Arvind Chari is not a new name for Unovest readers. He has shared his insights several times with us in the past.
Arvind Chari is CIO at Q India UK, an affiliate of Quantum Advisors Pvt Ltd.
He has 22 years of experience in investment management in Indian capital markets. He began his career in 2002, gaining experience in macro, credit and fixed-income portfolio management. He has multi-asset exposure by helping launch the Gold ETF, Equity Fund of Funds and multi-asset funds at Quantum. As CIO, Arvind guides global investors on their India asset allocation.
We get in touch with him again, this time on audio/video, where he shares his views and insights.
We cover:
Indian economy's context in the world economy (The total global wealth is estimated at USD 300 trillion)
The unique interplay of GDP growth and stock market returns in India
The risks that are playing out in the world as well as specifically to India, as a country.
INR depreciation - Will the rupee touch 100 to the dollar? What did RBI do there?
Role of Gold vs international investments
Taxes and subsidies
Will interest rates in India drop to lower single digits?
Arvind's own portfolio asset allocation
You can watch the entire podcast below or on this link.
If you like to read, the full transcript is further below.
This conversation does not provide any investment recommendation rather an understanding of how an investor should look at investing for the next few decades. India offers a unique opportunity to build wealth in the future and you don't need to be super smart to participate in this opportunity.
Do share your comments and views. ----
Transcript:
Vipin: Hello everyone, this is Vipin Khandelwal and today we are almost at the first episode of Knowledge with Unovest and I have with me Arvind Chari Arvind is someone I have known for many many years. It's just a strange thing that we are actually speaking today after also many years.
Welcome Arvind! That sort of brings us to the very first question I would like to ask to you. What are you telling your investors?
Arvind: Thanks, Vipin. It's so good to speak to you and speak to your clients. I remember we used to do those written interviews and we did a few podcasts as well. And I hope you and your clients benefited from that.
And I hope they'll benefit from this as well.
I just want to clarify one thing till 2013. So between 2004 and 2013, I was with Quantum Mutual Fund. That's where I launched the Liquid Fund and the eventually the Dynamic Bond Fund and all the gold ETF, the multi-asset, the equity fund of funds.
So, and then in 2013, I moved back to the parent, which is Quantum Advisors. And now, as you said, I'm the CIO at Q India UK, I moved to London two years back with family. It's been a very good move up until now. So yeah, so what do I tell investors, right?
We think India is big. So India is almost 3.5, 4% of global GDP. It is almost 4% of what we call global market cap. But if I look at allocations by investors, you know by global investors, most of them have less than 1% invested in India. And even that, you know or it comes from their investments in a global emerging market fund. So they are allocated as in a emerging market fund and that emerging market fund has India exposure or you know, so that's how they have India exposure. Very few have what we call direct India exposure where they've taken. I like the India story. I think it's a great place to be and I want to invest directly.
Now, they can choose any asset class. It could be public equities. It could be private equity. It could be some little ventures. more Quite a few will do infra and real estate. I'm talking about the large institution, like pensions, sovereign wealth funds, some central banks, insurance companies. you know These are the university endowment. These are all large institutions. But yeah despite that, they we don't see a large direct allocation. So just to give you numbers,
The global wealth, like global AUM, is somewhere around 300 trillion US dollars. Huge amount of money, right? I mean, that includes pension funds, which are about 60 trillion sovereign wealth funds, which are about 10, 12, 13 trillion insurance companies, which are about 40 trillion. And then asset management, global investors, retail investors' money and H&I money invested in asset management companies or mutual funds that is about $140-150 trillion. So that's the amount of global wealth. And if I look at the total investments in India, if I look at just market value, but as of let's take December, 2024 at market value, the total market value of all foreign investments in India was about $1 trillion, exactly less than that. But if I look at public equity and debt, it's about $1 trillion. dollars
You add private equity, venture, infra and real estate. come market value mill lega that it's It's a bit different difficult because if they are not as market valued as public equities are. Take another trillion of market value. So about two trillion of foreign capital is invested as compared to the overall AUM of 300 trillion. So it's less than half a percent or just slightly more than half a percent.
Whereas if India's weight in global GDP is about 4-5%. So even if you say, OK, all the 300 trillion is not available for foreign investors, not everybody has home bias.
As an Indian, you will want 70%, 80%, 90% of your money to be invested in India. That's just the home bias of institutions and individuals. That is similar in the global world. So say we say two-thirds is not available, one-third is available, one-third of that 300 trillion is 100 trillion.
5% of that is 5 trillion dollars. We are nowhere there as well.
Vipin:But that's the size of the India market.
Arvind: And the reason I say 5%, the reason I say 5% is India's weight in global GDP is 5%. And India is a beautiful long term story where GDP growth gets reflected in market returns. I can send you a chart on that we've and we've used it very often on our websites and our articles that the Indian GDP growth grows at about six, six and a half percent in real terms. Nominal GDP grows about 10, 11, 12 percent.
If the economy is growing at that level, then the corporates, let's say the listed entity, all the listed corporate, they are the best companies, well-run, best brands, best businesses. you know They are the ones for the top, say, top 1,000, 2,000 companies in India.
they will have they will technically grow at a faster pace than the macro. So if the economy is growing at 10, 11, 12%, they should be able to grow at 12, 13, 14% revenues. And if revenues equals profits and profits equals EPS, the share the that profitability should be growing at about 12, 13, 14%, on an average. And if you look at stock prices returns, you know you've been covering markets for a long time. If you look at long-term equity returns, tend to be between 15 and 17% INR terms on a peak basis. When there is a trough, if you see a rolling returns, it will be between say 13 and 15%. But that's the kind of range. So in India, you can actually make a very clear, simple link that if GDP growth grows at 6%, your expected returns from equity should be anywhere between 12, 13, 14%.
So that's why we introduced that same thing that in India, you if India's weight in global GDP is 5%, and India has this beautiful link between GDP growth and equity market returns, you should be able to think of allocating at least 4-5% in India.
Because in India, economic activity gets reflected in in market returns. It is public equities, it can also be somewhere in private equity. So this is my main role and this is most of my meetings I do with this approach saying that think about India, think about that how much you want to invest in India.
And think about if India in a dedicated manner, you know, India is very different in a like if you look at emerging markets, you're like China, Brazil, South Africa, also is part of the of the emerging market index. There are it's very varied kind of countries that are that like Russia used to be part of an emerging market. Turkey is the most volatile part of the emerging market.
But if you look at India's long-term equity market returns and this link with GDP and equity market, no other country has that. I can say with charts on that as well. We've compared China where the GDPs are like this and equity market returns are like this. Brazil, same. But in India, it's a reasonably closed link.
So we so we we are trying to tell investors that you know you need to think of India dedicated. India is big. And India has delivered. If you look at the last 20 years, 40 years, equity market returns, public equities, it has been in double digit, in dollar terms as well. Forget about IANA terms. Even in dollar terms, India has given double digit dollar terms. So that's the way to think about India. And that's that's most of my discussions with them is to think and and and then guide them saying that,
OK, if you eventually want to do 2%, 3%, 4% in India, what kind of risks are you taking on? It's not it's not a one-way street, right? There is a lot of risk that in in India is that you take up. Like infra real estate, if you have a team in India, if you think you can manage the governance aspect of it, then great is a great asset class. But if you if you're sitting somewhere in New York or in Chicago and you're trying to do that through a manager of whom you don't know whether they're good or not,
You know, that there are, there are, there are, that it can be very damaging to your returns. and deputy So how, what to take risk, how do you think about it? And then we, then we narrowed down in our, at least in our, which is saying that public equities is the best option for you to play, you know, irrespective of what you think about valuations and all those things. But a longterm, a dedicated allocation to public equities is yeah needs to be made by these investors.
And then in that, with then we talk about you know how we at quantum, know, you know, the quantum long term equity value or what we call the Q India value equity strategy for foreign investors. We use our thresholds of, you know, a liquidity filter, a very clear governance screen. There are companies that we will never invest, you know, irrespective of how big they are, how large they are, we just stay away from them.
And a valuation metric. you know When you invest in India, our job is to manage that risk. So it could be a liquidity risk, it could be governance risk. Liquidity, when we also say, like a lot of people get enamored by mid and small cap, and they've done well. But the amount of capital that they can deploy and take back and have a predictable enemy is very different. So a large investors cannot allocate as much capital to, say, a mid and small cap strategy. So that's why we use a liquidity filter.
And then this valuation govern discipline that we have, that we want a discount to intrinsic value. And when we reach intrinsic value, we'll kind of trim and sell. So we we we basically feel that everybody should have a fundamental allocation to us. And then they can take risks. So they can take a risk with a growth manager, with small cap, with private equity.
But this is this is broadly what we say. in Look at India, think about a higher location, think about dedicated in India, think about public equities, and think about quantum. That's the way I'll frame it.
Vipin:
Okay, okay. So I picked up that one line from what you said that in India, there has been this coinciding relationship between GDP and sort of the market returns. And you're saying that this is quite unique to India in that sense. I'm asking, you know, maybe I'm questioning, what if this link breaks in the future?
Arvind
Yeah, so its we get this question as to why this is in India and what if this link breaks. I think there are four things that drive India in in that sense. The first two are democracy and rule of law.
which some other countries might not have, or even they have, they have a very authoritarian regime, or you know, there are different things. In in India, because you have democracy and rule of law, people have property types. People have rights of property, people have rights of business, but and people are free to do what they want to do. And India is essentially a micro story, right? I gave you the macro reason of investing in India, but essentially, the entire story is a micro story of individuals, entrepreneurs like you,
and their aspirations and and what they want to do and they will thrive and survive and have problems irrespective of the system and we find a way and we do it right and that is true for everybody like people are aspirational and you can see that right for the last 30 40 years where we've seen people's aspirations change and they're evolved and they're We have a long way to go. But but but that and then if you look at Indian corporates, given their history of what they have felt from the government and in terms of what they can do, what they cannot, they are very good in converting this broad growth to their own revenues and profitability and are very capital conscious. So that just the concepts of you know cost of capital, return on equity, cash flow, it's all it's ingrained in many Indian businesses.
And that shows off in terms of either in the private business or Indian business, you can you'll always see return on capital ratios to be higher. I think these combined to to go then. The risk that you said is the reason we believe it has not worked in many other emerging market countries.
is again the same thing, democracy and authoritarianism and crony capitalism, for example. right So in Russia, the GDP growth happens, but it is concentrated with a few oligarchs, for example. So you see GDP growth, but that growth is not getting transported either to the people or to private corporates and private investors. Same with China. The state is such a heavy hand. And the state can decide who will get to business and who will not. The state can decide who can make money, who cannot.
Manmohan Singh made a beautiful comment in 1991 after the July 1991 budget. And he said that investment is an act of faith.
He was basically telling to private corporates and foreign corporates, invest in India as an act of freedom. We have to ensure that we always keep that freedom. Private businesses are always always like that. right you When you do something, you need that trust to be able to invest. When you don't have that trust or when you feel that if I invest, there is a possibility that a crony capitalist within the government can steal my business or can steal my assets.
It is a limited amount of you know how much risk you're going to take with those kinds of situations. i think I think if we get into those kinds of situations in India, we will have a problem, which is also why we've been, you know, we've always said that in India, coalition governments are the best outcomes because in a coalition government, there are always checks and balances, pulls and pressures and and and aspects of of you know centralized control becoming lesser.
right So India is barring the previous two terms under BJP. Even this government is like this is not a proper, what we call an NDA government. It's no it's no longer called a Modi government. Because India is so diverse and India has so many different aspects, coalition governments helps. And I think we believe that coalition governments keeps checks and balances in place at at some point in time.
So that's the risk. So you don't want to get into a risk where, like other countries, where few people or few companies or few individuals or few oligarchs or few government officials benefit. and And that breaks the link. Otherwise, I think in India, given our a democracy, our you know very diverse basis, federal government, state government, municipal government, so we have those structures in place, which is why I don't think it should break in India.
Vipin:
Okay. So sort of your, what you're trying to say is that even in, you know, in your future, let's next 10, 20, 30 years, if we are able to grow at our GDP at about six, six and a half percent, you know, we should see on a broad market basis returns about 13, 15, 16%.
Arvind.
Correct. yeah that's I mean, it's not a guarantee, but that's the way you think about frame your expected risk and return. And that is a good rate of return rate. 6% GDP growth is double of world GDP from from a global perspective as well. It is not enough for India to grow at the pace at which it should be growing. But having this estimate, having this expectation makes it better to look at returns. but I'll tell you an example. do you know You remember the BRIC period, right?
India was part of Brazil, Russia, India. Goldman Sachs coined it. And in that period, people expected India's birthright to be growing at 9%. India will always grow. You had our policy people, government people were saying that India will grow at 8 - 9%.
So when you grow it when you expect to grow at 8 - 9%, then you build the same, like 8% real GDP growth, 5%, 6% inflation, or 14% nominal GDP growth at 23% for corporate revenue. So you actually your public equity, large-cap liquid expectation went to 17%, 18%. And then you expect more from small-cap private equity venture. Look at the risk that you are taking because of the expectation moving then. And you know how that played out.
At that time, especially in small caps, you had a lot of foreign money into small caps and private equity and real estate. Indian retail, they're not as exposed. You know that story. Our major increase has happened since 2014.
So we didn't feel the impact of a social political impact of a big market crack because of the expectations going wrong. Because the GDP growth came back to six, six and a half percent very quickly.
Like there was a some spike and 2011, we haven't actually gone back to that 2011 growth cycle. I just shared that document with you yesterday, what I wrote about, you know, the GDP growth.
Vipin
I hope there's no statistical adjustment involved. This is all comparable when we say 2018 and now, right?
Arvind
Correct. Yeah.
It is comparable because yeah things have changed, trends have evolved, but still, you know, gross domestic savings is gross domestic savings.
Real GDP growth is real GDP growth, right, the way you think. So, having this 6, 6.5%, 10%, 11% nominal and this 13 to you know that that range of equity market expectation growth will help you invest properly, will help the invest calibrate, saying that, OK, this is what I can achieve. If I want more, and I have to take more risk. So what is that risk that I will take? But this is what India has delivered, irrespective of whichever government is in power, single party coalition, left government, right government.
whether global rates have been higher, whether global rates have been lower, whether there have been wars, whether there have been famines. You've seen everything in the last 45 years since 1980. And this is your average growth and this is your average return in equity market. That's the way to frame your basis of what you can think and what you can achieve and how you can plan your investments.
Vipin
What is the status today for India as the economy?
Are we slowing down? or there is not much of a problem. is Everything is temporary for now.
Arvind
I'll just go back to the same framing, right? If you expect if you expected India to grow at 7% plus, GDP growth. Then of course, this is a slowdown. It's a structural slowdown because we've not had average 7% growth for 10-12 years now. Our average last 10-year average also is about closer to about 6% real GDP growth. Of course, there's a COVID period. So that that took away some of the data. But it is still between 6 and a half. So so if you're thinking about slowdown, yes, you are slowing down. The numbers below 6% last quarter is slow. And then we've slowed down over ah the last one year.
But it is not, if if I look back in 2016 to 20 pre-COVID period also, we had similar aspects of be going up and then slowing down. So there is some there are some structural reasons. And you know um I said democracy is a good aspect. Democracy could also be a constraint you know in terms of what we can do and what some other country can do. But we have to live with that constraint. So of course, India is slowing down. but Like i I don't believe if, because my expectation is that India will grow at six, six and a half, I will believe this has a cyclical slowdown.
And there are like fiscal, like look at all the. Ladli Behena, whatever schemes have been announced by all state governments, right? Well, BJP, Congress, non BJP, non Congress, everybody has gone and announced either a direct transfer scheme and they've chosen to do it for women because it's a good vote base and it's also, and because you can do direct transfers.
That's a significant fiscal impulse. There was a calculation that it's almost like 2 trillion dollars, 2 trillion rupees of new spend is going to go direct into people's account. So that is a fiscal lever.
People can call it khatakat, people can call it Revdi, you know, the politicians will call it, but they are they are the first ones to react to it. They are closest to the people. They know the underlying reality. And the underlying reality weapon is that India is more at that 6-6.5% growth. India is not creating enough jobs of weight. Nobody can remain unemployed. It's just too difficult to remain unemployed in India.
but a job for your education, for your work at the wage level and is not able to grow at that level. And yeah politicians have realized that you need social stability. you need certain and short You have to ensure that certain amount of money is going to social stability. Otherwise, people will revolt and riot, or you know or or ah they will lose elections. So we at Quantum, we've always seen the government spend in rural. And this is a necessary spend to ensure that people have incomes and consumption and sentiment.
And maybe they'll have to ensure that capital expenditure comes from, you know, better policies. So that's that's one aspect. If you look at RBI also, if we we've maintained for the last six, seven months that they've actually kept monetary policy as we call too tight, where liquidity is too tight and rates are slightly higher. And so they have levers. You would have seen the last week announcement where they were announced the way they allowed the rupee to depreciate. They were actually holding the rupee very, very tight.
In fact, for a point, the Indian rupee was less volatile than the Hong Kong dollar. And within Hong Kong dollar is a peg. It's a pegged currency. So you know yeah it was so less volatile. and It doesn't make sense for a country like India, which is dependent on goods import, current account deficit. If you are dependent on foreign capital, you have to allow the rupee to float. They have allow of the rupee to float. I think the rupee will depreciate a bit more yeah eventually. But which means they will focus on maybe cutting rates. I would expect a rate cut to come through. And they added liquidity. So these these immediate steps should have should have some impact, some slowdown. It will erase the cyclical slowdown. Whether India goes back to 7% growth,
I think that that still requires a big factor for that is investment and exports. If you see the previous cycles, 1990s and the 2000, mid-2000, it was exports and then domestic investments to cater to that exports initially and then exports drive domestic demand. Those were the high points. right That's where the money went. And we still don't see a large exports of goods. Export services have done very, very well. But exports of goods haven't picked up.
And we haven't seen what we call this private Capex, right? Companies investing in fresh capacities who either cater to export demand or for domestic demand, which tells us that the domestic demand is still weak or capacities are in excess. So companies are still deleveraging or, you know, raising capital because equity markets are attractive, but not reinvesting in maybe using it for a payoff debt. So once we get into that cycle, maybe we'll see an But otherwise, I think we'll middle around this five and a half to six and a half percent real GDP.
Vipin
Okay, so let me tie around you know what you have said and take some questions that you know my clients or readers have asked.
Arvind
Yeah, absolutely.
Vipin
This currency depreciation thing, right! people have been, this is a perception thing, but they are really upset you know that the currency is depreciated so much.
People who are planning to send the kids to you know universities outside certainly have to shell out a lot more. and I know I mean my limited knowledge I think is of course and as you said it's going to depreciate more how much more is it going to happen
Arvind
There's a technical answer to it, which is, you know if yeah if I look at measures of currency valuation, which is, we typically use something called real effective exchange rate, India has about 5% or 6% overvalued to that level. So this was, now we can debate why they kept it that way. And I'm seeing average. This is not a, it's a long term average. Against a very long term average, India seems to be about 4% to 5% over valued. So that could be one way to think about it. We generally believe that India will depreciate about 2% to 3%. You should assume against the US dollar, the Indian rupee will depreciate by 2.5% to 3%, 2% to 3%, every year on an average. But it will never be every year. It will be flat and then there will be a span. We've always seen that. If you go back to the 90s, the rupee was 37 flat and then went to 44.
then it remained between 40 and 46 in the during the BRIC period and then from 2010 it went from 46 to 65 right from then then in 2014 to now from 60 or it has come to 85. So, there are flat period and there is spike, but if you see the long term average it tends to be about between 2 and 3 percent. So, if for people who are who want to send their kids for foreign education or whatever, should budget for this against the dollar, other currencies. But generally, again, other currencies also we we tend to have somewhat similar averages, which is why we've always said that the one asset, because you can't buy, if you can buy foreign equities is it's good, but the one asset to hold for that is gold.
Because that rupee depreciation risk that you get, some part of that gets gets comforted by gold. Now, of course, what price you buy gold when you buy gold matters. But in general, that gold tends to be a, it's a sign of stability. And we've always said, like buy gold because you are worried about the stupidity of politicians, central bankers, government officials. It's a hedge against that stupidity of these set of people who rule us, who govern us. So that's that's a good asset to own. And for Indians, it also because it's a dollar priced asset,
So when the rupee depreciates gold, price and INR kind of increases. So it gives you some amount of, I'm not getting the sure shortage, but so it gives you a hedge against stupidity and it gives you a hedge against, you know, some amount of rupees. So that's a way to think. Of course, if you have, if you think you can do, you know, a mix of gold plus global equities or global investments subject to that, whatever, and investment offer So, that's the way to think about it. But assume at least a 2% depreciation of the rupee again.
Vipin
So with that, I think the 100 mark on the USG INR should be a few years away.
Arvind
Yeah, I mean, if you extrapolate it and I don't think it should be a sign of weakness or strong strength, it is it is what it is. And inner yeah in open economy like India has a fairly open economy.
Vipin
It is what it is, yeah.
Arvind
The currency is a good barometer of macro stability. You can have macro adjustments through the currency. So and people make it into a political thing of you know ah ah strong rupees, mean strong nation, or weak rupee. It's not bad. I mean, yeah india will if India's productivity, inflation, and inflow of capital is way more than what we need, the rupee will appreciate.
29:47.40
Arvind Chari
like the rupee could have appreciated in 2018 to 22 when we were getting a lot of foreign flows and the RBI were actually buying the foreign flows to not allow the rupee depreciate. So, some amount of what they are doing right now is they bought when times were good, when times are not good and outflows are happening, they are allowing the rupee depreciate or they are using the foreign exchange.
I think it's adjustment mechanism. I don't think people should take this at heart in terms of you know the dollar value of the Indian currencies. That doesn't mean much.
It means much from a like if for for you to send people out in dollar. So it means monetary impact for it. Or when foreign investors are investing and rupee depreciate, they lose out on their eventual dollar return. So it means for that.
Vipin
Yeah, so you also talked about this whole subsidy thing and direct transfers.
Some way, it also adds to the fiscal pressure, right? Now, and you know this is a common thing and I'm sure you must feel it and many others do that this fiscal pressure, especially through subsidies is leading to increased amount of taxation.
Is there a fair linkage there or not?
Arvind
I mean, see if not really yes and no, see India is a poor country and our policies of the last 30-40 years have made it better than what we were in the 1980s and 1990s.
Vipin
I just want to know whether it is actually the case and if you know people are carrying sort of a misconception that you know because of these subsidies and revdis, there is more taxation happening and it is impacting everyone.
Arvind
But we're still not, as I said, not going fast enough to deal with the, like, we basically have a number that 25,000 Indians are joining the workforce every day.
you know that's That's the amount of number of people who are jobless. So you need to be able to create jobs for those people. And we are not growing fast enough. So if you don't do that, and if you're not going fast, then the state has to provide for certain aspects. Now it could can it could be direct transfer. It could be you know cash. It could be free food. It could be subsidy on the gas. you You have to do it till the time people's per capita income levels come to a level.
Now, the way to think about this is but the government has limited resources. but And India, there is that is what we call a fiscal act. You can't go beyond a particular level of fiscal deficit, both at the center and the state. right So if a large amount of your allocation goes through subsidies, interest, salaries that you pay,
then the government has to decide, okay, I still need to invest, I still need to create roads, I still need to create infrastructure, I still need to create capacities. How do I do it? So the there is a huge private sector sitting and wanting to participate in that, but at terms which will be beneficial to them. So the government will have to then decide, okay, i I want to do this, but I have already done all my spending here and I have to do this because this is social requirement. I only have this much left.
How can I ensure that I get the best bang of bang for buck for this capital expenditure? Why, what kind of policies? I'm not saying incentives. It could also be policies that, you know, in 10 years back, NHAI was, people used to say they were the biggest defaulter too.
And a lot of private entities did annuity road projects and lost money. But it could be their estimates go have gone wrong.
It could also be that the governance structure at NHAI was not good enough to you know allow that ah ah return should happen. So there is a fiscal constraint, but we need to do both. Can the government figure out good policies to ensure that there are more private sector doing some of the project that it cannot do? So it's a mixed taxation It is high but like on a relative basis at our income levels. It is higher than other countries, both the GST and in income tax. And people tend to make a misconception that income taxpayers are only the taxpayers. They are not. Every Indian who buys a product or a service-based tax, because there's GST on it. So everybody's a taxpayer. Now you can ah can argue that people are not disposing. And that's that's a government compliance problem. it's not
And also I always say that people say salaried income tax are honest. They are only honest because there's a TDS. You remove the TDS and then you'll see the honesty of direct income tax salaried players. So let's not get into that aspect that and he's not paying tax and I'm not paying tax and our farmers are not paying tax. That's a policy decision. But is there a scope to reduce taxation? Yes. I mean, like look at fuel prices. I think the fuel prices are at least 78 rupees higher than what they should be.
because the global prices are like that. So I don't know why the government is not. They did cut something like even GST or the overall GST given the revenues that we're getting. Maybe there is ah there is a case for rationalizing GST and in terms of you know how to simplify it plus also reduce some amount of GST tax rates to ensure that there is a benefit for the like people's consumption costs go down.
And we know that as taxes go down, if the economy activity is supposed to go up, the government will make up its taxes just by more activity.
Vipin
Exactly.
Arvind
There is a big scope for that. Of course, I think there should be a lot of you know direct tax reforms. And I think we've we've made it very complicated. plus Today, from an investor perspective, because your dividends, interest is taxed, dividends is taxed, dividend distribution is taxed, and then you all your capital markets are taxed. STT, short term capital gains, long term capital gains, derivatives futures. There is a significant amount of tax on capital, which is for but for professionals and salary. It is after tax. So after tax money, you get taxed some more on your income.
I don't know. The government has really taken a rule that they want to you know and they want to tax it. But given our long-term requirements of capital to be able to build what we want to build for the country, and i there are there are no two ways to think about it.
Vipin
Okay. Okay. I think the government is getting to decide that. The taxpayer is not going to decide that.
Arvind
Yeah, it's a policy decision that you have to live with that policy decision.
Vipin
Okay. So, so tell me based in today's scenario, how is your own portfolio asset allocation? How are you as Arvind Chari investing?
Arvind
So it got a bit changed because I had to move and you know, London is a very expensive place to stay. so i don't it's not much of saving that ahead of doing when I was in India, I and i still follow that. I had a very simple allocation. I had three buckets that I chose. One for me and my wife in terms of our wealth and our eventual retirement or whatever corpus that you call.
One was a retirement corpus, which was pension, and then one was my daughter's component, and I had kept it very simple. So, in pension, I went as low as I could, mandatory on EPFO.
And I did NPS, 75% equity, the rest was debt. So I chose that option. And that was from my employer. So 10% of basic, yeah, corporate NPS.
I moved to corporate NPS whenever quantum my firm moved to corporate NPS. So that was my retirement corpus. 75% equity, 25%. I like that exposure, very low cost. like well That is computation, taxation, and all those things. But i there is no other option. So I did that. Anyway, capital gains tax is there on the equities anyways now. For my personal portfolio, again, it was 75%, 80% equity, and 5% to 10% gold. And the rest was liquid bond fund,
In equities of that 75-80 about barring 5-10% of that 75-80. So, say 60-65% was in three mutual funds, I didn't do stocks.
And the rest, 5-10% was to satisfy my own ego as being a fund manager. I thought i I can time better and I can, you know, so I should do whatever was allowed from a compliance perspective, I should do some sector allocations or sector funds, depending on what I think about valuations and and stuff like that. Otherwise, I generally don't do SIP, but which which is a problem because there's no discipline. I've generally been a lump sum allocator as compared to SIP allocator for my personal portfolio. For my daughter, it was 90%, 95% equity, 5% gold. Again, two equity funds, but hers was SIP every month I used to target. So I i just tried, I thought this was simple. I think, I don't know, you can tell me, you've seen many other portfolios. So, I just found this to be a very a good way to think about three buckets and how I want to put.
So, daughter was SIP, 95 equity, 5 gold, retirement coppers was NPS, 75 equity and my coppers was 70, 75 percent equity and then the rest was debt and gold.
Vipin
And you keep this allocation constant.
Arvind
Yeah, so like last year when my equity went to about 80, I've trimmed, I've sold quite a bit of my, not quite a bit, like I got it to about 70% slowly, gradually over the last years.
Vipin
But that's what you're comfortable with, 70% equity.
Arvind
Correct, I just, it's, I don't know, there's no math to it. It just felt like it.
Vipin
That's OK. That's your personal comfort.
Arvind
Yeah. That's just, that's the way I do i just, it made my mind, it just becomes simple that I don't want to be more than 80% in equity. So when it started going there, I cut it. I also expected the GDP growth to slow down in my mind. So I said, okay, earnings will have an impact. So maybe I cut early, then and the market is correcting only now. So I may have missed some of the rally last year, but fair enough. I got it to about 65 or something like that, 65, 70, and I will scale it up now.
I think now I think if you look at index might not have fallen much, but some other stocks seem to have fallen a lot. Although I still think it's many things still look expensive, given the you know the growth estimate or to estimate, if the growth is going to be at six, six and a half, then you know what is the earnings growth and you know what kind of compounding you're looking at. yeah, so some maybe some sector allocation, some some more allocation can be started.
Vipin
Okay, so now also tell me this that, you know, interest rates in general, you know, have reduced over the past few decades, right?
It's like a particular trend there.
Arvind
Yes.
Vipin
Would you say that this is going to continue in the future and we're going to be at like a 2%, 3%, 4% interest rate, maybe 10, 15 years down the line and never see a 7% again.
Arvind
Globally or you are saying India?
Vipin
India, India, I'm talking about India.
Arvind
No, I think India for a conceivable period you should i assume Indian range to be between 6 and 8 percent. like So if there is a macro problem, inflation goes up, you might go to eight. And I'm saying about 10 year bond yield or or you know a mix of, or just look at FDs. The way I think about bonds in India is that whenever it goes towards seven and a half and above, I start buying duration or I i will start recommending longer duration. So if you're doing an FD, then start locking in slightly longer term FDs.
This used to be eight and a half, nine percent 10 years back. I would start doing it at about eight, but now you know India has inflation targeting, right? So India targets that four to six percent inflation. So if you look at Indian yields, so the 10 year bond yield used to trade between four and nine, between 2000 and 2014, and now trades between six and eight.
it had during Even during COVID, it went below six, but didn't sustain that.
It has not gone beyond eight, barring once in 2018. Even in this spike, when global rates went up, Indian rates did not go and anywhere close to eight percent.
So that's the band that I think. So if it goes above seven and a half, eight, towards eight, I will increase, I'll buy dynamic bond funds, I'll buy increased long maturity duration or I'll increase my FD profile. If it goes towards six, I'll reduce it. That's the way to think about allocation to fiction. But I think that six to eight band will remain in in India. We still have about five percent inflation. And globally, I i don't think
Because globally, my only worry that I have is demographics has changed. The world is becoming older and all this immigration nonsense that every country has now that they don't want immigrations is going to have a big problem on this developed world where they are running out of people or they're getting older and they're not allowing immigration to happen.
right So, which means the the employment, the labor market as we call it is will will remain tight, which means inflation will remain slightly above average.
Europe is different from a demographic perspective, Japan is different from a demographic perspective. But like i i if I look at US, where there is still the average age is still low. But they if they have immigration problem and they they don't allow immigrants to come in, you should expect inflation to be relatively high. And then so you are in this 2% to 4% band globally. So if you are 2% to 4% band globally at 2, 3% more to that for India. So you are in the four, in even in the five to 7% band, which means you are in a six to 8% fixed deposit bond yields band. And that's the way to think about rates.
Vipin
okay okay
Are there any other risks you are forseeing in this year at least or let me put it another way, are there things that you would tell investors to not do in this year or to' say the next 6 months?
Arvind
I think one thing I'm worried is how do Indians respond to a 20-30% drop in their portfolio value in equities. We've not seen this, like the prior times when we've seen this in 1990s, 1999, we've seen people moving away from equities.
2008 after Lehman, so a lot of money went to Ulips and mutual funds in 2005, 2008, and then Lehman happened and then 2009, 10, 11, 12, I think four years of net outflows, mutual funds had at a very low base, like the number of investors itself was very low. Today, the number of investors is very high in mutual funds, direct equities, AIF, PMS, there the the it's become very broad based.
I don't, I want to know, I want to see how they react to a sustain, a drop and then a weaker markets for say, six months, one year, I don't know how so politically, socially or you know, in terms of returns, they will they will react and that is, that is something that I want to see. And if I look at data points,
The allocation to mid and small cap or micro cap or SME seems to be very large as a proportion of the portfolio especially in the last two years.
And we know within more cycles how that corrects that and and get can correct and can remain in correction for a long time. I want to see how that is one risk that I don't know. We have not seen it. There is a large amount of allocations. And it's great to see Indians investing in equity. It's fantastic. This is a big win for Modi. That investment is an act of faith that I talked about earlier. And if you see the curve, it's exactly 2014. From 2014, you see a spike.
in equity, mutual fund flows, SIPs. And it's just a confidence that people have to invest in their own company and take risk. So retail, Indian retail has shown it, Indian corporates has not shown it yet in terms of Capex, but Indian retail has definitely shown that and it's fantastic to see and it's a structural story. But I just want to see people who have over allocated How do they respond? What do they do? What is the response? I know whether how the regulators respond and how the politics respond if there is a very large correction. we And we don't know how and when so that. So that is one risk that I will see. And I want to see, I don't have a sense of it, I hope. Because generally from whatever falls you've seen, people have popped. If you've seen every dip globally i in India, people have actually allocated and it's worked very well for them.
how, whether this is different to the same thing as a dip and you know, people will allocate more or have people allocated more than what they should have in expectation of past returns. And we can see those trends in say sector funds. There are so many sector fund NFOs that came last year. And I saw a table on on Twitter, which somebody had put a table of all the NFOs, sector fund NFOs and their products. And it's all like, you know, everything is more than dentistry.
And a lot of money has gone into that. If you look at flows, sector funds had the largest allocation as compared to any other category of flows. So people have lost money. And I don't know how they'll respond to it.
I think there was a number that just in mutual funds, there are some three crore new investors since 2021 or from 2021, from CY 21. There are some three crore new investors just in mutual funds. I'm assuming there'll be a lot more indirect equities and
I think that is it is I do not know I do not know the pulse, but I think there is a risk that that is something to be noted.
Vipin
Okay, so let me ask you what sort of a twister here. Let's say over the last five years or more maybe, what have you changed your mind about?
in terms of your work, in terms of what you observed, is there something you've changed your mind about? Yeah, you believe this was right, but no, it's not actually.
Arvind
Well, it's a tough one.
I was genuinely surprised by the number of people who got interested in investing in equities. Like I didn't expect it to be so high and it has been a significant. So whether that changed, I mean, it's it's changed the way we think about markets, for example. Today, you know we used to say that the you know price and the value was determined, what the value of the asset was determined by the foreign investor.
in terms of you know how they price it. But today it's a retail investor or the Indian investor who drives the public equity markets. So that has been a significant change in terms of how we will think about investing and and, you know, risk. And also, like, since I deal a lot more with foreign investors in terms of their outlook, but for them also it's a big comfort. See, look at the amount of exits that foreign investors are had at a very high value issue. And people say, FIIs are not homogenous
They are heterogeneous funds, but they are responding to market valuations and maybe the RBI gave them a very good exit by keeping the rupee very stable. If the rupee would have depreciated, if the rupee would have depreciated faster, they might not have sold as much or you know if if mutual funds were also, for example, conscious of the valuation and they would have maybe asked for a slightly more discount for for that for that market price or ah valuation perspective.
or you know held cash with different things in terms of how they look at valuation. Maybe they would and they would not have been able to sell as much as they've sold in the last six months. So it's it's a function of that. But it's for the foreign investors, a big comfort that there's a huge retail investor base where the liquidity has gone up and they are able to enter and exit in a good manner.
Has that changed after because it' changed the way I will look at allocation, recommendation, investments? That's been a very, very big change.
I was expecting that once we've come out of the demonetization shock, we will eventually get into a situation where we will be able to grow faster. And the global environment was so much in our favor. China plus one, you think about everything that has to happen from a global geopolitics, everything was in favor and we got some benefits of it. But have we taken the entire benefit? We still don't see that in numbers. Maybe it will come through. So that has been a disappointment in terms of, okay, should India, should incomes and growth could have been a lot faster than what they're doing. But our base assumption has always been that, you know, it's difficult, like, it's better to have realistic expectation. And I think that has, that has, it just keeps getting reinsert every time, every cycle we think, okay, has things changed? Should we increase our estimate? Should, will India go faster? And just comes back to this level saying that, no, there are some things that that might not change. So you'll have to live with that here.
Vipin
Thank you so much for making out this time and sharing all the insights.
Arvind Chari
Thank you.