Pay less dividend tax by doing this one thing

I’d like to make sure I can pay the most amount of taxes possible. I love knowing that I’m partly responsible for paying for weddings, buying coal mines and financing a really interesting news channel with completely unbiased views. It’s the best.

Said nobody ever.

My family were quite early adopters of what was then called a “home computer”. We started in 1984 with one of those overgrown keyboards you connect to your TV, but in the late 80s my mom spoilt us with a really futuristic machine called a compaq. It could show 16 colours and had a very weird joystick called a mouse. It even had something called a C drive which meant we no longer had to swap floppy discs halfway through playing a game.

Dubai, it's like sim city with cheatsWe loved it, and thanks to the fact that there was no way the games could phone home to report piracy, my neighbours and I copied games with abandon! One of our favourites was called Sim City (the 1989 edition). In this game you were a virtual mayor and had to decide where to put shops, factories and houses, build roads, airports, power stations and repair damage from all the earthquakes and monster attacks that kept happening.

Your goal was to make the biggest, coolest city around. Every now and then the game stats would pop up telling you how you were doing. You’d get to see the how much money you had, how happy the people were, and what their biggest complaints were.

If the biggest complaint was the high crime rate, all you had to do was put another police station in the high crime areas. If they complained about traffic you’d just build more roads and trains, but if high taxes was the biggest issue you had a much more challenging problem. Lowering taxes would make people happier, but you might run out of money and wouldn’t have enough for services, repairs and growing your city. Make it too high and people would simply move away and you’d end up collecting far less in taxes since you’d have far fewer taxpayers. It really was a delicate balance.

Sadly it’s a balance that our government hasn’t quite worked out. Over the last few years the tax rates have been creeping skywards. Income tax went from 40% to 41% in 2016. It had been there for 14 years while our country wasn’t broken. This year it jumped to 45% if you’re luckily enough to earn over R1.5 bar.

Capital gains tax didn’t even exist in SA before 2001. Then they made it a 25% inclusion into income tax. That lasted until 2012 where it went up to 33.3%, and again with nothing in the kitty left to steal this year it was upped to 40%.

Dividends tax (formerly secondary tax on companies) used to be 10%. In 2012 it was upped to 15%, and then last year it was raised to 20%. Yes, in the space of 5 years the dividends tax rate has doubled, and us poor investors have just stood by and watched. Imagine what would happen if VAT or income tax doubled in 5 years, there would be a mutiny.

I can think of a few people I’d like to see in this outfit. Sadly after so many years with their snouts in the trough they just won’t fit.

It’s also one of my least favourite taxes. As investors we work really hard so we can save for our futures. We invest money we’ve ALREADY paid tax on, into companies that will employ people and add value to our lives. I plan to live on these dividends, something many of our current pensioners to some extent do. Now I may have to work longer and save more to make that possible, but if I was a pensioner that just wouldn’t be possible. Thanks for working so hard your whole life gramps, now empty your pockets.

The government keeps quoting the fact that we were lower than the OECD country average. I’m not buying that though. The OECD countries include Finland, Sweden, Denmark and Germany where you get a hell of a lot of value for money with taxes. If I don’t need to pay for medical aid, private security services, school fees or university fees among others then I’d happily pay the 20%, but that’s just not the case.

There’s also the fact that in many OECD countries there is an exempt amount of dividends, and the rate isn’t actually as high as you’d imagine. In the UK the first £5000 (R84 000) is completely tax free, and unless you earn over £45 000 a year (R750 000) you won’t pay more than 10% on those dividends. In the USA you won’t pay any dividends tax unless you earn over $37000 (R480 000).

Another question is why are we all of a sudden comparing ourselves to first world countries when we like to trumpet how much we admire our fellow BRICS members. Brazil pays 0% in dividends tax, Russia13%, India also 0% (they abolished the tax in 2002) and China also won’t charge you a cent as long as you’ve held the shares for over a year. In the BRICS club we’re comfortably the worst!

All of this is going to make people emigrate. They’ll go somewhere where they’re treated better. If you’re not able to to that, you’ll be happy to know that like we saw with capital gains tax, when it comes to dividends tax, there is a workaround.

With one change to you portfolio, you should never pay 20% dividend tax unless you earn over R1.5 million a year. In fact, you could be paying under 10% in dividends tax. Depending on how much dividend and other income you earn, it could be as low as 8%.

If you’d like to know how this is done, all you have to do is buy my ebook for $49.99. I guarantee that if following my techniques doesn’t get you paying a lower rate in dividend tax I’ll send my favourite french poodle.

I’m kidding of course. Fortunately I’m not a slimey internet salesman, and I’m quite fond of my tiny poodles. The simple answer is that all you need to do to pay less dividend tax is invest offshore. And I don’t mean by hiding funds offshore either, hardly anyone looks good in orange. If you invest offshore, you can legally pay less dividend tax with the full blessing of SARS.

Here’s how it works
Foreign dividends are taxed as if they were income and not dividends, but to avoid a case where you might end up paying 45% in tax on dividends, they exempt some of the dividends from tax. The exempt portion is calculated with a ratio which is (maximum tax rate-dividend tax rate) divided by maximum tax rate.

For 2017/18 year, the exemption ratio is 25/45 or 55.5% meaning you don’t pay tax on 55.5% of foreign dividends, leaving you with 44.4% of dividends you do pay tax on. This ratio means that only those who earn enough to be put into the top tax bracket will pay 20% tax on their foreign dividends.

Happily, or sadly rather, I’m not earning the R1.5 million needed to fall into that tax bracket, and if you’re spending your working hours reading this, you’re probably not either. To work out how much tax we’d need to pay you need to add 44.4% of your foreign dividends to your income for tax purposes.

Now if you’re thinking this won’t make a huge difference as you already paid 15% in dividends in the country you’re invested in then you need to hear this good news: Even though you only pay tax on the 44% of your dividends, you get to claim 100% of any foreign taxes paid as a tax credit! That means that the tax credits may be higher than the tax you actually should have paid, which would mean SARS would give you a break on your regular income tax to make up for it!

Let’s look at a few examples (warning mathematics ahead)

John is a highly paid corporate executive. He earns a million rand a year and has built up a huge share portfolio. This year he expects to pull in R200 000 in dividends. Let’s compare the difference is they’re foreign or local:Foreign dividends exampleI imagine you’re thinking “What, all that effort for a miserable R3.5k saving in taxes?”.  If that’s the case, please send me R3500, I could put it to great use, and then read the next example.

Sarah is semi-retired, just doing part time work for R10 000 a month, and receives R100 000 a year in dividends:Foreign dividend tax example 1

As you can see, the total amount of tax owed by Sarah is almost as much as the tax she’s already paid overseas on her dividends. That means she has effectively overpaid tax on her small salary throughout the year and so will hopefully get all but R965 back when she files taxes. She’ll have an extra R12000 a year to spend simply by investing offshore. Effectively is paying just 8% tax on her dividends!

Budget 2018: Income tax relief must be blended with additional tax measures

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An analysis of Budget data highlights that the tax-GDP ratio has remained much the same since 1990s. It was just 9.9% in FY15, only 10 bps higher than what it was in FY91. (Reuters)
Given there is all round expectation of income tax relief to assuage the demonetisation pains of the people, FM Arun Jaitley may have already decided on lowering of the tax burden through some measures in the Budget to be presented on February 1. While doing so he would be bogged by the same problem that his predecessors have faced, to increase the tax-to-GDP ratio in India. While expectations are that the government would increase public spending to stimulate the economy, this cannot be achieved on a low-tax base, which has been mark of the Indian economy. In fact, India has one of the lowest tax-to-GDP ratios, with emerging market economies’ averaging 21% and OECD’s averaging 34%.

Recent data for the April-December period shows that direct collections have increased 12.1%, while indirect tax mop-up is up by 25%, this may help in achieving the goal of 10.8% this year, but it would still fall short of the 12% level. An analysis of Budget data highlights that the tax-GDP ratio has remained much the same since 1990s. It was just 9.9% in FY15, only 10 bps higher than what it was in FY91. In the case of central taxes, FY08 is the only year the share of taxes increased to 11.9%, but thereafter fell below the 11% threshold again. Now, according to the medium term fiscal statement even the government is projecting it to increase to 11.1% in FY19.

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While a large part of low compliance has to do with high taxes and low reporting, government’s efforts to reduce taxes have not created enough stir to increase India’s tax base. Consider the case of direct taxes, starting off from a low base the ratio increased from 1.88% in FY91 to 3.07 in FY98, when tax rates were reduced to the present 10, 20, 30% category. Then it started to rise again after FY01 with not much change till the government increased its exemption limit in FY07, which led to the highest tax-GDP ratio of 6.26% in FY08. But the ratio has been falling ever since despite the government increasing exemption limits. On the other hand, indirect tax to GDP ratio has fallen for most part since FY91. The ratio fell from 7.94% in FY91 to 5% in FY02, thereafter increasing to 5.79% in FY07. Since then, it has stayed below the 5.8% level.

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This means that income tax relief will have to be blended with the additional tax measures, which can also come through extension of the tax base and increased tax compliance if the tax burden is lowered—on the indirect tax side, the implementation of GST will have to do the same for the tax kitty. Although with sluggish growth, the task may not be as easy even with the GST and income-tax push.

Calculate your income tax post budget 2018 through this Income Tax Calculator, get latest news on Budget 2018 and Auto Expo 2018.

Union Budget 2017-18 May Look to Soften Note Ban Woes by Tax Relief

New Delhi: Finance Minister Arun Jaitley will on Wednesday (February 1) present his fourth and perhaps the most challenging Budget that may look to soften blow of currency ban with tax and other sops as he seeks to revive growth.

While largely sticking to fiscal consolidation roadmap, Jaitley will present the Budget for 2017-18 amid strong headwinds caused by government decision to invalidate 86 per cent of the currency and the newly elected US President making protectionist noises.

Topping the list of sweeteners could be the hike in Income Tax exemption limit to Rs 3 lakh from current Rs 2.5 lakh as the Minister will look at putting more money in hands of people to not just create a feel good atmosphere but also check the disruptive impact of demonetisation on demand, supply chains and cratered credit growth.

Alternatively, he may raise the deduction limit for interest paid on home loans to Rs 2.5 lakh from Rs 2 lakh currently. A higher medical rebate may also be on the cards.

Besides tax break, there could even be a universal basic income in the Budget, industry officials and tax experts said.

But cutting 30 per cent corporate tax rate to lift sagging investments may not be easy given that government’s official estimate of 7.1 per cent GDP growth for the current financial year does not take into account the chaos wrought by demonetisation.

While revenue collection targets for the current fiscal may exceed, there are doubts if Jaitley may project any substantial jump in tax receipts in 2017-18.

Also, the rising oil prices are a cause of worry for him, leaving him with very little fiscal room to manoeuvre social and infrastructure schemes.

Incentives or schemes for farmers and rural India, women and social sectors like health and education may be cornerstone of his budget given that five important states including Punjab and Uttar Pradesh will be voting within days of his Budget presentation.

Besides agriculture, the Finance Minister may also announce schemes for boosting domestic manufacturing and promoting start ups.

Tax experts and economists said Jaitley may hike the service tax (currently at 15 per cent) to align with the GST regime.

It will be keenly watched if he makes any changes to the tax regime on investments in equities. At present, gains from transactions in shares held for less than 12 months are considered short-term capital gains and are subject to 15 per cent tax.

Gains on holdings above 12 months qualify for long term capital gains benefits and are exempted from tax.

Tax experts said ending tax breaks on equity gains may turn sentiments sour towards the capital market. There is a thought that the 1-year limit for long term could be changed to two years but the tax rate is likely to be kept at zero.

He will have to juggle numbers to remain largely within the fiscal consolidation roadmap. The current year’s fiscal deficit target of 3.5 per cent of GDP is mostly likely to be met on back of surge in tax receipts from 7th Pay Commission grant to employees and tax amnesty schemes.

It remains to be seen if he will narrow the deficit, the widest in Asia, in 2017-18 to 3 per cent planned previously.

He may continue to piggyback on public spending, especially on infrastructure, as he looks to reverse the investment collapse.

A roadmap on Goods and Services Tax (GST), that will not just turn India into one market with one tax rate but also improve tax compliance and check evasion, may figure in Jaitley’s Budget speech.

Union Budget 2017-18 – 5 key aspects

The intent and thought process in today’s Budget speech reminds us of these lines in the famous poem by Shri Harivansh Rai Bachchan –

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“Asafalta ek chunauti hai, ise sweekar karo,

kya kami reh gayi, dekho aur sudhar karo.

Jab tak na safal ho, neend chain ko tyago tum,

Sangharsh ka maidan chhodkar mat bhago tum.

Kuch kiye bina hi jai jaikar nahin hoti,

koshish karne walon ki haar nahin hoti.”

In our opinion, today’s Union Budget for 2017-18 is a continuation of the overall Pro-Reform, Pro-Governance and Pro-Growth manifesto of the ruling government.

We are encouraged to note that our thought process documented in the Pre-Budget Note (dated Dec-13-2016) wherein we had highlighted 5 key aspects – Improving MSME health, Tax Reforms, Rural Impetus, Infra-Public sector boost, Housing for All have been the revolving tone in today’s budget.

Perhaps for us, the single most important takeaway has been the reforms on “Political Funding”. We strongly hail the FM for this bold move and reckon that this single step sends out a very strong message to the world communityIt is a testimony to the ongoing thrust on de-railing corruption, enhancing transparency and increasing the taxation ambit. In our opinion, Rating agencies would sooner than later pay heed to this drastic ongoing transformation.

Net-net, the budget with its hawk eye focus on Fiscal Discipline is indeed commendable and has been hailed by Markets, Industry leaders, Economists and Rating Agencies.

There were high expectations of increase in Capital Gains taxation and Service Tax rates ahead of the budget. With status-quo being maintained on both, it has come as a relief for the markets; which otherwise could have seen a negative reaction today.

The increase in allocation to MNREGA to Rs. 48,500cr, up by ~ Rs. 10,000cr augurs well for the rural economy. At the same time, the reduction in tax liability on tax slab between Rs. 2.5-5lakhs would have a positive rub off on consumption demand. These two, along with a. hike in government salaries b. OROP pay-outs c. good monsoon d. easing of interest rate cycle e. secular trend of urbanization, rising per-capita incomes and changing lifestyles – all augur well for the domestic consumption led demand.

9 Things A New Stock Investor Has To Experience

The stock market can be a life-changing place. But only if you are able to find the best stocks to invest in and more importantly, invest a sizeable portion of your investible surplus in such stocks. If you can manage to do that repeatedly, you can create enormous amounts of wealth.

But that is easier said than done. More so for those who are just starting their journeys to invest in stocks.

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So let’s discuss few important things that new investors experience:

1 – It’s not a One-Direction Journey

Irrespective of how markets have done in recent past, they are destined to be volatile and can go in both directions – up as well as down. Many newcomers commit the mistake of exiting the markets just after experiencing few initial losses. As a new investor, you should remember that it’s normal for markets to rise and fall and for the long-term investments, this volatility doesn’t matter much.

2 – Have the Right Investment Goals

Do not try to beat everyone in the markets. Invest in stocks with reasonable expectations in line with your risk appetite, financial profile and financial goals. Taking an approach that is aligned with ‘your individual goals and risk profile’ will help you stick with the chosen approach for longer.

3 – Focus on the Correct Strategy

At the start, you are sure to be fascinated by stories of people doubling their money in few weeks or even in days but such stories are rare and exaggerated. In reality, long term investing works better than short term trading. Chances of losses in short term are higher. So stick with an approach that has a higher chance of success and which focuses primarily on investing in the best stocks to invest for long term.

4- Stay away from Tips, Derivatives and Day Trading

All these are approaches to make quick profits from market fluctuations but in the long run, most traders following these methods end up making losses. It’s better to focus on long term and only invest in stocks of fundamentally sound companies, after doing thorough research and analysis.

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5 – Don’t be Emotional

As a new investor, you will experience a lot of emotions due to fluctuating stock prices. But don’t let your emotions control you. Don’t sell just because a stock is falling and you are feeling bad. Don’t buy just because everyone else is buying. Your buy and sell decisions should be based on sound strategy and not your emotions.

6 – Review your Investments Regularly

Not all your stock picks will do well. Sometimes, you will have to sell those that are not doing well and replace them with companies having better growth prospects. So reviewing your investments regularly is necessary.

7 – Have Patience

Creating wealth by investing in stocks takes time. So unless you are patient, you will be unable to stick with a strategy for long enough. So don’t expect magnificent results from the very first day. At times, you may lose money too but have patience and persist with a long-term view.

8 – Start small

Since you are just starting, take baby steps into equity markets. As your learning and experience grows, you can commit larger sums of money.

9 – Find the Right Advisor

A competent and trustworthy investment advisor can handhold you during initial investments. Right advice supported by strong market research (about best stocks to invest in) at the right time has the potential to help you invest profitably.

Four Fundamentals Of Successful Stock Market Investing

Investing in stock markets is all about knowing where to invest, when to invest, for how long to invest and when to sell.

But as simple as it sounds, these questions require a lot of effort, skill and time to be answered correctly and more importantly, profitably. After all, when you are investing in stock markets, you want to earn profits and create wealth. Isn’t it?

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If you really want to know how to invest in stocks profitably, then understanding these four time-tested ground rules of the markets would greatly help:

1st – Never Ignore Fundamentals

Stock market is best suited for long term investors.

But failing to realize that, thousands of investors want to make quick profits and get rich overnight. But unfortunately, in trying to do that they end up overlooking fundamentals that really matter. Like how good is the business (operationally and financially), how is it being run, is the management capable and trustworthy, future prospects of the business, etc.

A stock might be quoting higher than its intrinsic value but sooner or later, the stock price will align itself to the actual value of the business. Hence, one should never ignore the fundamentals.

2nd- It’s Impossible to Predict Market movements in Short Term

Irrespective of what experts tell you, there is no way to correctly predict the movement of stocks in the short term.

There are just too many factors and variables that impact prices in near term. However in the long term, the business fundamentals take over and stock prices adjust to reflect actual business realities.

So you should not worry about the daily price fluctuations or what markets will be doing over the next week, month or even a year. You don’t check the value of your real estate properties daily. So why do it with your stocks?

Instead, direct all your efforts towards finding stocks of fundamentally sound businesses that are available at reasonable valuations. That is all that matters when it comes to successful investing.

3rd- Learn to go Against the Crowd

Think about it. If everyone in market did the same thing, then do you think all of them will make money?

The answer is NO and there is enough proof for that.

Generally what happens is that investors buy stocks that everyone else is buying, assuming that the stock must be a good one and worth buying (since everybody is buying – band wagon effect). Result? Since the stocks are neither properly researched nor bought at the right price, investors end up making losses.

Smart investors know that they can make money in markets only when they buy something that is out of favor (i.e. against the crowd), but which has a good chance of recovering. This is how to invest in stocks successfully.

4th- Focus only on Long Term

If all the claims about money doubling overnight (in short term trading) were true, everyone would have been rich by now. but that is not the case.
Most successful investors have made use of the fundamental truth – in equity investing, chances of succeeding are higher with a long-term mindset rather than a short-term one.

Equity as an asset class has outperformed all other asset classes and historical data proves that it can easily give average returns of 12-15% on an annual basis but this is when you remain invested for sufficient periods of time.

Still Waiting For Union Budget? Well, Money Is Never Made By Timing

Sensex surged by more than 6.2% since the start of this year and crossed the range of 36,000, the highest in the history. Given the impact of the budget on the stock markets, it is that time of the year when every citizen of the country has fastened their seat belts for the much-awaited Union Budget which will be presented on February 1, 2018. This will be the last full budget before the 2019 Lok Sabha Elections and if we believe the grapevine buzzing around, it will be Finance Minister Arun Jaitley’s most ‘populist’ one till now.

It is noteworthy to point over here that this budget session follows the two revolutionary reforms initiated by the BJP-led government in the previous year i.e. Demonetisation and GST.

While we are not expecting any sweeping measures like GST and Demonetisation this year, the budget still holds its strong magnitude of importance, given the built- up buoyant expectations.

This year, we are expecting positive measures for various sectors including Health, Infrastructure, Mining and Manufacturing, etc., here we list few expectations from this year’s budget which are expected to give tremendous relief to the retail investors in India.

  1. Hike in the personal income tax exemption: As per the current tax brackets, income up to INR 2.5 lacs is completely exempted. There is a strong anticipation in the market that the Finance Minister can lower taxes by hiking this ceiling from INR 2.5 lacs to anywhere in the range of INR 3 to 5 lacs. If you consider the tax collections for the year 2015-2016, out of the total individuals who filed returns, only 20.5% declared income above INR 5 lacs. If this turns into reality, it will increase the disposable income in the hands of the consumers which will boost consumption and investments.
  2. Governments spending towards infrastructure sector: Investments towards sectors like infrastructure and construction have multiplier effects on our economy. Initiatives towards revival of stalled projects across roads, highways, ports, airports, power, railways, waterways and mining will increase the job opportunities which in turn will aid the income levels and consumption in the economy, thus stimulating the growth of the economy.
  3. Tax relief to equity investors: ELSS are the most sought after investments as they are tax friendly to the tune of INR 1.5 lacs under Section 80C, provided there is a lock-in period of 3 years. Since there are many categories such as provident funds, tuition fees, fixed deposits, etc., the deduction of INR 1.5 lacs is not sufficient for many retail investors. Many expect that this range would climb to INR 2 lacs, thus navigating more savings towards the stock markets.
  4. Measures towards fiscal consolidation: Given the overvalued markets, buoyed sentiments and acknowledgement of Modi’s reforms across the globe, the stock markets are resilient when it comes to the moderate fiscal deficit for the short-term. Given the current fiscal and trade deficit levels, it is implied that measures for curbing the same would be one of the highlights of the budget. However, it will be interesting to see how our Finance Minister is able to balance the market expectations and fiscal deficit.
  5. Fast-pace the growth of the rural sector: In this budget, we can watch out for measures which will remove the bottlenecks responsible for the slowdown of the rural economy. Since the rural population constitutes 70% of the Indian population (Source: Census 2011), it will be worth waiting to watch governments expenditure allocation towards the rural hinterland as well as the focus towards jobs creation and boosting the growth rate of purchasing power of the rural population.
  6. Stimulus to agricultural sector: Farm-focussed measures towards improving irrigation, agricultural credit, crop insurance would be one of the primary consideration for the government.
  7. Along with the above-mentioned reforms, we expect the government to give a further boost to the manufacturing sector.

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With this, we jump to the most fundamental question:

With the bull-run, is it the right time to deploy additional funds in the stock markets?
If yes, how retail investors can leverage on this ‘populist’ budget and myriad of investor-friendly measures anticipated from the budget?

Let’s start with the fact that there is no time to enter the markets, albeit you buy growth opportunities with a vision of 2-3 years or longer. Here, we list down few reasons behind why we stick our neck out to investing now and not wait for the budget results to unfold.

  1. Timing the market will always remain a BIG No: Irrespective of repeated educational stories on the ill-effects of timing the market, many investors prefer to ‘wait and watch’ or try to ‘time the market.’ Ahead of the Union Budget, we take this opportunity to accentuate the importance of ‘time in the market’ approach while investing in the equity markets.
  2. Stock-specific investment methodology: We like to stick to our investment philosophy of investing in quality mid-cap stocks. After the prolonged run, markets witnessed mild corrections in the mid-cap stocks, thus opening new avenues of investments in high-growth potential stocks.
  3. Buying quality businesses: Once my mentor told me, invest in stocks like you purchase groceries and not the way you buy branded cologne. The message hidden behind this message is that we do not compromise on the quality of the grocery which goes into the cooking of our day-to-day meals. The reason: We all are little finicky about our health. The same connotes to buying stocks as there is not only a monetary investment involved, but also intangible investments in the form of time, financial hopes and efforts.

The Electric Vehicle Rush: How Indian Companies Are Gripping With It?

Imagine a scenario, where even at a standstill traffic, you no longer feel the air hazed in smokes and fumes. Imagine driving a car, which costs you a fraction of the expenses spent on petrol and diesel cars over the entire lifespan of the vehicle. And lastly, imagine a vehicle which boasts of more efficiency due to lesser moving parts.

Yes, enter the era of the new-age ‘cleaner’ vehicles.

India has envisioned a laudable mission to phase out all Internal Combustion Engines by 2030. Since the announcement, the government is taking innumerable initiatives to walk the talk. It introduced FAME – Faster Adoption and Manufacturing of (hybrid &) Electric vehicles in the year 2015 and has earmarked the corpus of INR 14k crore reserved under National Electric Mobility Mission Plan (NEMMP) for the 2020 roadmap (Source: Department of Heavy Industry).

Government-owned Energy Efficiency Services Limited (EESL) has already awarded the coveted tender to Tata Motors Ltd and Mahindra and Mahindra Ltd for the procurement of first 10,000 electric cars which will replace the ICE vehicles owned by the government. To encourage the faster adoption of new-age vehicles, EVs are being taxed at 12% against 28% for petrol and diesel vehicles, as per the current regime of GST.

How India can benefit from going ‘Go Clean’?

New Delhi and other cities are reeling under intensified smoke and as per the Lancet report, India witnessed close to 2.5 million deaths annually in 2015 due to air pollution. Amidst the accelerating concerns of pollution in India, the government’s recent announcement of plying all-electric vehicles by 2030, is touted to be one of the momentous ambition towards ‘Go Clean’ in the recent history. This will not only be a panacea to reduce the CO2 emissions in the country caused by transportation, but also reduce the dependency on fossil fuels and spending on oil imports.

“India can leapfrog the western mobility paradigm of private-vehicle ownership and create a shared, electric, and connected mobility system, saving 876 million metric tons of oil equivalent, worth US$330 billion and 1 giga-tonne of carbon-dioxide emissions by 2030.”
– Source: Report released by FICCI and Rocky Mountain Institute.

Why Indian Government is bullish on going all electric by 2030?

The automotive industry contributes around 7.1 percent to the GDP and the sales of passenger vehicles soared by 5.22 per cent on a Y-o-Y basis, in December 2017 (Source: ibef report). Currently, India falls under the list of countries with lowest per-capita vehicles with only 18 out of 1000 owning a motor vehicle in 2014 (Source: nationmaster). As per the estimates, India’s urban population will reach approx. 600 million by 2030. And this can serve as an immense opportunity for a nation aspiring to be one of the largest growing economies in the world.

Even though only a minuscule number of 450 EVs were sold last year as compared to 336,000 electric vehicles in China (Source: International Energy Agency), the government is quite committed to deploying six million EVs on roads by 2020. The CEO of strategy think-tank Niti Aayog expects this number to reach up to 30.81mn by 2040.

Is India ready for the big disruption?

As per the forecasts by UBS, penetration of Battery Electric Vehicle is expected to be around 9%, while ICE stands at 80% and Plug-in Hybrid EV is expected to be at 11% by 2025 (Source: Mahindra CIE presentation – Jan 2018). Even though India wishes to pave way for electric future by 2030, the journey meddles with many stumbling blocks along with the sweet spot it enjoys. As per the report released by FICCI and Rocky Mountain Institute, India needs to address the key issues adhering to price, manufacturing, selection, range, charging and consumer adoption, if it wants to actualize its mission.

Infrastructure development: With only 350 charging points today (Source: Bloomberg New Energy Finance Report), Indian buyers may be reluctant to shift to EVs unless the rudimentary problem of charging requirements is addressed.

Solving the bottlenecks in power supply: The government also needs to make a roadmap of generating uninterrupted electricity, developing a robust infrastructure for charging and provision for battery – manufacturing to attain all-electric by 2030.

With the advent of advanced technologies, sufficient coal availability and renewable energies, process and business model innovation, increased connectivity across the globe, India has the potential to bring the much-needed transformation.

Which companies can benefit from the transition to all-electric?*

This transition to environmentally friendly alternatives is expected to create a humongous disruption in the automobile industry, which in turn will open the doors of new opportunities and challenges for Automobile OEMs, Automobile component makers, power producers and infrastructure developers. Here, we list of few of them:

  1. Tata Motors: It is looking to revamp its ambitious project Nano, as Nano EV. It is currently conducting trials of its electric car and has even found its place as part of Ola fleet of taxis. With the company all set to enter the league, valuation concerns over the profitability and revenue collections on account of strong emphasis towards Jaguar and Land Rover cannot be discounted while investing.
  2. Mahindra and Mahindra: In November, it unveiled its plan of launching three high performance EV’s by 2019. Its electric mobility arm, Mahindra Electric is planning to invest INR 300-400 crore in the project.
  3. Maruti Suzuki: It has invested INR 12 billion to set up a new plant for manufacturing lithiumion batteries, which is a key component in the electric vehicle. Also, its parent company Suzuki signed a MoU with Toyota to launch its first electric vehicle on the Indian roads by 2020.
  4. Force Motors: Its first Electric Vehicle is under trial run. Management highlighted during AGM FY2017 that it plans to spend 7 – 8% of capex on R&D, a large part of which will be directed towards the development of EVs.
  5. MOIL Limited: It is the state-owned manganese-ore mining company. Manganese is used to produce aluminium, steel and also will be a key ingredient in EV batteries.
  6. HBL Power Systems: It will make batteries for the defence and industrial sectors. With its presence across the globe, it is capable of adapting to technological changes and manufacture high-quality lithium-ion batteries.
  7. Ashok Leyland: It will make electric buses and batteries in partnership with SUN Mobility.
  8. Other battery makers like Eveready, Amara Raja, Panasonic, Exide Industries Ltd and Microtek International Inc. are looking to increase the supply of high-quality batteries.

How the disruption in the automobile industry can impact the investment methodology for the year 2018?

2018 will be a curtain-raiser in terms of how Indian government braces up to launch more energy efficient vehicles on the road.

At this juncture, it is difficult to quantify the impact of the developments in the EV space on the financials of the above-mentioned companies. Hence, we recommend investors to follow a systematic investment methodology and invest in businesses that are backed by agile management, robust business model and strong balance sheet. With many players venturing in to the space, it is more crucial than before to hire a qualified financial advisor to identify the best growth opportunities.

Why 2018 Will Be An Eventful Year For Markets?

The year 2017 was no doubt a great one for investors in general and good stock pickers in particular. With both Nifty and Sensex delivering close to 30%, it was one of the best years since 2009.

Here are two graphs that further highlight an interesting point:

Fresh YTD highs

Fresh YTD highs

The 1st graph shows the fresh YTD (Year-To-Date) highs that Nifty kept making throughout the year. The green line is the Rolling-Year-High figure while the blue line depicts the actual Nifty movement. The 2nd graph indicates the Nifty nosedive from these year high figures before recovering again. And if you note, the maximum drawdown from the rolling year high is less than 4.5%. This means that Nifty did not slump more than 4.5% from the highs it was making!

To sum this up, the Indian indices cruise in the year 2017 was sailing smooth and unabated.

The index of mid-and small-caps did even better with several cases of eye-popping returns generated by the individual stocks.

Such a performance has obviously set the bar high as far as expectations for 2018 are concerned. And many large brokerage houses are forecasting that the bull-run might just continue in 2018 as well on the back of a supportive global economy and recovery in the corporate earnings.

But we are able to spot few other indications that helps us to deduce that 2018 will be an eventful year for the Indian stock markets.

Union Budget – The upcoming Union Budget was the last full budget of the current NDA government before the next general elections. So the expectation among various sectors was high. Walking the precarious line between fiscal prudence and populism, FM Jaitley has deftly structured the Budget around ‘Consolidation’ of various reforms that have seen the light of the day, under the leadership of PM Modi. The budget, on a broader level, was along the expected lines. The emphasis was expected to be on agriculture, rural and boosting farm incomes and that, in fact, turned out to be the central theme.

Rationalization of tax structures across asset classes: India now joins other world markets in instituting a 10% long-term tax on equities, notably, the existing capital gains will be grandfathered, and the newly instituted long-term tax will be applied only on a going-forward basis starting 01-Feb-18. This move may have startled the stock markets for a short time, we strongly feel that the corrections the stock markets witnessed is only a knee-jerk reaction. Long-term investors would carefully deploy the funds and it will not abrade the inflows in the equities in a long run, given the fact the equity is still among the lowest taxed investment avenue in our country.

Crude Oil Prices – Crude oil has slowly faded away from the prominence it held in economic discussions till just a few years ago. Reason being its continued low price trend. But what is worth noting is that there has been a rally in the oil prices in 2017 and the prices have risen above $65 a barrel ($70+ now) for the first time since 2015. Indian economy is heavily dependent on crude oil imports. So any price spike could drastically impact government finances and put inflationary pressure on various sectors. But the oil threat is still manageable to an extent. The real problem would begin if prices cross $100. Also, any negative geopolitical event can send the prices up suddenly. This can be a key risk for the markets in 2018.

US Fed’s Stance – The US Federal Reserve has already begun tightening its monetary policy. And as per Fed commentary, this is expected to continue even in 2018. The practical assumption is that a tighter US monetary policy hurts portfolio inflows into emerging markets like India. Is this a reason to panic? Not so much like in past. But it can play some role no doubt. Also, there is almost zero probability of a sudden stop in this flow. There is another factor that sets off this risk to an extent – domestic liquidity support (discussed below).

Financialization of Savings – This has come as a big surprise for many. Thanks to the dedicated flow of money into mutual funds each month (via SIPs), the continued support received by the market from domestic entities has been very strong. To be fair, this has been a game changer for last one and a half years. Fortunately for markets, this trend is expected to continue not just in 2018 but in future too. Going forward, $10-20 billion per annum of incremental flows into equity markets from domestic retail investors (via MFs) will become a norm. The numbers might seem large but that’s because of the abysmally low savings historically flowing into equity from retail investors. The unprecedented retail money coming into the market is seemingly creating a floor for the market.

Earnings Recovery – Markets have been waiting patiently for the real earnings recovery. This fact combined with a run-up in prices has pushed stock market much above long-term average valuations. So naturally, a large number of market participants are concerned about valuations. More so in mid and small cap space. In words of Mr. Uday Kotak, “organized savings are chasing a limited supply of stocks” now and that has been a big reason for the surge in valuations. So the corporate earnings growth will be a crucial thing to watch out for in 2018 and may define market’s trajectory.

State Elections – Financial markets are quite sensitive to the electoral cycle. In a run-up to the general elections, 2018 will see a string of state elections in Nagaland, Tripura, Meghalaya, Karnataka, Chhattisgarh, Madhya Pradesh, Rajasthan and Mizoram. How the BJP-led NDA fares in these states will influence market’s mood as it inches closer to the 2019 general elections.

As you might have guessed by now, it does seem that 2018 may not be a non-volatile year like 2017. Though overall investor’s sentiment is positive and is expected to remain so, risks are also not ignorable.

There is another thing – we need to remember that in hindsight, every year in the past has been an eventful year for one reason or the other. Sometimes due to domestic reasons and at other times due to global ones. And this will continue to happen in future too.

But despite all these past ‘eventful’ years, the markets have chugged along on an upward growth trajectory and have done exceedingly well in the long term. And there have been hundreds of companies which have grown multi-fold in last few years.

The role of macro factors on the stock markets cannot be underplayed, however the truth remains that they are beyond our control. We continue to believe that one should choose (and invest) in fundamentally strong businesses having strong growth prospects and run by ethical and capable management.

We recommend investors to remain invested and maintain a disciplined investing strategy with long-term pursuit of wealth creation and not be dejected by a meagre 10% LTCG. And once chosen, one should remain invested in them for the long term until the fundamental thesis is broken. This is the real “Wealth Creation” secret which is known almost to everyone but unfortunately, very few follow

You don’t earn nearly as much as you think you do!

When I was 24 I thought I’d made the big league. Thanks to a bit of luck and thanks to having F-You money, I ended up in a contracting position where I was earning R160 an hour. That meant I made R28k per month since I worked about 176 hours a month on average. This is a pretty good salary today, but 13 years ago to a 24 year old who was still pedaling his bicycle to class and eating vetkoek for lunch just over two years previously it was an astronomical amount of money. More than double what my last salary was before I took my extended F-You holiday. So what does a 24 year old earning such a large sum of money do with all of it? Invest it? Not a chance, I bought myself an Audi.

To my credit, it wasn’t a new Audi, but a used one in what I believed to be a good condition. To my demise, it was about as reliable as a government employees university degree, and due to that, it went through parts faster than we go through finance ministers. In the space of a year I went through a fuel pump, the interior fan, the air-conditioning compressor, and ended the year with another fuel pump. Thank god the last fuel pump was 6 days before the warranty expired, for once. Also, since being one of the exclusive German auto brands everything had a price. Eerily, it was practically the same price for each of those things. Plus minus R6500 a piece. In the space of one year, that luxurious leather clad high speed German sedan had taken R26K out of my bank account, and put into the hands of the four ringed stealership.

If you’ve read a few of these blogs before, you’ll probably have been given an inkling that I quite like numbers. This isn’t a new fascination, and that’s why when I added up my car repair bills at the end of the year, I decided to see how many hours I’d worked that year just to keep my car on the road. In other words, how many hours did I work purely so I could get to work?

At first I thought it was a simple exercise of division. R26000 divided by R160 = 162.5 hours. But once again, the quick and easy answer isn’t actually the accurate answer.

To work out what I really earn per hour, you actually need to go into the small details. If you think about your working day, you’re not in the office for 8 hours a day. There’s the time spent going to the office, and back home again. Considering I lived in Pretoria and worked in Rosebank, that was a huge amount of time, at least two hours a day. Coupled to that was the cost of traveling to work. Even if I ignore the huge repair costs, that car back then was probably costing me R3/km in depreciation, fuel and maintenance. As I was driving 100km a day, that added up to 2200km of driving to get to work every month, or another R6600 a month gone.

There are other costs too. For some reason, even though I was a long haired rock star developer, they wouldn’t allow me to go to work in my normal uniform, beach wear. I could get away without a suit, but I still had to wear half decent looking slacks and a shirt with buttons. I didn’t keep track, but I believe I spent about R3000 a year on clothing in an average year for work. Thank goodness I didn’t study accountancy, they probably spent that every other month! I also went out for lunch every day. Mondays was a Mimmos pasta special, tuesdays their pizza special. Wednesdays were Wacky Wednesdays from steers, and I can’t remember what I did on Thursdays and Fridays, but it was spent out. If I was home I would have made a sandwich, or maybe had some leftovers, so this is also a work expense, and resulted in a waist expanse. At around R30 a day it added up to R660 a month. And just in case you’re thinking I’m forgetting the biggest work related expense of all, well I’m not. I had to pay taxes, and lots of them! I had to dig up a long lost payslip to see what the actual figures were, and they were generally around the R8000 a month mark.

So let’s see where that leaves us:
R28000
-R8000 tax
=R20000
-R6600 car expenses
=R13400
-R660 lunch
=R12740

So since you’re smart, you’ve just worked out that I wasn’t actually earning R160 per hour, but only R72 an hour. Well if you worked that out you’re actually wrong. I still had to drive two hours every day to get to work and back, so in actual fact, it was like I was working 220 hours a month, when the traffic wasn’t too bad. That means my actual hourly rate was only R58 an hour. That’s not good at all, I can clearly remember the first time I calculated that figure. I couldn’t quite understand how I was earning 64% less than I thought. Even more frightening was the fact that in one year I actually spent 448 hours working just so I could pay for my car repair bills.

Of course you can guess what happened soon after I realised that. For one, I moved to Joburg so I could walk to work. The second time the fuel pump died was also the last straw on the camels back. The Audi was sold asap and to replace it, I had to break out of the “my next car has to be bigger, better, faster and more expensive than the last car” routine and bought myself superbly dependable Japanese bore-mobile, knowing full well that this car could last me for many, many years without costing two arms and a leg… and a left nut in repair costs. And of course I started to eat properly, I definitely prefer a 6-pack to a barrel.

But enough about me, let’s talk business. If you have some business training you’ll know that you need to consider all the costs of operating a business when you calculate your profit. Failure to do that will get you into big trouble as the Lewis group seems to be finding out lately. Now you need to do the same for yourself. You are a business, and your business is selling parts of your life. Life is a finite thing every hour that passes is an hour you can never get back. Consider yourself the CEO of My Life Pty Ltd.

Now that you know you’re a business, lets work out what your business brings in every month, and every hour in profit. What should we call this new hourly income number? Net income is the number on your payslip, but that’s a completely different number to the one we’ve just calculated. Perhaps we can call it “What I Really Earn”, or WIRE for short. To make life easier, I’ve made you a amazing WIRE calculator (and that’s why this post is late!) to help figure these things out.

So lets put the calculator to work. I’m going to use a friend of mine in this example, Mike Middleclass. Mike is a rather well off person, earning R30k per month. He lives 25km from work, and drives a car which costs R5/km, and has two children in daycare. He also has a housekeeper and a gardener even though he loves working in the garden because he has no time for that thanks to needing to bring in cash. On Friday afternoons he has drinks with some work friends which costs about R100 a week, and about once a month after a particularly hard day he’ll go bowling to take out his frustration on defenseless wooden pins, also for about R100. At the end of the year, Mike and his wife use their 15 annual leave days in the traditional Joburg way, by taking the family to the beach, for which they split the costs.

So here’s the screenshots from Mike’s WIRE calculation:

Mike's work related time and expenses

So who wants to see how much Mike actually earns per hour? All of you? Great enthusiasm 😉 here’s the result:

Mike's actual income and working hours

So even though Mike thinks he earns R30k a month or R170 an hour, he actually earns just R14.8k or just R67 an hour. That means in reality, he actually earns 61% less than he thought. Now if he decides to go out and buy a new iPad mini, he knows that it’s not costing him R5000, it’s costing another 75 hours of extra work. Those are hours that he’ll have to add on to the end of his working career if he one day would like to be financially independent.

How much work Mike does to pay for these things

So hopefully Mike doesn’t have a coke habit, as he’d have to work pretty close to four weeks to sustain it. Also if he was considering a sex change, he should know that he’ll have to work another 45 hours a month to pay for waxes and nails. Smoking, aside from costing you your life, also costs you two days a month.