user to work on it like any regular website owner i.e. sharing ideas, uploading pictures, videos and space for the viewers or readers to comment on.

In this I-age, people prefer buying many things online or even prefer buying things to gift it to their friends and families like buying books, jewellery, paintings, flowers and cakes etc. Infact for a shop which has advertised its line of service online and is based only in Mumbai can receive orders from across the globe if it has the revealing product to offer and is targeting its end customer by serving them, by overcoming the problem of the geographic limitations.

The marketers who follow the ancestral ways of approaching their end customers are always in a question that have they actually addressed them? Many such questions are left unanswered. Here even the PR manager comes as a superhero who handles the positive image of the organizations. Many companies like Tata DoCoMo, have realized that the social media is the ideal medium to reach out to the consumers. Hence, the company’s posts are relevant to the target audience, interactive and they always elicit a response from fans. On an average, their posts get about 200 likes and over 100 comments. They had over 1,60,052 fans on Facebook and  over 8,241 followers on Twitter ( as on July 8 )

Like a coin has two sides of it, the availability of the social media has its pros and cons. Social media is a mean by which a person or an organization gets exposed to innumerable readers and has to be very particular about its advertisements and comments and even responding back ways. Ethical standards are also expected to be maintained by any organization. Any company could face negative comments. It is impossible to please everyone all of the time. But handling criticism or negativity by going on the offensive causes more harm than good. A negative feedback should be handled very smartly by the company’s spokesperson as he is unaware of the attitude of the respondents. Many companies have to face backslash due to arguing with the customer. In fact, customers have to often be thanked for giving feedback, not rapped on the knuckles.

 As you are constantly in the eye of public the one more caution that is required to be taken is to be safe from the fake brands or even the mocks of the brand that are carried out by the competitors in order to defame our brand by running fake blogs in our name.

These were some of the examples of companies who are making the best possible use of the available opportunity by using the social media at its best and exploiting it completely to satisfy the customer and also to churn out large profits without paying any real money in advertising their product or service.

If studied and planned properly by the marketer in order to address the end customer effectively and in a very short time then the social media is the perfect tool. And at the same time it is again for those who want their ad spend to be practically and technically nil.

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 We all dream for a bright future for our loved ones and plan our investments accordingly. However market fluctuations & changes in the economy can sometimes put an end to your dreams. Therefore it’s advisable to spread your investments across different asset classes.

There are obviously no guarantees but you can maximize your chances of making money irrespective of what is happening in the economy by investing in a diverse range of assets (such as equity, debt and gold). By balancing your investments across multiple asset classes, you tend to reduce risk of losing money to economic shocks (like the recent global financial crisis).

Empirical studies have shown that between 1995 and 2009, if you had invested equally in stocks, bonds and gold, only once would you have lost money i.e. in 1995. In all the other 14 years, average returns from an equal mix of these three assets were positive.

Usually, gold prices move in the opposite direction (negative correlation) to that of equity and, hence, the metal is considered a good hedge against equity market uncertainties.

The above reason & also for the fact that AMCs are faced with dwindling assets caused by changing regulation & investor apathy, mutual fund companies have now hit upon a new strategy - launch all-in-one or hybrid products. These products combine multiple asset classes in one, supposedly making the job of asset allocation easy. The logic behind it is to offer investors the ‘opportunity’ to participate and gain exposure to different asset classes under one roof. Hybrid funds invest in a mix of equity and equity-related instruments and fixed-income securities. There’s a new twist to the old idea of hybrid fund. Up till now, hybrid funds (also called balanced funds) meant a mix of equity and fixed income. Now, there’s a new one -a fund that’s a mix of equity and gold, or a mix of debt & gold or funds with all three debt-equity-gold.

The funds which have come up with new type of hybrid options are
• Axis Triple Advantage Fund - consisting of Equity & Equity related instruments (30% - 40%), Debt & Money Market instruments (30% - 40%) and   Gold Exchange Traded Fund (20% - 30%). the fund house has set the benchmark as composite benchmark consisting of S & P CNX Nifty (35%), Crisil Composite Bond fund index (35%) and INR price of Gold (30%).

• Religare Monthly Income Plan Plus - flexibility to invest 0-25 per cent in equity assets, 65-90 per cent of the assets in debt instruments, and 10-35 per cent in Gold ETFs. A back-testing of data by Religare shows that adding a 20 per cent gold allocation to the CRISIL MIP Blended Index pushed up its returns from November 2003 to nearly 9.9 per cent a year, from 7.5 per cent.

• Canara Robeco InDiGo (INcome from Debt Instruments & GOld) Fund - mandated to invest 65% - 90% of the collected corpus, in Indian debt and money market instruments and 10% - 35% in Gold ETFs. As an investment strategy, the fund will take cues from seasonal pattern in gold, global & domestic macroeconomic events, Government policies and central bank’s actions, to decide on the asset allocation between gold & fixed income.

• Taurus MIP Advantage Fund - Shares/Equity and related instruments - 0-25%, Debt Instruments - 65-95%, Gold ETF’s - 5-25%. This fund is still in NFO stage.

• UTI Wealth Builder Series II - Equity & Equity Related Instruments 65 - 100, Gold ETFs 0 – 35, Debt and Money Market Instruments 0 – 35. Benchmark BSE 100 for Equity part of the portfolio, CRISIL Bond Fund Index for that part of the portfolio relating to investments in debt and money market instruments and the price of Gold as per SEBI regulations for Gold ETFs.

The above funds have investments in equity, debt & gold barring Canara Robeco which invests only in debt & gold. These funds are a good option for investors who don’t want to worry about asset allocation & rebalancing their portfolio. Also the gold & equity negative correlation makes these funds attractive from diversification point of view. The idea of combining gold with equity is an interesting one. Gold is believed to be a good asset type to hold during what may generally be described as bad times. For some time now, gold has generally done well. Let me explain the logic of a hybrid fund and why it is better than doing a mix and match yourself.

As I always say, two very basic ideas in investing are diversification and asset allocation. Diversification simply means that one must invest in a mix of investments that are likely to do balance out each other’s bad times. Whenever one type of investment in a diversified portfolio does badly, others should do well. This ensures that the entire portfolio does not do badly simultaneously.

To some extent, diversification can also mean that the entire portfolio may not do well simultaneously but that’s the price one pays for safety. Diversification is essentially a safety technique. What sharpens diversification in practice is asset reallocation. Asset reallocation means making sure that a pre-determined balance between various asset types is maintained.

For example, let’s say that there is a mutual fund that is supposed to keep 25 per cent of investors’ money in debt instruments and 75 per cent in equity. During a phase when equity is doing much better than debt, this balance will swing towards equity. Now, let’s say that in a given period, equity gains 20 per cent and debt 2 per cent. This could easily happen in a hot equity market. Such a period will see this fund gain 15.5 per cent on the whole. However, the balance will shift to about 78 per cent equity and 22 per cent fixed income. At this point, the fund manager should sell off some equity and buy fixed income assets to bring the balance back to 75:25. These will effectively ‘book profits’, taking out money that you have earned and putting it in a safer place. In theory, you could do this yourself but that would take a lot of discipline. But when you do it yourself it would leave you liable for taxes whenever you shifted from one asset class to another. Plus there are even other associated costs which you would have to bear.

Hybrid funds are available in a range of different balancing points. At one end are the so-called Monthly Income Plans (MIPs) that may have as little as 10 per cent equity. At the other end, there may be funds with 70 or 80 per cent in equity. Now, AMCs have launched funds that will have around 65 per cent equity gold.

Balanced benefits?

The asset allocation decision in balanced funds rests with the portfolio manager. This helps investors’ moderate regret from the rebalancing decision. Such funds also reduce the costs associated with rebalancing. For one, portfolio rebalancing does not attract capital-gains tax; such taxes are attracted only if investors redeem the units. And then too, investors have to pay short-term and long-term capital-gains tax only if the fund has less than 65 per cent in equity. Balanced funds with 65 per cent equity or more suffer only short-term capital gains tax. For another, investors do not pay exit load during rebalancing, as stocks and bonds are held within the same mutual fund portfolio. There are, however, some issues with balanced funds. The equity exposure in the portfolio may be tilted towards large-cap stocks in certain periods and towards mid-caps in other periods. Funds with such style drift may not fit neatly into the core-satellite portfolio framework. Such portfolios are constructed using index funds for the equity core and style-specific funds and sector funds for equity satellite.

Then, there is the problem with the bond component. Since balanced funds have open-end structure, investors will be subject to downside risk on the bonds as well, as the NAV would depend on the market price of the bonds at the time of redemption.

Besides, selecting balanced funds is not so easy. Investors should buy funds whose asset allocation policy aligns with theirs. This would require differentiating between a balanced fund’s tactical decisions and its long-term asset allocation policy.

Conclusion

Balanced funds help investors by shifting the responsibility of asset allocation to the portfolio manager. The disadvantages — style drifts and bond price risks — are, however, not so significant. Investors should weigh the costs and benefits before considering exposure to such funds. Hybrid Funds are suitable for investors with low to medium risk appetite and long term horizon.

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What Does it Mean?

1. The price of an ounce of gold divided by the price of an ounce of silver. The min ratio aims to examine the relationship between gold and silver prices.

2. A fixed rate of exchange for gold and silver.
 
Source: www.investopedia.com

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 Mutual Funds have time and again responded to the changing market dynamics. Be it an innovative product or a different investment strategy mutual funds have tried to capture every pocket of the market and enthuse greater investor participation. That could be gauged from the response different ideas have garnered.

Mutual funds essentially were meant to pool the resources of small investors and invest them in such a manner that the risk is spread across a number of industries. Given the cyclical nature of businesses, it was witnessed that certain sectors did extremely well when others were facing troubled times. To capitalize on the sector that is in a bullish phase, asset management companies came out with specialized funds or Sector funds.

Till about a decade ago when equity diversified funds were the only choice available, sectoral funds kicked off a new genre of equity funds. It all started in 1999 at the height of the dotcom boom. Kothari Pioneer launched the country’s first technology fund, starting a trend that soon became frenzied.

Sectoral Mutual Funds

Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour. Sectoral mutual funds come in the high risk high reward category and are not suitable for investors having low risk appetite.

When the Asset Management Companies (AMCs) came with IT sector oriented funds in 1999, they invested in companies with an ‘e-’ or a ‘.com’ in their names & posted 30% monthly returns. However, the period of plenty was short-lived; by 2000-1, the bubble had burst.

There are many lessons that have been learned from the dotcom collapse, including the fact that sector-specific or focused funds do very well if the sector was faring decently. The converse also holds true; the fund’s value can be erased if the sector goes through a rough patch. For instance, globally, the dotcom crash wiped out $5 trillion in market value for technology companies from March 2000 to October 2002. But savvy investors, who exited before the crash, made a good profit. This, in a nutshell, is why focused funds are still popular.

Today there are Technology Funds allocating primarily to IT stocks, Auto Funds focusing on auto stocks and many more. The sectoral funds which have performed well this year are pharma funds. Looking at the past three month’s performance, the best performers are FMCG funds. It’s because over the year pharma as a sector had performed well & similarly over three months FMCG performed well. These days infrastructure funds are hot favorite.

These funds bring with them a potential to perform in case of good market conditions for the sectors in focus. But by the virtue of being too focused bear a risk-return profile unknown to most investors on account of their volatile nature. Once the rally in that sector fizzles out such funds become difficult to manage and thus investing in sector specific funds is only advisable for those who like all their eggs in one basket. Consequently Sector Funds are passé and ball game shifted to new category of funds.

Thematic Funds

The new category of funds is the thematic funds category. These funds identify themes based on global trends or unique criteria as a part of their stock pricing guidelines. DWS Global Thematic Offshore Fund & L&T Global Advantage Fund are examples of funds with explicit global themes.

Some funds may focus on just one major theme as the backbone for their investment process. These funds invest in a single theme but there are several sectors within it, so there are chances of diversification unlike that in Sector MFs. The theme is not just one or two sectors, rather a broader opportunity encompassing several sectors. For example, the outsourcing opportunity is not restricted to technology; it includes manufacturing & pharma among other sectors. The latest entrants in thematic funds are Birla Sun Life (BSL) Mutual Fund’s India Reform Fund and DSP Black Rock’s (DSPBR) Focus 25 Fund.

While the objective of DSPBR’s Focus 25 Fund is to generate good return by investing in 25-30 stocks of the top 200 companies in terms of market capitalization, BSL India Reform Fund intends to invest in stocks of sectors that are likely to benefit from the economic reform process undertaken by the government.

Thematic funds also by their very nature are intended for active investors, who can capitalize on a theme that may play out over a two-three year period. Investors in theme funds have to keep close track of the dynamics of the funds they are putting their money on, and cash out if they feel the theme is running out of steam.

Diversified equity funds

These are vanilla equity funds that invest in various company stocks. They have the basic objective of generating regular long-term capital growth from a diversified and actively managed portfolio of equity and equity related securities. These funds can be further classified as large-cap or mid-cap funds.

A large cap fund limits its investment to big company stocks like Reliance, Infosys, ONGC, Tata Steel, SBI, etc. On the other hand, mid-cap funds invest in small or medium sized company stocks like Nagarjuna Fertilisers, Madras Cements, Punj Lyod, etc.

Since small companies are usually less stable than large firms, we can expect higher volatility in case of mid-cap funds as compared to large-cap funds. Hence, before making an investment in a diversified equity fund, one should read the investment objective very carefully. If you don’t have the appetite to take higher risk, ignore mid-cap funds. Instead, choose among large-cap funds.

As a final word, thematic funds are slightly less risky when compared to sector funds. But equity diversified funds are even less risky when compared to both thematic as well as sector funds. Because sector funds are meant to do what their name implies: Restrict investments to a particular segment or sector of the economy. Such a strategy appears to throw diversification to the wind. Investing in a narrow segment of the economy is risky for the following reasons:

• Fund performance will largely depend on the sector’s performance, which may differ in direction and degree from that of the overall stock market.

• Financial, economic, business, political and other developments affecting the sector will have a greater effect on the fund.

Sector & thematic funds should not form part of your core investment. Your core investment should be in large cap diversified equity funds like HDFC TOP 200 / DSPBR TOP 100 / BIRLA FRONTLINE. If you want to invest in sector or thematic funds - limit it to 5-% of your total investment. Once you invest, it is up to you to get out of the fund at the right time. Since they are the riskiest type, you can incur great losses or get maximum profits.

Diversified equity scheme fund manager will be entering various sectors and then getting out when he thinks that sector will not perform. He will be more nimble than you or me. So why do you want to put money in sector funds & increase your risk?

Think twice!

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What Does it Mean?

Negative consequences arising from large increases in a country’s income. Dutch disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency, including foreign direct investment, foreign aid or a substantial increase in natural resource prices.
 
Source: www.investopedia.com

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The Indian Wealth Plight is such that India saves heavily but does not invest wisely. We save for long-term goals such as emergencies, education and old age, but do not invest in long-term instruments. Statistics show that we, Indians save about 32% of what we earn. But our exposure to growth oriented financial instruments is still very low. About 65% of what we save is in liquid & safe assets like Cash, Deposits, post Office Savings etc. Another 23% is invested either in property or gold & hence only about 12% of what we save is directed towards growth oriented financial instrument viz. equity.

It is awful how we have managed to duck such a fantastic asset like equity that has the potential to perform exceptionally well.  From 2003 in only 5 years the Sensex rose about 7 times. This was a phenomenal bull phase for Indian markets, but instead of us (Indians), its benefit was taken by the FIIs. By large we Indians remained only the spectators in this phase & then by the end of 2007 we realized it & hence we invested heavily that time. But that was too late & then from Jan 2008 onwards the market fell badly that year. Then becoming fearful of falling markets we stopped investments. Amazing! I want you to think in retrospect & understand how foolish have we been & how we entered the markets at the wrong time. Going forward, looking at the India growth story, such bull phases will convincingly occur time & again. Let’s not be unwise to miss the opportunity this time………!

While investing an investor basically looks at HIGHEST & GUARANTEED returns with no risk or low risk, & high liquidity. But remember “ONLY high risks can get you high returns”. Risk & returns are interconnected. We should expect the returns proportionate to the amount of risk we are ready to take. When it comes to investing, we, Indians are a bit risk averse. But risk aversion exists even in more matured markets. As per a recent survey by Wall Street Journal, the Europeans are the most risk averse. They rank even above Indians when it comes to going for safe & guaranteed returns.

It’s ok to be risk averse but then even our return expectations should be low. Else choose a prudent financial planner who will manage risk efficiently & earn you better returns.

How financially literate rather illiterate are we:

- Life insurance is among the most popular financial instruments in India.

- Even though they may know it & its basics & importance but hardly 50% have an insurance policy in their name.

- Among those who have a policy, most have taken it only for tax purpose or some investment purpose, forgetting insurance’s real purpose i.e. risk cover. Hence many are inadequately covered.

- Indian investor thinks from his heart. Some matters like child education, marriage are more important for him than his own retirement planning.

Today’s complex financial services industry offers consumers a vast array of products & providers to meet their financial needs. Under insured, over leveraged & excessive new funds are mostly found in individual investment portfolios. These are all due to lack of knowledge or wrong notions developed over the years by the investors. The chances that a client may get involved in transactions which are financially destructive are more. Hence to protect their investment portfolios from being shattered & to help their money earn more through sensible investment, the only solution is INVESTOR EDUCATION, INVESTOR EDUCATION & INVESTOR EDUCATION!

The lack of financial prudence by individuals or instances of investors getting duped are concerns shared by both developed & developing countries. Various researches have shown that levels of financial literacy world wide are unacceptably low. In one of the researches, it was observed that in a developed country like Australia, only 28% of the respondents were able to calculate compound interest & US the figures were even low at about only 18%. For developing country like ours the challenges are even more.

What are other countries doing in the area of financial education?

- Australia has launched programs like understanding money campaign for raising awareness at schools, at workplace & in the community. It has also launched consumer website called FIDO (www.fido.gov.au) that provides money tips, knowledge on financial products & research publications.
- Singapore has launched national financial education program (Moneysense) including knowledge on basic money management, financial planning & investment know how.
- Malaysia has launched online information channel for consumers of insurance & banking products. It provides tips on credit usage & money management.
- National Bank of Poland conducts an open day for school children. On this day, bank encourages school children along with their parents to visit the bank. They set up education village in the foyer of bank. The children & their parents visit the village which is like a fair with lot of fun things. Then they give a guided tour of the central bank to visitors & make them play games through which they learn about the central bank, its currency, monetary policy etc.
- The Austrian National Bank has developed a set of three CDs titled Money & Currency. These CDs cover the role & significance of money, financial market organizations & its role within European System of Central Banks. A quiz contest called TEMPO is created to test the knowledge acquired through the CDs.

As told by the ministry of corporate affairs, India this year will host about 3000 investor education programs across the country to spread financial awareness. There are even websites like www.iefp.gov.in, www.watchoutinvestors.com & www.investorshelpline.in to assist the Indian Investor in his pursuance of being financially literate.

“The sea is common for all, some take pearls, some take fish and some come out with just wet legs. The world is common to all, but what we get is what we try for.” And we will try only if we have the right knowledge, right education.

I personally believe that spreading knowledge that you have acquired is the best gift you can give to the society. To take this thought forward I have developed Ghalla Bhansali Learning Academy (GBLA) to spread financial awareness. At GBLA we provide coaching for various personal finance courses & even conduct various seminars on regular basis. Some topics for these seminars are Risk Return trade off, Techniques of investing like SIP, Understanding of individual asset classes, Importance of asset allocation, rebalancing the portfolio, diversification etc. Writing articles in columns like these makes me reach the masses & I feel privileged to help you understand finance better. On this note I assure you better stuff as per my best ability & in your best interest but ask you also to take steps towards becoming an informed investor!

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Mr. Mehta, “Hello Ritesh, how are you? Met you after long. So, how is business going?”

Ritesh,” Hello, Mehta sahib, I am fine. Business is a bit slow, but going on. You say, how’s the retail industry doing?”
 
Mr. Mehta “Retail industry has picked up. Consumption power of people has improved but if you ask me whether my retail business has equally performed well, then I would say not really. Our margins have shrunk. We are managing to earn bit more than our costs. Hence we are even considering a change of strategy to remain profitable in future”

Ritesh “Thankfully my business is going good. We have managed average 25% p.a. net profit since past 5 years. At least consistency is maintained.”

Mr. Mehta, “That’s good. But I hope you looking at not only consistency but also growth & by growth I mean not only growth in the net profit you mentioned but overall growth. Like how much wealth are you creating or how much is the Economic Value Added (EVA) by your business”

Ritesh, “Mehta sahib, what is EVA? I have never heard about it. I always thought growth in net profit is the best measure to see the growth of ones business.”

Mr. Mehta,” this is the general perception & rather I too used to think the same until I had discussion with Mr. Mukesh Dedhia on business & its actual growth. He brought to light the concept of EVA to me.”
 
Mr. Mehta, “First of all the net profit we get as per our books of accounts is restricted only to the accounting fundas. But as per the modern theory, business is founded on the blindingly simple insight that it is primarily about economics, not accounting! The “accounting net profit” is what we get after deducting the costs incurred from the total revenue earned. But in this cost we normally do not factor in some important costs.”

Ritesh,”But Mehta sahib we do consider the cost of production, salary to staff, rent (if any) paid, interest (if any) paid, and depreciation etc. & then we get the final profit. Even on that we consider taxes we pay to government & then finally what we get in hand is our actual profit isn’t it?”

Mr. Mehta,” In calculating this profit we do consider all the payments we do to others like rent paid to others, taxes paid to government, salary paid to staff etc, but have we considered the costs which we should pay to ourselves? Let me explain.
To start with, let’s take the initial capital we invest in the business. If this is somebody else’s money then we deduct the interest paid to them. But if this is our own money then we don’t account the interest supposed to be paid to us. Suppose this same money we park with somebody else, we would earn the interest. Isn’t it? Yes! Then interest (as per market rate) supposed to be paid on own capital should be debited as cost to business.
Similarly even if you are working for your own business still you should debit the supposed salary which could have been paid to you. This salary should also be as per the market rate. Hence not only your staff’s salary but also your own salary should be considered.”

Ritesh,”But why consider salary paid to yourself? Ultimately the profit the business earns is all yours”

Mr. Mehta,”Profit is all yours. But if instead of you there would be some outsider who would be running your business, then the profit you get would have been after deducting his salary, yeah? So your portion of salary has to be deducted as cost.
Lastly if the land which you use for business is your own then supposed rent to be paid also has to be noted. Just like the rent you would deduct if you would be using somebody else’s land”.

Ritesh,” But your land is appreciating in value, so that does factor in your balance sheet”

Mr. Mehta,” If you would have rented out the same land to somebody, still you would earn both rent as well as capital appreciation. When you are using the same land for your business then this earning (rent) you are missing out on. So in such a case rent to be paid to you also has to be taken.”

Ritesh,” OK! So in conclusion you mean to say that we should consider our business as a separate entity, different from us & hence deduct all costs supposed to be paid to us as we would have paid to outsiders & then come to our net profit figure.”

Mr. Mehta,” Exactly! This net profit after deducting ALL the costs is what can be called as the Economic Value Added by the business. If still your profit is positive then it is good. That means you are actually being productive & actually creating wealth. If the profit comes negative consistently over the years then you need to reconsider your business strategy.”

Ritesh,” Now I understand. If EVA does come consistently negative it really does not make sense to take so much risk & headache to earn same or even less than what you could otherwise also earn. I mean, then you could invest your money which you would otherwise use as capital for business & still earn the same return. You could work somewhere else & earn decent salary for same amount of efforts & you could rent out the land you own instead of using it for your business.”

Mr. Mehta,” But my dear, instead of giving up on the businessman within you, in order to improve your business’s EVA you should
• Increase the returns from the assets already in the business by running the income statement more efficiently without investing new capital.
• Invest additional capital and aggressively build the business so long as expected returns on new investments exceed the Cost-of-Capital.
• Release capital from existing operations, both by selling assets that are worth more to others, and by increasing efficiency of capital by such tactics as turning working capital faster and speeding up cycle times.”

Ritesh,” Now I’ll have to sit back & calculate the actual profit my business is giving me. In case I am running negative or hardly earning anything out of it, then I’ll rethink my business strategy. So what new strategy are you deploying?”

Mr. Mehta, “We are planning to move out of Mumbai. We think by doing this we will be able to reduce the operating costs & have good EVM. Anyway now I am above 60, so I plan to get away from this busy Mumbai life & my son along with his family too have agreed to move out of Mumbai. We are planning to shift to Pune, which has similar opportunities like Mumbai & is near yet far from Mumbai”

Ritesh,”Oh! That’s great! ALL THE BEST on your new venture & thanks a lot for the invaluable insight on business growth & EVA.”

“Mr. Mehta,” You are welcome. Remember, until a business returns a positive EVA it is not a profitable venture. The enterprise still returns less to the economy than it consumes its resources….until then it does not create wealth, it destroys it!”

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 Where it’s been hardly more than one n half year to the American crisis & the world has barely come out of it, there we have one after another global economic problem striking our face. After America we faced Dubai debt problems & now it’s the Euro zone crisis. Hence for the investor fraternity these days, country risk is a major concern than company risk! In today’s article I wish to analyze current euro zone situation, its impact on India or the way India is placed in comparison to other countries & finally the impact of all this on your portfolios(because after all, your portfolio is all that matters!)

In early 2010 fears of a sovereign debt crisis developed concerning some countries in Europe including: Greece, Ireland, the United Kingdom, Spain, and Portugal. This led to a crisis of confidence. Concern about rising government deficits and debt levels across the globe together with a wave of downgrading of European Government debt has created alarm on financial markets. The debt crisis has been mostly centered on recent events in Greece, where there is concern about the rising cost of financing government debt. On 9 May 2010, Europe’s Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe. Will this help the euro zone is another question!

Causes

The Greek economy was one of the fastest growing in the euro zone during the 2000s; from 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. Since the introduction of the Euro, debt to GDP has remained above 100%. The global financial crisis that began in 2008 had a particularly large effect on Greece. Two of the country’s largest industries; tourism and shipping, both were badly affected by the downturn with revenues falling 15% in 2009.

In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.

In 2009, the Greek government revised its deficit from an estimated 6% to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010. Its accumulated government debt is forecast, according to some estimates, to hit 120% of GDP in 2010.

Possible spread beyond Greece

One of the central concerns prior to the bailout was that the crisis could spread beyond Greece. The crisis has reduced confidence in other European economies. Ireland, with a government deficit of 14.3 percent of GDP, the U.K., with 12.6 percent Spain with 11.2 percent, and Portugal at 9.4 percent are most at risk. According to the European Commission, the U.K. budget deficit will surpass Greece’s as worst in EU this calendar year. Compared to this India’s fiscal deficit is 6.7% of GDP. Though not at great level but still lower compared to these European countries.

Comparison with Indian Crisis in 1991

If you see India in 1991, when we were under pressure, we kept on running high deficit & our expenditure was not productive enough. Our tax compliance was not good enough. So we essentially raised interest rates took out liquidity, opened up the economy, cut down deficit, etc. Essentially people suffered in term of profit correction, assets depreciating & in terms of devaluation. Effectively we worked so hard, that we became trim and fit. There onwards we started moving up on growth curve and today we are all benefiting because in 1991, 1992 someone suffered the pain.

Now in 2008 when the crisis hit the western world, they did exactly opposite of what we did. We were told to raise interest rates, and they said cut interest rates. We were told cut down your deficit, there they said government has to guarantee just about anything. We were told take away liquidity; here they said you provide liquidity. Here we were told that your consumption should come done and your saving and investment should go up, and there they are saying that they will do everything to protect consumption.

Effectively they are taking the path of least resistance, so their recovery will not longer be self correcting - it will be very long drawn. So what we were able to achieve in 2 and 3 years, they were to achieve in over 5 or maybe even 10 years. This is why we will keep on seeing the crisis resurfacing.

How is 2010 different from 2008?

Economically we are reasonably immune from the European crisis, but our markets are far more globally interlinked and our market will start sneezing whenever they get a cold. In 2008 when AIG and Lehman went bust, it was a shock. We never had any idea that something like this can happen. And because of this sudden shock we fell much more than necessary. Today, as regards Greece, Portugal, Ireland, Italy, UK, Spain - we all know that they are under pressure. If tomorrow Greece fails, it is not going to happen as a surprise to us or a shock to us. So hopefully our correction this time should be lower than last time.

Impact on India
Today we are trading at 15.5 times one year forward earnings - which is our long term average. It effectively means that even in the crisis we are still at our average. So that itself is a faith or confidence in India. So you have to appreciate that even in this crisis time when all other people are substantially below their average we are still at our long term valuation average - which shows the confidence on Indian market and Indian economy by investors.

Another aspect is the belief in the India long term growth story itself. Now, you can line up arguments to support the view in favour of the growth story just as you can line up arguments against the growth story. If you are bearish, you will worry about monsoons, naxalism, Pakistan, interest rates, corruption, about the pace of project execution, etc. Sure, we have our set of negatives, our set of limitations.

But, if you look at it another way, we have our limitations - no doubt - but despite that, we are able to achieve an 8% growth. Countries like Greece have none of our limitations - but can’t grow faster than 2%.

All these limitations will incrementally start to reduce and marginalize in the positives of demography, positives of education, positives of private entrepreneurs joining government, positives of talent remaining within the country.

If the crisis deepens or is not solved then FII outflows from our stock market can be an issue. But that’s a short term phenomenon. As I said earlier the India story remains & we don’t have to worry much about the external factors. Long term & disciplined investments will make you a winner always. On that note when such volatility persists, it is best to start an SIP, because if the market falls then you can accumulate more units & if it rises then that’s what we want!

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What Does it Mean?

The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.

Source: www.investopedia.com

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