There is No Fate But What We Make: October 2005

Saturday, October 29, 2005

India: SWOT Analysis

For Indians who have access to western education and possess english speaking skills, times couldn’t have been better. A generation ago, no one could have imagined the plethora of job options available today – IT, BPO, media, finance, insurance. Even traditional professions like journalism provide many more opportunities than they did a couple of decades ago. Economic upliftment can be seen clearly in most parts of urban India. Perhaps, the concept of middle class values is changing. Urban middle class people are coming out of the older “scarcity mentality”. Materialism is no longer a dirty word. Whether this is good or bad, or whether the benefits should be more broad-based is the subject of different discussion. But assuming that this is indeed a good thing, what are we doing to maximize the gains ? India is being seen as the “service” destination, much in the same way China has been the world’s manufacturing destination. Can this be our Great Chance to become a first world nation ? Here’s a SWOT analysis:

Service, defined Business processes and knowledge management suits well with the Indian temperament. We wrote treatises on various kinds of wisdom long before people in many parts of the world stopped wearing goat-skin for clothes. Knowledge management has been around here for a long time. Indians have never been renowned for military prowess. We never invaded foreign countries or made colonies abroad (OK, Tibbet campaigns of Mohd Bin Tughlaq or Ranjit Singh don’t count). This just hasn’t been our strength. Our skills have been on the “soft” side like service and knowledge management. Hence the current role India is taking upon is a well-suited one. This is our natural strength. It’s not a coincidence that India is nowhere in the computer hardware industry but has become a powerhouse in the software industry. It doesn’t mean we can’t become a hardware power, just that it hasn’t come to us naturally. Following processes has been an age old tradition for Indians (almost to the detriment of ourselves). Business processes outsourcing, once the processes are established, suits us a lot. This alignment of the nature of work with our natural temperament is our primary strength.

Our attitude of not questioning a tradition is our biggest weakness. See how Indian society is full of wrong and unfair traditions (read “discriminations”). There can be no innovation unless people question tradition or refuse to believe blindly. A typical Indian upbringing doesn’t encourage questioning authority and the existing conditions. We accept way too much and accommodate way too much.
In the new knowledge intensive era of Intellectual Property, the innovative will win. One can’t be innovative unless he questions the status quo. This is not to say that there aren’t bright people around. There are. But our institutions are not as much geared toward innovation, as they should be. How many path-breaking new technologies are coming out of premier Indian technical institutes ? A miniscule. Yet the same students after migrating abroad, are able to unlearn their “accepting” attitude and create innovative things. So it’s not that we lack talent. We need to realign our attitude. For far too long Indians have not had a say in their life – which explains the lack of innovation. But aren’t we independent today ?
The building block of the knowledge era is the intellectual property. Never accept the low hanging fruit. Create intellectual property. It took Infosys 24 years and an employee base of 40,000 to reach a billion dollar revenue. Google reached the same mark in less than 7 years with much higher profit margin and an employee base of one-tenth of Infosys. This is the difference between going after the low hanging fruit and path breaking innovation. (My apologies to Infosys, a company I respect a lot; the comments above are more about India in general rather than Infosys per se. And yes, this is not about the age old dichotomy of products vs. services. This is about path breaking innovation)
Yet, I am afraid that the current glut of jobs will also lead to people going after the low hanging fruit. Potential entrepreneurs who could have started the next Reliance or Microsoft will have cushy jobs and will have too much to lose when starting companies. Most of the successful businesses are started by people who give the business their best shot, because they have nothing to fall back on. With easy jobs around, we may not see too many Dhirubhais in the future.
If today’s good condition is merely due to the labour cost arbitrage, this will go away. Make no mistake about – no economic arbitrage is forever. We cannot ride on it for long. We must go up the value chain and create innovation and more deeper business values.

We are a young nation – more than 65% of Indian population is under thirty. This is a huge opportunity. More than 650 million people available as resource pool for industries ! No nation, other than China, has this advantage. Historically, this kind of “youth bulge” is associated with higher economic output and general progress. This is India’s moment. We must strike as the iron is hot !
India’s youth bulge has been accompanied by a reversal in the western countries. The young population is reducing in those countries. They need to induce people to migrate and work so industries can run and taxes can be collected. Also, they need to send jobs out as much as possible. This is why business process outsourcing is irreversible. This is not due to cost cutting alone. This is happening due to the fundamental reason – lack of people available locally !

Our biggest threat is that we may fail to move up the value chain by the time the cost arbitrage disappears. We have got a good headstart. The only we can sustain this is by businesses and people moving up the value chain. For example, the IT companies need a broader relation with the entire board of the client rather than just the CTO. Indian companies need to become more of a partner rather than just a replaceable service provider. On the other hand, tremendous thrust towards innovation is needed. This is the task for the education system. While we need a focus on primary education, we also need a more innovative higher education system. We just can’t rely on the Nehru era model forever. Similarly, employees need to move higher up on the value chain. Instead of just doing the assigned job, employees need a deeper understanding of the nature of business and come up with path breaking innovations. Unfortunately, here again the glut of jobs will hamper. Many employees are hopping from job to job, industry to industry. While this is necessary and even good to an extent, a good number of employees should try to find a niche and create a big value in that niche. Innovation needs deep understanding of the subject at hand and this can’t be developed if one meanders from subject to subject.

Friday, October 21, 2005

Personal Investment FAQs

Disclaimer: I am not rich. Follow at your own risk.

I have received questions from friends and colleagues.
So I started writing this FAQ. Nothing is etched in stone.
So fine tune as you learn more. And as Suze Orman says,
"People first, then money, then things !"

1. Why should we invest for future ?
An important question. Since prices of things are rising,
doesn't it make sense to enjoy now rather than save
and consume later when we will get less for the same money ?
Yes, if we are going to keep money under the carpet.
No, if we are going to invest and the ROI is higher
than inflation rate. So if inflation is 5% and we
get 8% return, the money effectively grows 3%. So a
year later, we will enjoy more than what we would
enjoy if you spent now. This is the concept of "delayed gratification".
This is a unique characteristic of human beings.
No other animal has this. We are unique. There
would be NO progress and order in society without
this fundamental human attribute.

So why might we invest ?
To meet future goals that need money. Even if you
don't have a future goal (really ?),
you may want to build a buffer so you can sit out bad times.
If you are confident that you can manage to tide
through bad times, you don't need to invest.
Go ahead and enjoy now !
But for most people, investing is necessary.
Talking about bad times, when we are young we tend
to feel (naively) overconfident.
"What ? Laid off, me ?"
Well, I have seen smart people with perfect GPAs and
patents going through layoffs and bad times. Layoff
isn't a judgment on the people, it's just bad economic
cycles. Over a long term, economies go through cycles.
This is good for the overall economy of the world because
that's how chaff gets separated from the grain.
Or god forbid, a person is disabled and can't work.
Or falls ill and medical insurance won't pick up the
bills. Anything can happen. We can't control it.
But what we can do is to control our response. We can
do that by being prepared for the bad times.
We prepare by investing and creating wealth - also by
investing in self and relationships.

2. Okay, I want to invest. Where should I invest ?
When we went to see the Taj Mahal, did we show more interest
in the Taj Mahal or the way/vehicle we used to reach
there ? Similarly, we should focus on our goals more
than the instrument used for financing it.
"Where to invest" is secondary. "What for" is the
primary question. Over the long term, AAP is more
important than the choice of particular financial
instrument. See my post "Ten steps to wealth creation"
for more on AAP.
Read on for more questions where I talk about how
to select a financial instrument.

3. What is AAP that you keep harping about ?
Why is it important ?

AAP (Asset Allocation Plan or Asset Allocation Policy)
is a product of a lot of research
in Economics and applies to not only personal
finance but pretty much all aspects of
an enterprise (including nations). There are
tomes that discuss but this article should get us started.

In short, AAP has been proved to be the most important
factor in the success of long term investments.

4. Tell me the stock which I should buy and sell at
good profit.

Short answer - I don't know
Long answer - I don't know (do you see me vacationing in Honolulu ?).
In fact, no one knows because it is unknowable
due the very nature of the market. A stock is an asset
(it's a tiny piece of a company) whose fair value
depends on a host of factors. By the very nature of
capitalism, it is not possible to predict which stock
will go up and which will go down. Imagine, if anyone
knew that a business will fail, would he start/continue it ?
Anyone who is sure of a "hot pick" or a "listing gain"
doesn't know and doesn't know that he doesn't know.
This is not to say that there can't be a temporary
mispricing of stocks. But the window of opportunity
where a stock is overpriced or underpriced is short.
Day traders jump on any such oppurtunities and there by
correct the very mistake they were trying to exploit.
But here's the good news. You don't need to know for
sure which stock will go up and which will go down.
Just stick to a solid AAP and over the long term you
will reach your goals.

5. What is diversification ?
It's a fancy way of saying, "don't put all your eggs in the same basket."
Diversification, which is intricately related to AAP,
means you spread your bets. If you buy shares of one
company, it may go down for many reasons.
Even very good companies can falter (death of key
people/unexpected competition).
But if you have shares of 20 companies, it will hurt you less.
Yes, if you buy one share and that happens to be of
Infosys, you will beat the market and diversified
portfolios. But then what if you buy one company
and it happens to be Enron ?
It's all about managing risk. Diversification reduces
the risk of a wrong choice. Theoretically, you may
lose on returns due to diversification.
But a study of last 100 years of data shows that on
the long term, diversified portfolios beat overwhelming
majority of single stock selections.
The probability of our selecting that winning stock
is very very small. Do you want to fight such odds ?
Do you want to take that risk ? If you can afford lose
the principal, you may. But if this money is for kid's
education, it is a bad idea.
So instead of chasing one "hot stock", we need to have
a diversified portfolio and stick to our AAP for the long term.

Diversification means spreading your assets among:
Equity (shares, equity mutual funds),
Bonds (FDs, Post office deposits, RBI bonds,PPF, traditional LIC policies, Debt mutual funds)
Precious metals (Gold,Diamonds,Silver)
Real estate (home, office buildings, rentals, real estate mutual funds)
Cash (cash, Savings bank account balances, Liquid mutual funds)

There are other types like Arts (Picasso paintings)
and commodities (rice/oil/power etc) but these aren't
really for the average retail investors.

So our investment needs to be spread among these
asset classes. Within each asset class, there is a
need for diversification. Not all shares are alike.
Some companies are large, some are small, some are
turnaround candidates, some are asset rich.
Some bonds are high quality, meaning, there is no
chances of the debtor running away (like RBI bonds).
Then there are bonds for rogue companies which
promise very high interest and then run away
with the principal. These bonds are called junk bonds.

The best way to achieve within-class diversification
is to invest through mutual funds. This is the true purpose of
mutual funds - to provide in-class diversification.
Most mutual funds give much more, but this is the primary goal.

Unfortunately, there are no mutual funds in India
which invest in real estate, Art, commodities etc.
So if we want them in our portfolio, we have to do it ourselves.

6. What is Insurance ? Do I need it ?
Insurance is way of managing risk. If the breadwinner
of a family dies, there is a risk that the family will suffer from penury.
Or, an accident makes someone disabled and unable to
work, he will live in physical as well as financial misery.
While the emotional or physical losses can't be
compensated for, Insurance companies can compensate
for the financial loss.
We all should take insurance to manage these risks.
( Read the earlier part on naive overconfidence.
Bad things can happen to anyone. )
What can you insure against ?
- Death (a sum is paid in case of death of the
insured person so that the family can survive
and maintain their lifestyle)
- Accidental death (same as above but this is a
subset of the above since the death must be due
to an accident).
- Damage/Theft of expensive stuff (jewelry/electronic
items/Arts items at home (insurance company will
pay the market value of what you have lost)
- Vehicle (insurance company will pay the market value
of the vehicle of the make/model if lost.
Or the repair value.)
- Professional lawsuits (important for doctors, lawyers
or any service providers)

Do an objective analysis of what kind of insurance
you need. For example, if you are young and have no
financial dependents, do NOT take life insurance.
Even for young people with dependents, chances of
accidental death is much higher than natural death.
So if you really want a life cover, take accidental
death cover. Take disability cover in any case.

Never mix insurance with investments. Take pure term
cover for life insurance. Treat insurance as risk
protection and not as investment vehicle.
Ignore that insurance agent. He is NOT your friend.
He has a family to feed and wants his commission.
(If there are good agents who really advise clients
what's good for them, I haven't seen them yet.
Till then, the above stands)

7. Should I enter the market now ? Isn't Sensex/NAV at a too high level ?
It's impossible to time the market or "optimize"
our timings. Just invest regularly and stick to your AAP.
The odds are overwhelmingly favourable towards you
if you do so. Investment decisions should always be
taken based on your situation and your AAP.
Not based on where Sensex is.
Don't try to time the market. It's not the timing
but the length of time that matters. Invest
regularly, stay invested and stick to AAP.
Mutual Fund NAVs don't mean anything. Higher NAV
does NOT mean that the fund is expensive.

If you are not mathematically inclined, you can
ignore the rest of this answer.
Consider an amount invested (P) for t years getting an ROI of r.
The amount at the end of t years is, A = P * (1 + (r/100))^t
If you plot graphs of A vs. P and A vs. t, you will
see that the final amount varies directly with P but
geometrically with t.
This means that the initial investment amount is not
as important than the time you give to the investment.

Similarly, an amount (P) invested every year for t
years with ROI of r fetches you:

P * [ (1 + (r/100)) + (1 + (r/100))^1 + (1 + (r/100))^2 + ...
... (1 + (r/100))^(t-2) + (1 + (r/100))^(t-1) ]

Again, the investment amount (P) has less control on
the final amount. It's r and t that matter much more.
All those clamouring for salary hikes with their
employers are probably focusing on P. It's much more
financially rewarding to focus on r and t.

8. What are Mutual Funds ? Are they any good ?
A little bit of history. Christopher Columbus and
his motley crew went to a voyage and found a new land.
While Columbus took risk, the Portugese royal couple
also took risk by paying for the costs. But this
investment was wildly successful. Once trades started
and gold looted, unimaginable gains were made. The
ordinary rich folks (what an oxymoron !) also wanted
to do this. But they didn't have the reckless attitude
of the royal family. They were paying for the investment
from their own money. Not like the royal family who were
paying citizen's money. The royal family didn't
care about shipwrecks or pirates. But the regular investors did.
If someone pays for a ship's voyage and that ship sank,
his lifetime wealth sank (literally) ! This problem needed a creative solution.
The risk was mitigated by mutual funds. Investors pooled
in money and paid for voyages. So five people together
pooled in money and together paid for 5 voyages (with
20% share each). This is better than each one paying
for one voyage. Because in case of a wreck, that
investor went broke. At the cost of some returns
(probability of one out of five wrecking is higher
than one out of one), people could feel safer.

Today's mutual funds are similar. They pool money
from investors like you and me. They buy shares
of not one company but many companies.
For this, we pay a salary to the fund investor to
whom we delegate the task of judging, buying and
selling shares. The salary is charged as an "expense"
on the mutual fund. So note that mutual funds are not
free. Besides this salary, they have to pay for
marketing and broker commissions. All this comes
from our money. It's good to invest in mutual funds
because we can achieve diversification.
Suppose you have 10,000/- to invest. If you start
buying shares directly, you cannot achieve enough
diversification (unless you are buying penny stocks).
But with a mutual fund, you get instant diversification.

There are many types of mutual funds.
Equity funds - they invest in equity. Stick to
these. They are the best vehicle for equity investing
for most of us.
But there can be subtypes - Large cap funds who invest
in big companies Small cap/Mid cap etc. - you can guess.
Cap stands for "market capital" which is sort of an
indicator of how much a company is worth.
Market capital = share price * number of shares.
Sector funds - they invest in shares of a particular sector.
ELSS (Equity Linked Savings Scheme) funds - regular
equity fund but gives you tax breaks under 80C.

Debt funds - they invest in debt or bonds
(meaning, they give loans).
There are types based on bond duration. Some invest
in long term bonds. Some in short term bonds.
Some in very short term (like a day to a week) bonds.
These are called Cash or Liquid funds.
Then there are some funds which invest only in
Government bonds (called Gilt funds).
You can stay with general debt funds for your bond
part of the AAP.
For immediate requirement and for keeping emergency
money, use Liquid funds.

Real estate funds - they buy and trade in
houses and commercial property. Also they rent out
to get income. These funds (called REITs in USA) are
great for the real estate part of your AAP. Suppose I
have 1 lakh to invest and I would like to keep 20%
in real estate. But I can't buy a house for 20,000/-.
But these funds allow me to do it.
Unfortunately there are no such funds in India yet.
So regular Joes like me can't invest in real estate
in this way.

Commodities funds - they trade in "things"
like cereals/metals. Advanced countries even have
funds trading in "weather". Go figure that out !!
Again, no luck in India yet. You have to be a guru
or a farmer if you want to make money out of
rice price cycles.

Index Funds
These funds invest in the same stocks in the same proportion
as the Index they track. For example, Franklin India Index Fund
is an Index fund that tracks Nifty. This means that it will
buy same stocks in the same proportion as there are in Nifty.
There is no judgment to be made. Computer programs can be
written that blindly mirror the Nifty. Hence expenses are less.
There is no need for a fund manager.
In advanced markets, it is believed that Index funds beat
actively managed funds over the long term.
I am not yet convinced that this is true for India as well.

Balanced Funds - These invest in a combination of asset classes.
Most common are the funds that invest in a mix of equity and debt.

After looking at all pros and cons, Mutual funds
in some form or other, are the best way to invest
for most of us.

The equity part of your AAP can be in
shares directly or in equity funds. Unless the
portfolio size is more than 2 lakhs, stick to
mutual funds, no matter how lucrative and surefire
that "IPO listing gain" appears.
It's hard not to give in. Specially, when all your
friends are gloating over gains and the media hypes
up everything. But this is what can be the difference
between retiring peacefully at 40 and enjoying life
or, having to work till you are 62 !

9. Boy, I am confused about all Mutual Funds.
How do I pick a mutual fund ? Which option is good ?

If you believe in AAP theory, you will know that asset
class is much more important than the exact investment
vehicle. Meaning, the fact that you are 60% in equity
is more important than whether that 60% is in
Franklin Prima Fund or HDFC Equity Fund.

Having said that, here's what I look for in
mutual funds.

Expenses - lower the better - this is the "fee"
you are paying the fund manager. All fund account
statement will give the expense as a percentage of
the total fund value (called "Expense Ratio").
There are laws which put a higher limit to the
expense ratios. For equity fund, it is 2.5%.
Most actual expense rations are around 2.3%.
But then there are exceptions. Watch for too much
transactions (buy/selling) by a fund. This usually
means higher expense ratio. Look for loads. Lesser
the load, better for the investor.

Fund size - too large is bad as they can't enter
in small companies. Too small is bad because they
can't diversify enough. Also smaller funds
will have higher expense ratio since the fixed
costs need to be spread over smaller fund size.

Philosophy - each fund states what the investment
pattern will be like. What % in shares, what % in
cash etc. How frequently it will trade (buy/sell)
shares. Check if the fund sticks to this stated

Diversification - Unless a fund has stated to be
a sector fund, it should be well diversified across
sectors. There were many funds which had upto 60%
in IT sector back in 2000. You know what happened
to them, right ?

Performance - while looking for performance,
look for consistency of performance with respect
to the benchmark. Don't compare a sector fund
performance with a regular equity fund. And don't
compare equity fund performance with a debt fund.
The fund you choose should be among the top
third in its peers over an extended period of time.
Past performance doesn't mean future performance.
But if the same fund has achieved a good
relative performance over a long term, I will tend
to pick it (provided other factors stated above are
OK). Don't have unrealistic expectations. If the
general market tanked 30%, even the best fund will
go down. This is when to remind yourself that you
invested in equity for the long term.

Note that I have listed the performance as the last parameter.
For two reasons - (i) as I have already stated elsewhere - performance of your portfolio is controlled more by asset allocation than the exact selection of investment vehicle (ii) Past performance is no guarantee of future performance. As Graham said, long term results of two different diversified and representative list will not vary much. Neither has any advantage over the other. Long term returns of instruments of the same asset class revert to the mean. So focus on picking a mutual fund based on the earlier parameters rather than performance alone.

Now about options. Each fund has further options -
growth, dividend, dividend reinvestment etc.
Earlier, these were important due to tax
considerations. But not any longer. Stick to
"Growth" option unless you have invested for
the purpose of regular income.

Watch for conflict of interest. Most mutual fund
agents push those funds that give them highest
commission. See how aggressively they push new
funds (they give them highest commissions). Do not let
agents advise you on which fund to buy.
Agents are not your friends.

10. What about taxes ?
It's very important that your investments are
tax friendly. Tax deferred growth beats taxed
growth by a mile ! Minimize your taxes.
Long term equity capital gains are now tax free.
If you are a follower of AAP, all your equity
investments are for more than a year. So even
the government is telling you to follow AAP and
avoid short term trading.
Real estate gains are taxed at lower rates if
the property has been held for more than
three years.
While bank interest is taxed at regular
slab rates, Mutual fund gains are taxed at
lower rates. This is why I would advocate
mutual funds to just about everyone.

11. What about investment expenses ?
Taxes are the biggest expense usually. But
watch out for loads in mutual funds, any fee
you pay to your investment advisor, subscription
to investment magazines, demat account charges.
If you are investing one lakh a year and you are
paying 5000/- as a fee to your "advisor" you are
effectively paying 5% entry load. The probability
of this portfolio beating a well diversified AAP -
compliant portfolio over the long term is almost nil.

12. Should I invest in IPOs ?
We human beings are irrational. If any proof is
required, we just have to study the IPO phenomenon.
What is an IPO ? It's when company insiders
sell shares to general public. Who knows more about
the company ? The company insiders or us ? Whom will
the price be favourable to - insiders or us ?
A lot of hype is made of the "listing gain".
Unless you are a trader (then you are in the
wrong blog), this gain means nothing to you.
What you need to see is long term returns.
Studies have shown that investment return from
IPOs will lag the general market returns by more
than 5% over the long term.
I am not saying you should completely ignore IPOs.
They can be good opportunities too.
Here's how an AAP compliant investor will look at
IPOs. Let's say you want to put 60% in equity.
Out of which 10% you would like to mid cap stocks.
Let's say this translates to 10,000/-. So you now
look for all the mid cap companies in the market
(and the IPOs happening around that time, if any).
Which is the most investment worthy ?
Let's say you are looking to invest in the Energy sector.
You should will ask myself, which company is the best for
investment in this sector today ?
If it is the one that is having the IPO, go ahead
and invest in it. But now you know why you are
investing in it. Blindly investing in IPOs wishing
for some magical "listing gains" is foolish.
You will ride your luck for a while. But sooner or
later you will burn your fingers.

13. Should I invest in Mutual Fund IPOs
(new fund offers) ? Isn't an NAV of 10 cheap ?

Short answer - No
Long answer - since you wouldn't invest in a fund
without seeing its track record for a long term,
how can you invest in a new fund ?
Do yourself a favour. Ignore that agent who peddles
the new fund. Read my earlier "Mutual Fund - 1" for
more on this.

14. What about futures and options ? What about Technical analysis ?
Warren Buffet calls futures and options financial WMDs
(Weapons of Mass Destruction). Read his articles on
this topic. If you are an ardent believer of these,
go ahead and invest. I don't find it worthwhile to invest
in them.

Technical Analysis ? The black art with which traders
can "predict" short term movements of a stock. Well,
short term stock price movements are random. No amount
of analysis and mining can find any pattern on something
that is mathematically "random". I don't believe one
can make a living by trading based on technical analysis.

15. Is this particular product XYZ good ?
This is the most asked question ! It is asked in various ways -
"Is PPF any good ?" "Is ICICI LifeTime plan good ?"
"Is HSBC Equity fund better than DSP Super SIP ?"
"Should I apply for Suzlon Energy IPO ?"
"When is the last day for Tata Contra Fund IPO ?"

As an AAP believer, you will know that these questions are much less
important than your distribution of investment across asset classes.
Still these are the questions you will hear being asked most often.
These questions are based on a false premise -
that a product is good or bad in absolute terms.
The real question to ask is -
"Is this particular product XYZ good for me at this point of time ?"
BioGene Inc may be a great stock for me today to park the bonus that
I received. But will I recommend it to my mother who is a pensioner ? Hell, no !
All financial products of the same asset class are based on the same principles.
So the real question to ask is whether the
product fits your financial plan. Again go back
to your AAP and decide what kind of products
(asset class) you will invest in.

Still, I will give my views on certain specific
products. I am not in a position in offer advice
on specific stocks as I am no good at it.
Besides, it isn't that important on the long term.

This is for the bonds part of your AAP for long
term goals. Government backed, investment gives
tax breaks, tax deferred growth, tax free gains.
Can't be attached by court. Can you ask for more ?
Enjoy while Government keeps the interest artificially high.

Life Insurance Policies
(Money Back, Endowment, WholeLife, ULIP)
Stay away. Do not mix investment and insurance.
They serve different needs. The "convenience" of
getting it all in a single product is costly.
Stick to term life insurance. For investment,
look for pure investment products.
For the super rich who want to pass on wealth
without inheritance tax, "WholeLife" is good.
I haven't seen any ULIP policy which can
beat mutual funds in terms of flexibility and
expenses. So they are no good for most people.
"Premium back" insurance policies - stay away.
It gets negative marks for misleading customers.

Debt Funds
Good in general. But because of artificially
high interests in post office products,
they score better. Tax treatment of these vary.
So decision will be specific for the individual.

Equity funds
A big resounding YES.
Diversified equity funds should be the core of
your long term investments.

Individual Stocks
Yes, if you portfolio is large enough so that
expenses are low and you can have adequate diversification.

Real estate
For self use - YES
For investment, wait till real estate mutual funds start in India.
Otherwise, if you have 1 crore to invest, you can
buy that 10 lakh land in Electronic city just for
investment. But taking a second loan to invest in
real estate ? And this land cost is more
than 10% of your total worth ? You are kidding, right ?

Gold/Precious metals
Upto 10% of your total networth. Preferably as bars
(yes, you can buy Gold bars certified for purity).
Precious metal is a good hedge against war times
and calamities. But most Indians buy way too much
gold as Jewellery. This is not good because
(a) it is more than 10% of the networth and hence
they are missing out on higher returns from other asset classes
(b) there are making charges and wastages in ornamental jewellery.

Commodities / Arts
Stay away unless you are a guru or a farmer.
Ditto for Arts. Don't dabble unless you can tell
Raphael from Van Gogh. But if there are mutual funds
for these, consider upto 10% of networth.

16. Does "know thyself" have any relevance to investment ?
Your best friend, and worst enemy, is not the market, not the stars,
but yourself.
Benjamin Graham's classic "Intelligent Investor" has done such a
superb job of explaining this. Read that book before you make your
first investment. After reading, spend a month introspecting.
Try to understand yourself.
You have no control on the market or the SENSEX. But you can and
should control your behaviour.
Here are some of his gems to whet your apetite:
1. "An investment operation is one which, upon thorough analysis
promises safety of principal and an adequate return. Operations
not meeting these requirements are speculative."
Please take the effort to really understand this. Each of the
terms used are defined in his book. All of us tend to think of
ourselves as long term investors.
Chances are, people will accept being shop lifters but not see
themselves as speculators. But with the light of the above rule
by Graham, was your IPO investment in that "hot" company not a
speculation ?
Not that speculation is evil per se. But let's not delude
ourselves that we are investing when we are speculating.
Apply Graham's rule ruthlessly.
2. Emotion is yout worst enemy when it comes to investment.
3. Inactivity and laziness won't make you look cool or popular.
Nor is it advised in general. But when it comes to investment,
inactivity is your best friend.
4. Know what is reasoable to expect from various asset classes.
5. Know the impact of inflation.
6. Know history. The basic tenets of the capitalist system have
not changed since the times of Isaac Newton. Newton could
calculate positions and movements of heavenly bodies but
could never figure out why stock prices are so irrational.
Nothing has changed since then even though we have gone
through tunip bulb craze of 17th century, great depression,
airline stock craze of 1940s, world wars, 1987 crash,
internet and technology craze and subsequent fall.
Those who don't learn from history, repeat it. If this is
true anywhere, it is in the area of investment.
7. Long term wealth is created by lack of trading (activity)
and a balanced portfolio that is in sync with your goals
and temperament. You don't need to get a Microsoft or
Infosys to create wealth.
8. A stock is not a ticker symbol. The stock price charts
are useless. Focus on the business behind.
9. Know how to calculate the worth of a company. And growth
prospects. But this information alone is not enough to make
an investment decision. You need to see the price you are
paying for the stock. Even a great business with a great
growth oppurtunities may not be worth investing into if
the price is too high. Even a so so company with so so growth
prospects may be worth investing into if the price
is low enough. Look for margin of safety in every investment.
10. Even though we need to be "intelligent" investors, this
intelligence doesn't have to do anything with the brain.
Isaac Newton or the Economics Nobel winners who ran LTCM fund
were more than intelligent. Yet they didn't have the character
traits that make it possible to create wealth over the long term.
Do you ?

17. My dad says stocks are risky. Are they ?
Your dad is right. Stocks are indeed risky. This is the truth. However, the complete truth is that there is a risk in everything – including NOT investing in stocks. There are various kinds of risks. It’s good to categorize them. There is the risk of principal loss. There is the risk of losing the purchasing power due to prices going up. While stocks can expose you to the former risk, not holding stocks exposes you to the latter risk. Just focusing on one type of risk is not correct. Since there are various types of risk, a balance needs to be arrived at by looking at your financial goals, your appetite for and ability to tolerate various kinds of risks.
Remember there is a risk of dieing in an accident on the road. But there is also a risk of dieing due to house collapse of one chooses to live indoors. The correct thing to do is trying to minimize the risks. AAP, diversification etc. are the tools to minimize financial risks.

18. What about pension plans ? Is that PruICICI pension plan any good ?
From a financial perspective, "retirement" is just another goal which is
no different from, say, "buy a large car two years later". Once you retire, you need
to live off your investments. There won't be a monthly salary. So you need to generate income out of money invested. To explain, if you have 100 Lakhs invested in
a bank at 7% interest, you will make 7 lakhs a year (pre tax). You have to live on
that. But things are more complex than this. Due to inflation, 7 lakhs will be not
give you the same lifestyle that you enjoy today. Also interest rates can change. If it goes down and you have inflation, it will hurt from both sides ! Then there are taxes ! You may have to part with one third of what you earn as taxes. Here's a more realistic calculation which takes into account inflation and taxes.
Suppose you want to retire in 20 years and at current price levels, you need 6 lakhs rupees a year to live on. Considering a 7% inflation, you will need 23 Lakhs a year 20 years from now to maintain the same lifestyle. Surprised ? Well, that's inflation power ! Inflation is the evil twin sister of compound interest. While the latter can make you a crorepati at 40, the former can reduce the value of that crore. If you need 23 lakhs a year, you need to generate at least that much every year. Actually you need more considering that inflation will be there even after you retire. So at 10th year after retirement, you will need ((1.07)**10) X 23 = 46 lakhs a year. If you are laughing at these numbers, you will be in serious trouble. Because this is the kind of income you will need just to maintain current lifestyle. Now, to the important question of how to plan for retirement, convert it all to numbers. Considering that inflation will stay forever (worstcase scenario), you cannot spend all the income you generate. In addition, you can't afford to pay taxes any more that what you absolutely have to. Which means that you can't withdraw full 7% interest that you may earn. Experts have come to an agreement that a 3% withdrawl rate can sustain someone's life without the risk of erosion of capital while handling inflation. So if 3% of R is 23 lakhs, R = 773 lakhs. With this amount of retirement capital, you are reasonably sure that your principal won't go away and you can live off income. Bank interests are not very tax friendly. So you will have to invest a good part in income funds (mutual funds that invest in bonds). Since capital gains tax rates are lower, bulk of money needs to be here after retirement.
Now we need to see the other side of the game. How to get that 773 lakhs ? Use the good sister - compound interest ! Invest in equity and you can get there. You may have to play aound with the number of years to retire to reach the correct figure. But you can't do anything but invest in equity for long term goals like retirement. Forget PPF, traditional LIC policies (either from state owned LIC or private ones like PruICICI). A lot of insurance companies sell policies as "pension plans". Just because they are called "pension plans", doesn't mean that they are the best way to prepare for retirement. If they don't invest in equity, just ignore them. If they do, see expenses etc, just as you would judge a mutual fund. They usually club some life cover. If you are not looking for life cover, that part of the premium which goes for life cover is a waste. Looking at many factors, one is better off investing in mutual funds even for retirement. I ignore these "pension plans" including those which are marketed as ULIPs. If i need life cover, i just buy term cover. So get cracking, use your calculator and start investing !

Thursday, October 20, 2005

Cognate Words

Etymology is fascinating. Words tell stories.
See some of the cognate words in different languages.

Asti (Sanskrit)
Ist/Ast (Persian) , as in Hanooz Dilli Door Ast...
Is/Ist (English/German)

Asur (Sanskrit)
Ahur (Persian). In many words "s" in Sanskrit becomes "h"
in Persian. eg: Sindhu/Hindu

Bhratri (Sanskrit)
Birader (Persian)
Brother (English)

Dev (Sanskrit)
Deev (Persian)
Diva/Diu/Theo (Latin/Greek)

Do/Dwi (Sanskrit)
Two (English)

Three (English)
Tri (Sanskrit)

Saptam (Sanskrit)
Septem (Latin/Greek)

Ashtam (Sanskrit)
Octo (Latin/Greek)

Navam (Sanskrit)
Novem (Latin/Greek)

Dasham (Sanskrit)
Decem (Latin/Greek)

Agni (Sanskrit)
Aagon (Russian)

Agra (Sanskrit)
Agora/Acro (Greek)

Arya (Sanskrit)
Arya (Persian)
Aryan,Ehre (German for Honour)

Asthi (Sanskrit)
Ostheo (Latin/Greek)

Dwar (Sanskrit)
Darwaza (Persian)
Door (English)

Irshya/Ichcha (Sanskrit/Hindi)
Insha (Persian) (as in Insha-Allah, God willing)

Jaat, ja (Sanskrit/Hindi) (as in Girija, son of mountain,
or Pankaj, borne out of Mud, Lotus)
Zada (Persian) (as in Shahzada or "son of king" or
literally "borne to a king" or "prince")

Kendra (Sanskrit)
Centre (English), Kentron (Greek)

Keshar (Sanskrit)
Khusrow (Persian)
Ceaser/Czar/Kaisar (Latin/Russian/German)

Madhyam (Sanskrit)
Medium (English)(Eg: air is the medium for Radio waves)

Main/Aham (Hindi/Sanskrit)
Mam (Persian)
Me (English)

Manu (Sanskrit)
Man (English)

Matra (Sanskrit)(= Amount)
Meter (Greek/Latin), Measure (English)

Maatri (Sanskrit)
Maadar (Persian) (As in, the famous North Indian swear word maadar-ch**)
Mother (English)

Mrityu (Sanskrit)
Maut (Persian/Arabic)
Morte (Latin)(as in mortal, mortgage)

Naam (Sanskrit)
Nama (Persian) (as in Shahnama, the 11th century "book of kings")
Name (English)

Parth (Sanskrit) (as in Arjun's name in Mahabharata)
Parthian/Parth (Persian) (ancient Persian empire is known as Parthian empire)

Path (Sanskrit)(= way)
Path (English)

Pitri (Sanskrit)
Peter/Father/Pierre (English/French)

Sam (Sanskrit)(as in "samta")
Same (English)

Samiti (Sanskrit)
komitah (Persian)
commitee (English)

Shaurya (Sanskrit)
Shoja/Shuja (Persian) (as in Shah Shuja, Mughal Prince)

Sthan (Sanskrit)
Stan (Persian)(as in Afghanistan, Pakistan)
Station/stall (English) (as in station, install), Stone

Vaar (Sanskrit)
Ber (Latin/Greek) (as in december)

Yama (Sanskrit)
Yima,Jamm (Persian)

Fida (Persian/Arabic)(as in Fidayeen)
Fidelity (English)

Raja,Ray,Rajput (Sanskrit/Hindi)
Reza,Raza (Persian) (like the Shah of Iran, Reza Shah)
Regal(regicide) (Latin)

Kaarwaan (Persian/Arabic)
Caravan (English)

Urdu (Turkish) = Army of men, Army camp
Note: the language that was spoken by the Turkish armies in
the Indian subcontinent came to be known as "Urdu"
Horde (English) (as in "horde of men")

Mythya (Sanskrit)
Myth (Greek/English) (as in Mythology)

Ooper (Sanskrit/Hindi)
Upper (English)

Naranj (Sanskrit)
Orange (English)

Mitra (Sanskrit)
Mithra/Mate (Persian) (as in Shah-k-Mate, king's friend)
Mate (= friend) (Latin/English)

Paththar (Sanskrit/Hindi)
Petro (English)

Arun (Sanskrit)
Arora (English) (dawn)

Dharan (Sanskrit)("to hold", this is the same as
Bengali/Kashmiri surname "Dhar")
Darius (Persian) (to hold), Dario,
Daria (= holder of water, Lake/River)
Note: "Darius" is the Greek way of saying the Persian
name "Dara". in Asia, the word is said as "Dara".
One of Aurangzeb's brothers was Dara who was blinded and
killed by Aurangzeb.

Sthir (Sanskrit)(stationary)
Esther, Sitara (Persian)
Star, Install, Stationary (English)

Atma (Sanskrit)(soul)
Alma (Spanish for soul, also as in "alma mater")

Sant (Sanskrit)
Saint/San (Latin)

Khsatriya (Sanskrit)(warrier)
Xsayathiya (Persian) (King) , "Shah" must have have been
derived from this.

Desh (Sanskrit/Hindi)(country)
Dahyaus ("Country" in Old Persian. This word can be found in Avestha)

Bhumi (Sanskrit)
Bumis (Old Persian)

Bhagwan (Sanskrit)
Baga (Old Persian)

Gatha , Geet (Sanskrit)
Gatha's (Old Persian) (these are parts of the Avesta)

Nav (Sanskrit)(new)
Nou (Persian, as in Nouroz festival)
(Nouroz literally means "new day", however it is used to mean new year.)
New (English)

Shanka (Sanskrit)
Shaq (Arabic/Persian)

Yuva (Sanskrit)
Young / Juva (Latin) (as in juvinate)

Paradise (English/Latin)
Firdaus (Persian)
The word Firdaus has a very interesting etymology. The famous
saying about Kashmir goes:
gar firdaus, ruhe zamin ast
hamin ast, hamin ast, hamin ast

(if there is paradise on earth, it is here, it is here, it is here)

Please add to this list if you come across any other
interesting words.

Ten Steps to Wealth Creation

Disclaimer: I am not rich. Read and follow at your own risk.

It doesn't take ten steps. Just a single step - Start your own
business. Look at top 500 wealthiest people in the world.
Except for those who inherited wealth, they got rich by owning
businesses ! Yes, that includes Bill Gates, Warren Buffet,
Sam Walmart and Azim Premji.

If you want to be a salaried person and don't want to own
businesses, you can still create wealth - by owning business
vicariously i.e. by owning shares of companies.

Follow the steps below.

1. Write down your goals that require money.
These are usually - Retirement, Education, Marriage, Car etc.
Each person will have his unique financial requirements.
Have you heard the saying, "If you don't know where you
want to reach, it doesn't matter which way you take!"
It's amazing to see people harping about this stock or that
policy without having figured out what their goals are.
Stop being one of those guys !
2. Write down your financial assets.
These are Bank FDs, Shares, Mutual Funds, Insurance policy
surrender values, Gold, PPF balance etc. Don't include "stuff"
(like Car, TV, Home that you need to live in).
3. Write down your liabilities (loan, credit card dues etc.)
4. Take cover - life insurance, medical insurance, accident/death
and disability. Cover costly "stuff" - home and belongings,
professional practice (for doctors and lawyers). Cover self and
those financially dependent on you.
Life cover is only for those who have financial dependents.
5. Pay off any debt whose interest is higher than what you can
earn in the market over the term of the loan. Meaning, if you
have credit card loan at 25% interest for 2 years, pay it off
before you start investing. Same with personal loans.
Home loans are an exception because of the tax
breaks. A home loan at 8% is effectively at 5% since you get a
tax break. Let's say the loan is for 15 years. Can you get returns
better than 5% over a period of 15 years ? Yes ? Then keep
the home loan. Don't prepay.
Otherwise, pay off loans before investing. If you are the type
who borrow to invest (that too in shares!), you are in the wrong
blog. I have wasted your time.
6. After factoring in the liabilities, calculate what your monthly
outgo for those liabilities is.
7. Find your monthly expense. Better, take your yearly expense
and divide by 12. If you don't know your expense, this is very
bad. Start noting down your expenses and find it.
8. Put the amount needed for each of the financial goals.
Also put how many years you have before that goal.
For example, you are 22 and you want to retire at 50
with 1 crore. You have 28 years to the goal.
9. Now here's the big gyan. There is some thing called
Asset Allocation Plan (AAP). I don't know why AAP works.
But Nobel Laureates and smart MBAs believe in it. I take
their word for it. The gyan is: The best way to meet
Financial goals is to create AAP.
For every financial goal, make an AAP.
What is AAP ? It is simply a way to distribute money across
various asset classes. What are asset classes ?
These are the various types of financial instruments - shares,
bonds, precious metals like goad, real estate and good old cash.
The theory is that the distant your goal is, the more you should
be in equity.
The closer the goal is, the more you should be in cash. Bonds
are for intermediate goals. It doesn't mean that you should 100%
in shares for long term goals. This is where allocation comes in.
Here are the rules (roughly put, without the mathematics and
customized to Indian conditions):
(a) Money for a goal which is less
than 2 years away should be in cash (cash can be in bank spread
across branches, under the carpet, or in Liquid Mutual Funds).
(b) For goals between 2 and 6 years away,
keep 80% in bonds (Post Office/Bank FDs, RDs, Debt Mutual
Funds) and 20% in equity (shares or Equity Mutual Funds).
Decrease equity by 5% every year and move it to
bonds. When you are two years away you will be 100% in bonds.
Now treat this as case (a)
(c) For goals more than 6 years away, stay 80% equity, 20%
bond. When you are six years away, treat as case (b)
10.Now some mathematics. You do remember what a compound
interest is, right ?
Consider long term equity returns as 14%. Debt returns as 7%.
Now apply formula to calculate what you need to invest every year.
Divide by 12 to get the monthly investment amount. For example,
you need 10 lakh for your kids education
in 15 years. Consider roughly 14% return. If P is invested every
year for 15 years, here's the equation:
P * [(1.14) + (1.14)^1 + (1.14)^2 + (1.14)^3 + .....
+ (1.14)^14] = 1000000
Solving this (you can use Excel or you ask your geek friend), you
get P = 22808. Monthly investment is 22808/12 = 1900.
So now you know by investing about two thousands a month into
equity, you will have 10 lakh in 15 years.

Do the above exercise for all your financial goals.
Now you know how much you need to invest every month
and in what kind of assets. Obviously, you need to
make sure your investment + expense is equal or lesser
than your income. If not, reduce your expense. or, lower
your financial goals.

Once a year rebalance your portfolio so that you don't stray
from AAP. Suppose you started
with 60% equity and 40% debt. But due to market going up,
your equity portion has ballooned and has become 80% of
the portfolio. Sell some equity and move to debt so that
you reach 60/40 split again.

I started this post by creating a dichotomy - salaried person vs.
business owner. But in reality, even a salaried person is a
business owner. A salaried person is in the business of
selling time and expertise. In business, products need to
move up the value chain. Similarly as an individual, a salaried
person needs to move up the value chain. That's why Warren Buffet
said investing in yourself gives the best ROI. In other words, if you
want to create long term wealth, start moving the product
(i.e. yourself) up the value chain. Get additional training/degrees
and experience. Money may get stolen, share market may crash
but your knowledge and expertise will be with you. And that is
the real wealth you should be after.

Wednesday, October 19, 2005

Mutual Fund - 1

Some Mutual Fund Gyan I have gathered over the years:

First, Index vs. Actively managed funds - I have not made up my mind
on whether active always performs worse than Index funds over long
term. Personally, i am sticking to actively managed funds. All that is
written below applies to actively managed funds.

Absolute value of a Mutual Fund's NAV has no meaning. Only %
difference over time with its own NAV matters.

How to judge a Fund ? Past performance (though, there is no
guarantee that it will be repeated), expense ratio, churn ratio
(transaction cost of fund), loads, fund manager style. NAV
value plays no role. Never look at a fund in isolation. Look
at the complete asset allocation plan
- what % will be in equity ? What % in larrge cap ? mid cap ?
Then look for good funds/stocks in each category.

Children's mutual fund schemes are the ideal way to assure your child's
future - Bogus !
These funds are the same as plain balanced funds (which invest in
equity as well as debt). Just marketed differently as "children's fund"
so as to cash in on people's concerns for children.

Mutual Fund IPO investing is good - absolutely wrong ! Fund IPO
investing is very bad !
In fact, technically there is no such thing as an IPO for a Fund.
Authorities are going to ban the use of the word "IPO" for funds.
Because this word confuses investors.
Here are the reasons why you should not invest in a fund "IPO":
1. Since mutual fund NAV absolute value has no meaning and only %
difference matters, there is no special reason to buy units at 10/-.
It is not "cheaper" at 10/-.
Agents and media try to fool people by saying this value is "at par".
There is no such thing as par value for a fund unit. Value of a fund is
the value of underlying stocks - no more no less. A fund unit selling
at 30/- is not more expensive than one that sells at 10/-.
Given this, why should someone invest in a fund just because
something is selling at 10/- ?
Purchase/Sell decisions should be based on your financial plan and
asset allocation plan. Not based on what has come for IPO.
2. There is no entry load during IPO - this is another fraud by the
agents and fund houses.
True, there is no entry load. But the higher initial expense (upto 6%)
is charged to the fund over the first 3 years of a fund's life. This is
from your money ! So in a way there is a load ! Besides, no-load
feature has a "lock in".
If you sell within that period, you have to pay load. "No load" benefit
can be had by investing in SIP as well.
3. You have no information about fund's performance or fund
manager's capabilities when investing in an IPO.
4. From the day of payment, to the day of purchase of stocks by the
manager, funds are idle, generating no returns. (Why do you think
many of the recent fund IPOs opened at an NAV of below 10/- ? )

Fund IPOs are different from stock IPOs. Stock IPOs are when a
company sells its equity to the public. Since they are selling a large
number of stocks, they have to make it more attractive by pricing it
lower than real value of the company/stock.
But fund units have no "real value". Their value is sum of underlying
stocks. So why should there be any attraction for IPO ? Why do we
expect a jump in NAV after IPO (like it happens sometimes with
stocks ) ?
The reason why agents try to sell fund IPOs so much is that they get
higher commissions. Funds give them higher commission because,
being a new fund, that's the only way it can attract money. Guess
where this high commission comes from ? That's right, from your

Wait for my next installment:
For anyone with even average brains and an iota of discipline,
any isnurance policy other than a term policy is not worthwhile.
In other words, say goodbye to ULIP, Endowment, Whole Life,
Money Back policies

Sunday, October 16, 2005

Gandhi - A Contrarian View

Another Gandhi-jayanti has come and gone. It seems to me over the
years, the enthusiasm with which this day is celebrated has gone
down. If true, this could be for many reasons. In a way, I am happy
about it. I am not in favour of blindly eulogizing any person. If a
person does an objective analysis and then venerates Gandhi,
it is fine (and I think I am in this camp). But Indians are never
given a balanced picture of Gandhi's life. Look at our history books
(at least the ones taught in academics). They seem to give a
completely one-sided account of his life. It's always - Gandhi was
great, all-sacrificing, fasting, peaceful messiah - British were bad -
Jinnah was communal and a devil - Congress was secular -
Muslim League created communal violence - ad nauseum!

I would prefer if people do not respect Gandhi based on such
reading. I would rather people do an objective analysis
themselves and then decide to applaud or denigrate
(or both) Gandhi.

Gandhi has had an immense impact on India's destiny. His
hunger strikes, non-violent protests and salt march brought
India closer to freedom. While his colleagues at Congress sat
in meetings and discussions about communal riots, Gandhi
would walk through riot affected areas and appeal for peace.
Noakhali is a good example of how he single-handedly
brought peace to riot stricken areas. Nobody in his right
mind can do anything but revere such a saint.

Yet, I would like Gandhi's failings to be discussed. They too
had as much (and more calamitous) effects on this sub-continent.
What was Gandhi's primary mistake? Before his arrival to India
and joining the Congress party, the Congress party was largely
an elitist institution. Started by Bhadralok Bengalis, the Congress
party was working on the modest aim of legislative reforms that
would give more self-rule, but within the framework of British
rule. Gandhi made it a mass movement. How's this a mistake?
To make this a mass movement, he employed religious symbols.
If he had used symbols from all religions and given equal or
more prominence to minority religions, it would have been fine.
But he chose exclusively Hindu symbols - Bhajans, talk of
Ram raj etc.

His failure to realize the impact of all this was a BIG mistake.
As congress took more and more Hindu appearance, the
political stage was begging to be exploited by the British on
communal grounds. And that they did very well.
Following the old Roman "divide and rule" dictum, the British
suppressed Congress leaders and actively propped up Muslim
leaders. But to blame it all on the British would be unfair.
Even without the prodding of the British, prominent
muslim thinkers realized for the first time that an independent
India would mean Hindu hegemony (as they saw it).

It was during this time that Jinnah left the congress. Jinnah was
once described by Sarojini Naidu as an "ambassador of Hindu-Muslim
unity". Jinnah left Congress in disgust at the vulgarization (as he saw
it) of the national movement. In fact, he left the country itself and
settled in London for barristry. Had it not been for Nehru's pompous
statement that "Jinnah is finished", Jinnah would probably never set
his foot back in the sub-continent.

Mohammad Iqbal, a prominent nationalist and the author of
"Saare Jahan se achcha, Hindostan hamara", too changed
his opinion and became an active supporter of the two-nation theory.
It was under these circumstances that Muslim League (which too
started in Bengal) started gaining popularity.

But there are other sides as well to Gandhi's movement. His talk
of an egalitarian society where the masses would yield power
rang an alarm bell to the landlord muslim Zamindars of Punjab.
For many centuries rich Zamindars in the fertile Punjab region
had an immense control of masses. This system wasn't necessarily
communal - the Zamindari system exploited Hindu and Muslim
peasants with equal harshness. This has a parallel in Bengal,
the other state which was partitioned in 1947. The masses of
Bengal reeled under Zamindari system too. The fact that
the Zamindars were mostly upper caste "Bhadralok" Hindus
and poor peasants mostly Muslim didn't change the intensity
or nature of the exploitation.

But this socio-economic background was ripe for a call for
"Pakistan". In the Indian subcontinent, it isn't religion but it
is the social-economic class a person belongs to, that controls
his destiny. Conversion to Islam/Christianity/Buddhism
never changed the fate of poor caste-oppressed Indians.
They remained the oppressed people even in the egalitarian
religions. (Anyone who doesn't believe this, please visit
"Brahmin" churches in Kerala which bar "Dalit" christians). So if
religion didn't make much of a difference to people's destiny,
why did the call for partition by Muslim league take roots?
This happened because "Pakistan" meant different things
to different people - to the rich Zamindars of Punjab this meant
a continuation of their rule over the masses - to the poor peasants
in Bengal it meant a deliverance from the cruel Zamindars - to the
urban muslims of UP it meant a chance to get new age jobs
(clerical/administrative jobs which so far had been taken mostly
by western educated Hindus). A purely religious analysis of the
partition would imply that the Maulavi class would support
partition. But the Maulavis were vehement opponents of partition
and Jinnah - to the extent of denigrating him as "Kafir-e-Azam".
This proves that we need to take a more complete view of the
partition. Each region had its own dyanmics and complexities.
Viewing through an all-encompassing communal lense would give
an imperfect picture.

Gandhi while making the Congress a mass-movement completely
lacked the foresight to realize the repercussions of his actions.
He made a ripe ground for communal passions that were unleashed
and caused the partition. For this he must take blame.

While this is his most important failure ("strategic" failure in
MBA-speak), his tactical failures were important too.

Look back to 1936 national elections. Congress won handsomely
all over the nation (except in Bengal where the masses voted for
KPP, and in Punjab where the gentry and masses were still solidly
behind Sardar Hayat Khan of Unionist Party). At this point,
Muslim League was still very weak politically - they had very few
representatives in the parliament.
Gandhi had the opportunity to create a bridge of peace with
Muslim League. The League would have been glad to do so since
they were weak. Congress and Gandhi missed this golden
opportunity. It's partly the hubris, partly their inability to read
the situation that was to blame. Either way, this miss was
disastrous for the subcontinent.

During the same election, KPP (Krishak Praja Party) won maximum
seats in Bengal. KPP was led by Sher-e-Bengal Fazl-Ul-Haque.
This party represented the masses of Bengal. For this reason,
the Bhadralok Zamindars of Bengal never liked it. They were solidly
behind the Congress party. Most of the monitory donations to
Congress came from this Zamindar class. Congress wouldn't do
anything to upset this class. Fazl-Ul-Haque proposed a joint
government to Congress with a formula for power sharing.
You would expect Gandhi to lap this offer.
But he didn't. The messiah of the poor masses failed to deliver where
it mattered so much. Subhas Chandra Bose pleaded Gandhi to accept
the offer. But Gandhi and Congress remained on the sides of the class
that fed them.

The minority government of Fazl-Ul-Haque was pulled down by
Congress soon. A disappointed Fazl-Ul-Haque was served on a platter
to the Muslim League. This gave the League a back-door entry to the
Bengal government. From this point on, partition was almost a
certainty. And guess what? It wasn't the muslims in Bengal - but
the Hindu Zamindars now who clamoured for a partition of Bengal.
Since they saw partition as the only way of getting their privileges

The blame for this must go to Gandhi.

Lest someone should get the impression that I am putting the entire
blame of partition and the riots on Gandhi and letting the Muslim
League scot-free, here’s my clarification. The League made
grave errors of judgment. The Pakistan that was created
(“moth-eaten” or otherwise) had a fundamental paradox.
The most vocal support for the partition was in areas where
the muslims were not in majority. This meant UP, Bihar,
Ahom, Punjab and Bengal. The areas with overwhelming
muslim population were never enthused with partition. The
Sindh province was lukewarm. Even in the 1946 elections,
the Frontier province chose Congress backed Abdul Gaffar
Khan, rejecting League’s partition demand. What does all
this mean? After the partition, the most vocal supporters of
partition found themselves in India and those where against
or lukewarm to it found themselves in Pakistan. Bigger irony
is for those muslims who stayed or remained in India, the
creation of Pakistan weakened them instead of strengthening
them. The leadership and educated urban muslims from north
India migrated to what became Pakistan. This left the poorer
and uneducated muslims in a precarious position. They had
no real leadership to speak of – an affliction that has remained
till today. Of course, the migrants didn’t exactly get a welcome
mat in the new land (read about Muhajirs). It’s highly
questionable whether muslims are better off with the partition
than they would have been in a single nation.
This was League’s fundamental mistake. A large part of the
rioting was caused by League’s lower level leadership. Some
of them were pure demagogues. They incited riots and horrible
pogroms. The “Direct Action Day” in Calcutta (August 1946)
called by the League was pure evil. There is no evidence of
Jinnah actively reigning in these elements. Being a leader, it
was his job to control what he started. I will accuse him of the
same crimes as I indict Gandhi for. In fact, in some matters,
he was worse. He should have known what his statements
(like, “muslims are not necessarily docile people… they will
give back in equally harsh manners what they receive”)
would trigger. Similarly, Suhrawardy of Bengal was equally
guilty of inciting riots. Riot happy Leaguers were matched
atrocity-to-atrocity by RSS/Arya Samajis. So both sides
share the blame.

Anyway, let me continue on Gandhi.
Zoom to 1946 - a few days after the political agreement
between Congress and Muslim League (Cabinet Mission Plan).
Mind you, 1946 was very different from 1936.
The Muslim League had won handsomely
in all muslim majority regions (except the Frontier province).
It was no longer ready to play the under dog. With the cajoling
of the British an agreement was reached. The League was still
ready to ditch its demand of partition. Provided, safeguards are
established for the representation of minorities in the legislature
and jobs. Not an earth-shattering unjustified demand.
Alas! Gandhi, the person you least expect it from, chose to display
extreme polemics on wordings of this agreement. He should have
seen the larger picture and adjusted. Yet he said, horror-of-horrors,
"Congress keeps the right to interpret the agreement in its own
ways." This, a few days after the agreement was reached and the
ill-fated press-briefing by Nehru, finally convinced the League
that Congress was never sincere about accommodating the

In the final analysis, the blame for partition must go to
Gandhi just as the credit for bringing freedom closer.