Capitalmind Podcast

"Taxation is the price we pay for civilisation," as the saying goes. But what happens when the price tag keeps going up? You may have thought you understood the friendly taxation system, until a new rule comes up that leaves you feeling like you've been sucker-punched. That's what recently happened when the government took away the tax efficiency of debt mutual funds and increased taxation. Suddenly, investors were left wondering how this would impact their investments and whether they needed to change their strategies. In this episode of our podcast, Deepak and Shray delve into the conversation around the new taxation rules for debt funds. They ask the tough questions that many investors are likely asking themselves such as: whether taxation should be a factor when investing in equities, what to do with existing debt funds, whether foreign investing is still exciting after all the taxes. But it's not all doom and gloom. They also explore other investment options such as MLDs, Gold, Real Estate, Startups, AIFs, and ETFs. Taxes are indeed taxing. But who knows, maybe someday Pink Floyd will come up with a new hit single titled "We don't need no TAXES." Until then, tune in to our podcast to stay informed and keep your investing game strong. Don't miss out on the show notes and references for this episode, where you'll find timestamps for each topic covered. So grab a drink, relax, and join us as we explore the fascinating and ever-changing world of investing and taxation. Show Notes & References Click here for the Google Sheet 8:50 Now all debt instruments are taxed similarly, isn't it now a fair system? 18:45 What should I do with my existing debt funds? 27:00 Should taxation be a factor while investing in equities? 33:00 In stocks, should you sell underperforming stocks and move to other stocks? 36:00 What about  MLDs, Gold & Real Estate. 53:00 How investments in startups are taxed? 56:00 What about AIFs and ETFs? 1:05:30 Is foreign investing still exciting after all the taxes? 1:09:00 Final thoughts

“A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster” - Bernard Baruch Short selling is mostly misunderstood and often demonized. Quite understandable, it's difficult to put your head around a concept that involves selling something that you don’t already own. But, it’s not as sinister as it is made out to be. Markets have enough checks and balances to accommodate short sellers and maintain their balance. Recently, we saw Adani group stocks come under attack by a US-based short seller which resulted in the marketcap of the group falling more than 50% within a month. This sparked a discussion on the concept of short selling. We're not going to talk about the specifics of this short by Hindebug. Instead, in this episode, we will talk about the nuances of short selling, their impact on the market, and dive deeper into how the whole thing works. Join, Deepak & Shray, as they talk about: How does short selling work? Is short selling always to bring down a stock? The operational aspects of short selling in India and the US? Examples of different short trades & how they played out Which market players, except short sellers, also short stocks? Show Notes & References 1:10 What is short selling 5:15 Why people would do short selling? 11:30 Are HFTs also market makers? Or speculators? 13:30 Paul Tudor Jones and the 80s crash 19:30 How do Indians short a stock? 23:00 How do US traders generally short a stock? 33:00 NSEL fiasco 42:00 Do arbitrage mutual funds also short sells stocks? 45:00 How does a foreign fund short an Indian stock? 47:00 Should short selling be illegal? 49:00 Can a PMS (like us) go short and benefit from such trades? 54:30 The thing called "short squeeze" and stories from far & recent past

Things escalate and hit the fan very quickly in banking. It's fascinating to see how banks go belly-up for the same fundamental reasons but in an entirely unique way each time. It's like being served the same romantic comedy story again and again with different actors, locations, and songs. But, these banking crisis stories are not as enjoyable and they hurt real people financially and emotionally. In this episode, we discuss the crisis at Silicon Valley Bank. How this seemingly robust, conservative, bank with $180 billion in deposits tumbled down in just a couple of days. All was good with the Silicon Valley Bank until, one day, it wasn't. NO, there was no accounting scam. This isn't like Enron.  NO, there wasn't any irresponsible speculative betting. This isn't like Lehman.  This time it's a different story. But, with the same result.  Listen in as Deepak and Shray tell you everything you need to know about the Silicon Valley Bank crisis:  What actually happened?  What could SVB have done differently starting a year ago? Understand how rising interest rates affect the business of banking What is going to happen next? Lessons for the future If you enjoy Capitalmind Podcast, tweet to us @capitalmind_in and let us know. It doesn't take more than 2 minutes and is the fuel that keeps us going.

Anyone who thinks financial accounting is boring hasn't seen the creativity in some of the financial statements. Not just in India but across the world. In this podcast, Deepak and Shray discuss the shenanigans of financial accounting while referencing various case studies from the business world. This discussion is important because "new age" businesses in India have started reporting "adjusted" accounting statements along with standard reports. While we do understand the need for "adjusted" metrics to gauge the health of a business. Especially when the nature of business is unconventional and may not be represented well by the existing reporting system. But more often than not, such adjustments are used for misguiding investors.  Listen in to figure out:  Why do businesses need to report adjusted earnings? How cheques, affiliates, GMVs, and ESOPs are used for creative accounting?  If such reporting is legal, why should investors care? How do you recognize whether adjustments are real or not? Show notes and time stamps 1:50   - What’s the big issue with showing adjusted revenues? 10:20 - Shenanigans of adjusting revenues go back to the days of AOL (1990s) 13:45 - Argument of using the contribution margin 23:00 - How do “adjusted” numbers mislead stakeholders? 27:30 - Examples of creatively using metrics to manipulate numbers? 52:40 - VCs & Investors want “adjusted” metrics to understand business performance 1:00:00 - How to recognize if adjustments are real or not?

  Stockbroking is a unique business enabling millions of people to trade billions of dollars of stocks with unknown counterparties. All trades, in this highly regulated ecosystem, are executed seamlessly, settled correctly, and recorded meticulously. It’s fascinating to see how far India has come in making this ecosystem world-class and in some cases, the best in the world. In this podcast, Deepak and Shray discuss the nuances of stock broking and how proposed regulations will impact the stock broking industry. They discuss, in detail, the role of stock brokers, regulators (SEBI), clearing corporations, exchanges, and investors. As an investor, how brokers are regulated doesn’t impact you directly. Yet, it is important to figure out what happens to your money when you click that buy/sell button on your app. Listen in as we talk about: How does stock broking work in its present form? What are the new regulations proposed? How will these regulations impact the stock brokers? How will it benefit the investors? Timestamps: 02:10 - How trades are settled by your broker and exchange? Earlier and Now? 14:15 - Moving from t+2 to t+1 in settling share transactions 16:20 - Now clearing corporation holds the transactions before settlement. Is it safe? 21:15 - The practice of commingling (shares & money) and regulations around it 40:00 - Drying up float income and the new role of a broker? 44:00 - How much does “no float income” hurt the broker? 52:30 - Will these regulations, meant to protect investors, actually lead to an increase in brokerage charges? 55:10 - Can these regulations prove to be counterproductive? 1:03:00 - Closing remarks

Forecasting is a very difficult business, like selecting lottery tickets. No one could have predicted 2022 as a year in which there was geopolitical war, worldwide inflation, a massive hike in interest rates worldwide, and the US S&P 500 down about 20%, and yet, the Indian markets ended up 4%. If anyone got this spot on, they could still be terribly wrong for 2023. That’s why we don’t predict, we react. So, what’s going to happen in 2023? We can almost hear this question, despite all the data that says prediction is a waste of time. But then, much about the markets is an entertainment business, which means it’s great to see people make crazy zany predictions, and maybe some of them will win. So we’ll participate mildly in what should purely be entertainment, even if at some point it appears to have deep investing insights. Show Notes and References 1:55 Where should we invest in 2023 and some random predictions 3:00 Four ways this decade will be different from the last one 8:30 Return of Volatility in the markets 14:00 The peril of high interest rates Podcast: Investing in a world with high interest rates 17:00 Return of inflation and higher yields 23:00 Putting Indian inflation in perspective 34:20 Geopolitical turmoil & the return of asset-heavy 39:40 ChatGPT, role of AI & Predicting how humans will react 47:00 Tactically where do I invest my money now? 51:00 Sectors that are positioned well for the current macroeconomic scenario 59:45 Will emerging markets outshine US markets? How did you like the podcast? – Tweet to use at @capitalmind_in

In this conversation with Shray, Deepak shares why he feels now is the time for India's concept of a Retirement Account - he calls it the MERA account. This account should help improve investment opportunities for retail customers, create a longer-term investment horizon and push people to save for their retirements. Listen in as we discuss: The concept of a retirement account Impact on the economy and people Imagining a retirement account scheme that works for India The operational aspect of such an account Who would oppose such a thing? Show notes and references 2:00 - Seven consecutive years of positive market returns for India 4:00 Seize the opportunity of India story with retirement accounts  Read: My Empowered Retirement Account (MERA) 8:30 Where do LIC and EPFO invest retirement money  "We're giving asset managers our retirement money and asking them to do great things for the next 20 - 30 years... But, they're not doing great things... They are conservative.. not letting me realize my larger risk appetite." 14:30 ELSS equity funds hold money for a longer period of time. Can't they act as retirement funds? 17:00 The peril of investing for retirement with post-tax money  25:00 Deepak introduces his idea of MERA - My Empowered Retirement Account (MERA) 33:00 Why does this matter so much at the national policy level?  41:20 Who are the people who would feel this is not a good idea?

Of late, we have been discussing macro trends that affect the stock markets, the economy, and as an extension, the world. We have been zooming out to capture the big picture painted by investors, regulators, and the invisible hand of Mr. Market. In this episode, Deepak & Shray break from the trend and do something different. Rather than zooming out, we zoom in. We discuss two companies that are going through fascinating developments and make for an interesting discussion. LIC is a recently listed insurer that has a gigantic balance sheet and is a household name in our country of 1.4 billion. It operates in a market that is expanding wider as well as penetrating deeper. Yet, the company seems to be valued poorly by the markets. What’s happening here? HDFC and HDFC Bank announced that they will merge at the start of this financial year. The merger is progressing rapidly, getting through from one regulatory approval to another, without much drama. But, this merger is causing drama at unrelated places that have nothing to do with the business or the merger (well, not directly at least). Will this merger make index funds do crazy rebalances? Listen In. Timestamps and highlights 2:00 - LIC has fallen 30% from its IPO. What’s going on? 4:25 - Cultural shift to maximize shareholder value 5:00 - Participating and Non-Participating Policy “.. This quarter, LIC said, you know what we have 15000 crores of profit.. which we didn’t know we can take.. it turns out that they can and they did.. ” 11:15 - 100% of the profit from the Non-Participating Pool should have come to shareholders 19:30 - What happens to LIC, due to its high equity holdings, what happens if markets don’t do anything for the next 10 years? 25:30 - Why isn’t the market not enthusiastic about LIC if this is such a fantastic opportunity to buy? 30:15 - HDFC merger and the opportunity with Index Constitution 41:30 - The worrying thing about Index funds

As we slowly settle into the post-pandemic era, one of the hallmarks of this period has been higher inflation than we have seen in the recent past. In response to rising inflation, central banks across the world have responded with a fierce interest rate hiking excursion. As a consequence, neither of the asset classes–stocks, or bonds, have performed well recently. It raises an essential question: how should we look at allocating our savings? That’s precisely what Deepak and Shray are here to talk about, among intriguing followup questions one may have when it comes to Investing in a world with high interest rates, including which pockets to consider in financial and real assets. Listen in. Timestamps and highlights 01:30 — To an average investor, is debt coming back as a relevant asset class? “If you have multiple periods of high and low interest rates, you might actually get very good returns on certain corporate, or even government bonds.” “[…] It’s coming to a point where debt might actually start to become an interesting investment, simply because interest rates across the world have gone up. This is not the time to look backward, but to look forward and say going forward, returns might actually be quite good from here.” 09:40 — Looking forward, how should one look at asset allocation? And, when is the right time to look at the debt markets? “You might actually want to position yourself at the outer end of the spectrum in government bonds when the RBI switches its stance. But, until then, I think it’s a waste of time because you may see interest rates go up substantially. And we don’t even know how long they’ll go up.” “Debt is a very boring instrument. What happens in equity markets in ten days, happens in six months in the bond market. It happens slowly over time, it’s excruciatingly painful, and people rejoice over 1% returns. […] But, I think the value in looking at a bond market as an equity-esque investment, only happens when interest rates start to come down.” 25:09 — Will high interest rates emanate an opportunity in gold? “It is not inflation that drives gold prices, it’s the fear of inflation that drives it.” 26:49 — What about opportunities in equity markets? “If in a low interest rate environment, the biggest beneficiaries happen to be zero debt service companies, then from an intuitive perspective, the beneficiaries in a high interest rate environment are companies with very high levels of debt, but whose competitors need the same levels of debt, but can’t acquire it because they don’t have the same standing in debt markets.” 40:03 — Are there repercussions on the startup ecosystem? “The unfortunate problem of startups is that they come from the concept of needing capital to burn.” 50:05 — How long do interest rate regimes last? “We have had a very long period of very low rates. Can that mean that we will have a longer period of high rates? The answer will come from how much damage there will be to the economy before the central banks blink.” 52:10 — How would we know when there's a pivot? “Interest rate cycles don’t change overnight, they take a long time. Watching an interest rate cycle change is like watching paint dry. Six to eight months, something will happen, and suddenly the cycle would have changed.” 57:30 — What makes Deepak optimistic about investing in the current landscape? “If you don’t deploy in an uncertain world, when do you deploy?”

RBI released a discussion paper that said: We’ve let you good people live all this time with “free” payment systems, so should we allow banks to start charging now? Specifically for UPI, which has reached volumes of 10 lakh crore rupees per month? And should we charge merchants? Deepak's answer is a big NO. He firmly believes that the payments ecosystem (and the economy as a whole) will gain much more than any fees on UPI transactions will. As always, Deepak has a context to his argument and covers a wide range of nuances. Listen to this podcast to understand his view on different aspects of the UPI payments system, its evolution, and the ways in which it can drive innovation. Also, this podcast covers many different aspects than Deepak's earlier post on the same topic.  Show Quotes & Time stamps 02:00 - Deepak and Shray trade fascinating stories about payment systems before UPI. 07:00 - The interoperability of UPI is a game changer 10:30 - How much do we pay for other payment systems? “RBI spends 4,824 crores per year printing cash. None of that cost is borne by anybody except the government itself” 14:30 - The evolution of ATMs, Cheques, NEFT, RTGS, and the big role that RBI played in making these systems affordable for users. 21:30 - Has UPI always been free? Or has it also evolved over time to be free? “The government went to parliament and passed a resolution to make UPI free… That’s the extent we went to keep this payment mechanism free” “1,00,000 Crore is now available to banks to make money by parking it RBI and earning interest…. This is because people want to keep money with banks to make UPI payments” 31:00 - How much does it actually cost to run the UPI payments system? “NPCI spends just ~680 crores per year maintaining the UPI infrastructure. Compare that against the float income that banks make on the additional 1 lac crore float” 34:00 - The argument that UPI is a toll road so you should charge for this "public infra" “Credit cards transact about 100k crore a month, debit cards 60k crore per month, ATM withdrawals are at 300k crore per month…. So even now, after all these years, credit + debit card transactions are not more than cash” 41:00 - If you don’t let players charge for UPI, who will fund innovation? “Internet protocols were free and they disrupted the world through innovation” “Interestingly, in the payments ecosystem, all innovation has come from the regulator and not private players” 43:40 - Counter arguments from Deepak’s Twitter on why UPI shouldn’t be free. 44:00 - Google and PhonePe did all the handwork to make UPI popular. Now you’re telling me I can’t make money on it? “You’re building a road and they tell you... you can never charge a toll. But you still keep building that road… that’s the payment apps for you” 50:00 - Let’s say that the biggest private players leave because you won’t let them make a profit. The top 2 guys control ~75% of all transactions. What happens to the ecosystem now? 1:02:00 - Why regulators have enforced limits on incentives and fees? “Financial regulation is not like tech where if you’re too big, rules change for you. Here, if you are too big, and you disturb the system, the regulator first makes you small and then beats you” 1:05:30 - Government responses to the UPI monetization paper were very harsh. Why so? “Hoarding cash is ok. Spending that cash on the economy creates a whole new economic system that’s outside the view of the government. That’s not ok” “From Jan 2020 to now, the total ATM withdrawals are flat. UPI has gone from 120k crore to 1000k crore. The fact that UPI transactions are free has reduced cash transactions” 1:09:30 - The number of UPI transactions has drastically increased. But, is that all? The UPI tech reached its full maturity? What do we have to look forward to wrt UPI? 1:14:00 - UPI as a credit check for lenders and a game-changer for quick small loans   There’s a lot more interesting stuff ahead with UPI. We’re just getting started!