Author: Jagoinvestor

Post Covid-19 hit lockdowns, India has seen a surge in demat accounts being opened. 

Around 114 million demat accounts were opened in 2023 alone which is around 2.8 times of 2020 number. Such has been the craze of the bull market we are witnessing.

As a result, there has been an unprecedented increase in the number of traders offering tips for undisclosed fees. Add to that, there are so many YouTube videos where people knowing very little about finance and how stock markets operate have now become overnight financial influencers. Too much irrelevant information is now floating around for no reason at all.

In short, the drama around stock markets is increasing.

Think about it.

Stock prices of several railways and infrastructure companies have multiplied in the last couple of years with absolutely no change in their earnings or their fundamentals. Whereas a high quality bank like HDFC Bank which has been holding the ship steady has lost around 18% in January 2024 alone.

So now you get people on YouTube and television trying to justify everything.

• If the market goes up, there’s enough justification.
• If the market crashes, there’s enough justification.

So what should an investor do in such a scenario?

It’s simple, just keep buying!

In the long run, stock markets are a net positive indicator for wealth creation. They cannot become zero. It’s not in their nature.

Check this chart out

It’s a simple chart of Sensex, Mid cap and Small cap index performance over the last 20 years.

You don’t need to go into tremendous details to understand that in the long term, markets keep going up. We have seen the fall out of the 2008-09 debacle, the 2013 crisis of India being a Fragile 5 nation and the Covid-19 meltdown.

Yet, the prices keep going upwards.

Take HDFC Bank for example.

Over the last couple of weeks, there has been a considerable amount of discussion around this stock. A lot of the youngsters who were born alongside the Bank’s launch date are declaring that this Bank’s future is over.

I believe some of these youngsters mindlessly comment via Telegram and YouTube, their careers are in grave danger.

Because if you take a 3 year horizon, then HDFC Bank’s stock has not gone anywhere.

But if you look at the last 2 decades, then the story is completely different.

It’s been a massive wealth-compounding machine for investors. I’ve written my own story of owning the stock which is up 30x now. (read here)

Now let’s take another example: Bharat Heavy Electricals Ltd. (BHEL)

In the last 3 years, it has become a darling of the stock market. Some people want to own it and some people are wondering what stopped them from owning the stock.

Let’s see the charts.

This chart makes your heart melt by missing out on the stock. 

Just look at the chart, if you had owned it for the same period as you would have owned HDFC Bank.

It would have been your worst nightmare of a stock in the portfolio.

Agree to disagree?

So as an investor, you would have made money if you had simply invested with your mutual fund or a portfolio manager whose one of the top holdings has been HDFC Bank and not BHEL.

The shareholding pattern of both companies give a clear insight.

HDFC Bank

BHEL

BHEL has had a very low ownership from institutional investors (FII +DII) with 25% at best vs HDFC Bank with an ownership of 82% as of Dec 2023.

Yet, we often get swayed by making a quick buck. So we tend to make a mistake of timing the market. This never works. As a result, in 2024 itself we are going to see too many people closing their social media shops or being financial influencers.

One fine day they would vanish into thin air leaving your trading capital in the red zone.

So what should you do if you don’t wish to be in red?

So all you need to do is switch off from the markets and keep investing all the way through. If you don’t need your money for the next 15-20 years, then why bother about what’s happening today.

Just leave it to the experts.

Conclusion

With the information flow increasing with each day, it’s hard to understand what is signal and what is noise. It’s even harder when you have a full-time job or a business to run. Such stress tends to take a toll on our family lives too.

Some of us might even be thinking of making a quick buck in this bull run so that we can retire early. That can be a big pitfall too. Because you are trying to make immediate money without understanding the very nature of the beast.

So it’s best to leave it to the experts to navigate the bulls and the bears, while you take a good vacation on the beaches of the Bahamas. At the end of the day, what’s the use of money if we cannot spend it.

This article is written by Jinay Savla, Jagoinvestor

Today we will talk about interest rates and inflation, the two hot topics of conversation in the investment world. I will try to simplify these two topics in a simple way and link it with your financial life.

The vast majority of views that we read in newspapers and blogs offer some form of asset allocation advice based on these 2 parameters. A simple retail investor like you and me will definitely get confused.

“To complicate is simple, to simplify is complicated. Everybody is able to complicate. Only a few can simplify.”  ~ Bruno Munari

Before we discuss interest rates and inflation, a story comes to mind. 

My wife and I really like to go for long drives. It just relaxes both of us. In fact, it’s the only common interest between the both of us.

For these long drives, we do some basic checks with the car and environment – whether it is raining or not, food, water and comfortable clothing. Since music is now streamed via the Internet, we don’t need to worry about CDs or cassettes, etc. Sorted.

Now when we start the car, Google Maps tells us that we will reach a particular destination in the next 7 hours with an average speed of 80 kmph based on the traffic. So we simply add a couple of hours of rest, washroom breaks and some lunch or dinner along the way. Effectively our journey becomes 8.5 to 9 hours.

Those of us who constantly drive on highways know the unpredictability of accidents. It’s like you are strolling and suddenly there’s a whole lot of traffic that you have to sit through. The crazy part is that there’s just no washroom or food mall available. So you are stuck in traffic listening to music and praying to God that the traffic clears very quickly.

Some uncles who are strolling around in such situations often become the messengers of bad news. It’s their duty to update every car whether there’s an accident, a fire, arrival of the ambulance, or police and then leave us with the hope that the traffic gets cleared quickly.

These unpredictable events lead us to a delay in reaching our destination and if we are not careful, these events also cause a bit of mental instability that leads to irritation.

But when the traffic clears, we drive as if our school’s last bell has rung and it’s time to go home. That feeling of relief. Some of us even want to cover the time wasted by driving at ridiculous speeds. It’s just different strokes for different folks. But if you just drive, you will reach your destination. It’s not rocket science.

Rocket science is what you do with your peace during these unpredictable events. That defines the happiness of your journey, not the destination.

Similarly, when you have planned your financial journey of life, there’s a destination set in your mind. Our financial independence is when we are no longer worried about looking after the expenses of our home and fulfilling the expectations of our loved ones.

There will always be some unpredictable events that will cause you to rethink your entire investment strategy. My humble request here is to understand the gravity of the situation before jumping into a complete restructuring of our financial plans. Because sometimes, the situation is made to sound a lot more horrible than it actually is.

Please keep an open mind and allow me to simplify these concepts to the best of my ability.

Inflation

This term has become the most used and highly abused in the world of investment today.

Some people talk about it as an end-of-the-world apocalypse in the making. It’s then linked to consumer spending and how things that are getting expensive won’t be consumed, so let’s stay away from the fast-moving consumer goods (FMCG) sector, and so on and so forth. It’s hilarious and disturbing at the same time.

So let’s understand what inflation really is and what it means to common people like you and me.

Simply, inflation is understood as a simple rise in the price of a particular commodity or service. Suppose, the price of milk goes up from Rs. 75 per litre to Rs. 80 per litre, the extra Rs. 5 is attributable to inflation. If you add human intervention to it, such as putting the milk in a bottle and charging extra won’t be considered as inflation.

To track inflation, the Reserve Bank of India (RBI) uses the metric of the Consumer Price Index (CPI). The idea is to capture the rise in price experienced by roughly 140 crore Indians. It’s a tough job, to be honest. That’s precisely the reason why such macroeconomic numbers should always be seen with a pinch of salt.

In the chart below, we capture the last 10 year’s journey of India’s CPI inflation. RBI has set a mandate to keep the CPI in the range of 4% to 6%.

Currently, CPI is inching towards 8% which is out of RBI’s comfort zone of 4% to 6%. There are multiple explanations for this and in my opinion, every explanation is valid. Because in macroeconomics, data is always supported by a story that we create.

However, if you come to think about it, our yearly expenses don’t rise by a mere 4%. They tend to be well above 18-20%. We call this luxury inflation.

RBI constructs its CPI with the following constituents.

Don’t be surprised! This is how the RBI budgets itself. Our household budgets are different.

The major pie of the CPI basket falls into Food and beverages. It constitutes a good 45.86%. So any unusual price hikes in onions, tomatoes, etc. have a direct impact on the inflation rate. Housing is 10.07% which is largely stable in price.

We don’t see massive fluctuations in a matter of a few months. Fuel & Light does have a lot of impact on our wallets but for RBI’s CPI it’s barely 6.84%. So a whopping rise in petrol prices might not directly affect the inflation rate so much.

So it’s safe to say that RBI’s expectation of the inflation rate and the inflation rate that we experience are two separate things. Yet, we give a lot of importance to inflation and base our investment decisions on it too.

We should really reconsider it.

Next in line is Interest Rates!

Interest Rates

When an investment professional speaks about interest rates, he generally refers to the Repo rate published by the RBI in its Monetary Policy Meeting.

In layman’s terms, the Repo rate influences our fixed deposit interest rate that we receive from the banks and the loan interest rate that we take for a house, business, car or bike.

Inflation and interest rates are interdependent. When the inflation rate goes high, RBI generally prefers to hike the interest rate. When the inflation rate is low, RBI prefers to bring the interest rate down.

Why does this happen?

Think about RBI as a head of the family, someone like a grandfather who looks after the entire family’s budget. He is constantly strategizing about which child of his should go out on his own and which child will stay together. Plus, business decisions even when they are independently run by his children, he is there to keep guiding constantly.

Suppose our monthly budget is Rs. 3 lakhs for a family of 10 people, and suddenly the entire family wishes to go for a small vacation.

How will he do it?

There are 2 options, to either tighten the household budget for a few months so that he doesn’t need to withdraw from investments or ongoing business. Or he will borrow from the bank to fund the small vacation and recover it later from the investments or business.

In the first case, the entire family will have to go through a tough phase because their expenses will become less for a while. In the second case, there will be too much pressure on the grandfather and his children to recover the money.

Similar is the case with RBI. When inflation goes out of its comfort zone, like a grandfather, it has the option to limit the supply of money in the economy so that people spend less. Or it has the option to print more money that will have to be repaid at a later date to avoid currency depreciation.

In a nutshell, whenever we see interest rates going high, we have to assume that inflation is higher too and vice versa.

Let’s look at a brief history of RBI’s Repo rates (interest rates).

Right from 2014, interest rates have been slowly coming down as inflation eased. However, in the last few months, we have seen them going back up. Home loans have become a bit expensive and so have our day-to-day expenses. But they are not so significant as to affect our budgets. If the price of tomatoes goes up, we will consume a bit less. It’s not a life-and-death situation for us.

Even if the interest on a home loan or car loan gets expensive by a couple of percentage points, most of us simply yawn. It’s not a material impact.

We are not macroeconomic forecasters who will tell you what is going to happen in the future. The intention of this article is different.

Yet, we take these 2 numbers seriously when considering our investments. Isn’t it so?

When interest rates are high, banks offer a very high fixed deposit rate. So we tend to move our money from equity to fixed deposits.

Contrary, when the interest rates are low, we move our money from fixed deposits to the equity market.

We forget the most important principle here.

The equity market is a completely different beast to conquer. Fixed deposit is a completely different financial instrument. They are not supposed to be interchanged due to some temporary economic factors.

What is an equity market then?

In simple terms, the equity market is a place where you get ownership of a business. So suppose, you want to own the growth of Reliance Industries. You will go to the equity market and buy some shares of the company. And if you want to sell because you don’t see any further growth in the same, then you can go and do that.

Companies like Zerodha, Upstox, etc. merely offer a platform to enable such a transaction. They are not the equity market themselves. They are merely enablers.

The factors that make you buy or sell a particular company’s stock is a completely different discussion that we will keep for a later date.

The biggest mistake that we see investors making today is simply moving their money out of fixed deposits and pumping it into equity markets. If you ask them why? That’s because equity markets will make better returns than the interest rates on fixed deposits.

Yes, we agree that equity markets will always make better investment returns than fixed deposits. Here’s a question I want to leave you with.

Will these interest rates and inflation make you a better investor?

Think about it.

Hint – We will cover this answer in the next article. Stay hooked.

The article is written by Jinay Savla, Jagoinvestor.

We all want to achieve financial independence in our life!

• That day, when we will have enough money!! 
• That day, when we will no longer have to worry about our future expenses!
• That day, when we are out of the rat race finally!

For the last couple of years, we are hearing an acronym FIRE for this!

Financial Independence Retire Early (FIRE)

FIRE, or Financial Independence Retire Early, refers to achieving a point in life where you have enough money to cover your expenses and financial goals without having to work for a living.

Ideally, this happens well before the traditional retirement age of 58-60 years. Achieving FIRE means having financial security for your future, as well as the ability to travel well, spend on big-ticket expenses and also leave a legacy for future generations.

At this point, you no longer have a compulsion to actively work to “earn money”

FIRE is a great achievement 

Achieving FIRE is a wonderful accomplishment, but there are many myths that are still there in investors’ minds who have not explored or read much about this topic.

This article will bust some myths around the topic of FIRE for you today.

Let’s start!

Myth 1: FIRE is all about a big number!

Most people feel that FIRE is all about just reaching a target number. Like 5 cr or 10 cr

For those people who are totally new to this concept of FIRE, you shall know that one can call themselves financially free when you have

• 30X of your yearly expenses – at age 60
• 35-40X of your yearly expenses – at age 50
• 45-50X of your yearly expenses – at age 40

* Note that all these are high-level thumb rules only!

For example, if you are at age 50 and your yearly expenses (considering everything in this) are Rs 20 lacs, then you would need 7-8 cr to call yourself financially free (FIRE’d) assuming you will live for another 40 yrs

NO, it’s not about reaching a number, but more about creating X times your expenses, when X can range from 30-50 depending on your age and your ability to invest the money properly.

• For someone with a Rs 50,000 per month requirement in life, they need roughly 2-3 cr today
• For someone with a 3 lacs per month requirement and wanting to FIRE at age 40, it would mean a 16-18 cr corpus today!

As you move in life, your expenses will change and hence your FIRE corpus goalpost will also shift!

Myth 2 : Life is all set after FIRE

Contrary to what most people imagine, life is not hunky-dory after you achieve FIRE.

Yes, life is very comfortable and you will surely be less worried than someone who doesn’t have enough money. But still, you have to constantly think about how your money is invested and how it’s going overall and if it will really last your lifetime or not.

This is especially true if you dont have enough margin of safety in your FIRE corpus. So if you do your calculations and Excel tells you that you need 10 cr for all your life, then if you actually FIRE with 10-12 cr, then you are on the edge!

You have very little margin of safety. The inflation can be totally different in future, you may not make exactly the same return on your portfolio, and you may have some totally unexpected life event

All these will still keep your thoughts occupied to some level.

Don’t expect yourself to be chilling on the Goa beaches with Pina Colada after FIRE. Life will be almost be the same for you  minus a lot of money worries

This is of course not true for someone who has multiple times what they truly require for financial freedom.

To learn more about FIRE, you can also watch my video below on various types of FIRE

Myth 3: So many people in India are achieving FIRE, and I am a looser

There is a lot of buzz around FIRE these days. You constantly see people on social media, youtube, telegram channels, and podcasts where the conversation is alive about FIRE.

There are many people who have already achieved FIRE or they are somewhere midway.

This has started putting a lot of “pressure” on millions of others that other than them, everyone is getting financially free these days!

Let me tell you something!

Me and my team have already interacted with more than 5000+ families in the last 10+ yrs in India + NRI and we have not seen more than 5-6 people who have achieved FIRE by the age of 40-45 yrs. I am talking about people who are into regular jobs and have to create their wealth from scratch.

Apart from these 5-6 people, there are dozens of other families who will achieve FIRE by the age 50 yrs, but not in their early 40s.

Rest all others, will at best retire at their regular 58-60 yrs age bracket. In fact, many of them may not even retire properly and may face financial crunch. I am considering the whole population here and not a specific class of people.

Only a tiny minority of people in India achieve financial freedom early in life in our observation now.

In absolute numbers, you will often see many people talking about achieving FIRE but remember that thousands of others are not close to it. In a group of 1000 people, if 2 people talk about reaching FIRE, the rest 998 people starts feeling that it’s a common thing these days

Having a few crores means FIRE?

Also, having a few crores does not mean a person has achieved FIRE.

A person having a nice loan-free house plus Rs 3-4 crores may not have even reached midway of FIRE. They look RICH (and they are) but they are not Financially FREE in the true sense. They have their own share of financial worries and insecurities.

FIRE before 50 yrs of age is a wild achievement, but it’s statistically very rare. Understand that it’s quite TOUGH to achieve and it’s normal to not achieve FIRE. You are surely not missing the FIRE bus, however, you shall give an honest attempt to achieve financial independence as early as possible

Myth 4: Achieving FIRE means never working again

FIRE is “Financial Independence Retire Early”

However, most people focus on retiring early part which is often unreal. It’s very tough to not do anything all day and just retire from your job.  Humans are designed for staying busy and be active, to pursue something. People who FIRE actually keep working and dont sit at home.

One of our readers once shared with us that to experience how it feels after retirement, he took a very long break from job (around 2 months) and tried to see what life looks like and soon realised that it’s very tough to spend the day and also withdraw from your corpus for your day to day expenses. He had to return back to the job in 2 weeks as he could not take it.

Now that’s not the best example I could give but it simply gives you a hint that “I am not working again” after FIRE is mostly wishful thinking and mostly comes to mind if you are into a stressful job and dont take enough time to enjoy your life.

Better not aim for FIRE with that mindset.

At best, what will happen is as below

You will achieve FIRE, take a very very long break and then get back into some low-stress job/work which gives you a lot of flexibility and help you explore your hobbies/what you enjoy.

Also, its a good idea to talk to your spouse once about your plans of staying at home all day after FIRE, mostly you will be directed to keep working for a few more years as they won’t be able to tolerate you all day long at home 😉

Myth 5: FIRE requires extreme frugality and deprivation

This is one of the biggest myths in my opinion about FIRE.

A lot of people feel that cutting down on expenses and depriving themselves of the initial years will help them move towards FIRE. After all, what you save will get added to your wealth kitty.

This is not TRUE!

Most of the people who actually reach FIRE early in life are those whose focus is on increasing their INCOME and not those who cut down on their EXPENSES.

Cutting down on expenses has a limit, and truly speaking depriving yourself is not a healthy way to achieve financial freedom.

There are people who earn 5 lacs a month, stay their life in a decent manner in Rs 1 lac and save Rs 4 lacs a month in the right manner with discipline for years. These are the people who mostly FIRE young and not the one who earns a smaller income and is trying to squeeze the expenses a “bit more”

Dont do that!

Cutting expenses beyond a limit will mostly take away all the FUN from your life and add up some extra money in your kitty which eventually you will spend on something stupid again. It will not lead to financial independence.

If you are naturally a frugal person and live with a very small amount of money, then it’s fine. But just make sure you dont fool yourself with trying to cut expenses where you truly dont want it.

Aim for Financial Freedom

The mail of this article was to simply present some facts about retirement and clear some myths so that one can pursue financial freedom with the right mindset. Do focus on your income and try to increase it and save a big chunk of that to invest smartly in inflation-beating financial products to create wealth in the true sense!

I have tried to share my personal thoughts and what I feel about the topic based on my experience.

Do share your thoughts about this topic. Have you seen some more myths in the minds of your friends/family about financial independence? Do share in the comments section!