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The best index fund, IndusInd whistleblower, Musk sells stock and more


In this week’s edition

  • 2 fresh posts and the CPL: our version of fantasy stock-picking goes live
  • Weekly Fundas post – The money you wish you never need.
  • From Capitalmind slack: On market valuations, broker billing, tidying up an MF portfolio and more [Premium]  
  • 5 interesting reads
  • 🆕 TLDR – a new fortnightly section on things that made us go 🤔

The Best Index Fund!👻

What if we said that when it comes to evaluating index funds, expense ratios do not matter? What matters is the “Real Expense Ratio”, and you won’t find that on the fund factsheet, and definitely not in the marketing presentation.

In this post, we get into the details of how to evaluate and pick the best index fund. Also, which is the best NIFTY Index fund and best NIFTY ETF in 2021.

[Premium Read] The Best Nifty Index Fund in 2021

There’s just so much money around!💸 

Three IPOs have opened this week – Paytm, Sapphire Foods, and Latent View Analytics. This comes after five companies successfully concluded their public offerings last week. Among the three IPOs that open this week, the Chennai-based data analytics services company – Latent View Analytics Ltd. – is looking for the least funds.

Data being the new oil and digital transformation accelerated by the pandemic fuelled the boom in the businesses of data analytics companies. But does that mean an investor should subscribe to the IPO?

[Read] Latent View Analytics IPO: Should you invest?

Our very own fantasy stock-picking league!📈 📉

We started Capitalmind Premium League last year – a fantasy stock-picking exercise for Capitalmind Premium subscribers. The idea was to put ourselves in the shoes of the fund manager and take bets on stocks to beat the market in the coming year.

Here is a round-up of the 2021 edition and announcement of the next one!

[Read] Capitalmind Premium League – 2021 Results and 2022 launch

CM Fundas – The money you hope you would never need💡

We plan for all our small and big financial goals – from trips to weekend homes. We invest in mutual funds, try to pick the right stocks, and also apply to all the fancy IPOs. While all this is great but it’s no good without getting the basics in place first. We discuss one such basic – Emergency Fund.

[From Archives] Your Emergency Fund – Make Hay While the Sun Shines, But When It Doesn’t….

[Premium] School of Slack 😎

Putting together the best conversations from our slack community

Links we Like

In this section, we bring you curated articles from across the internet that we found interesting. Today’s links are curated exclusively from our slack community: 

  • This article outlines how to get the most out of your reading. It doesn’t matter if it’s a book, article, or academic paper. Read about Reading Better
  • What makes a stock price move and deviate from the fair prices. This is one of the ways to think about the “mispricing” on which all markets thrive. Read: It’s all in the earnings
  • Podcast: Chris Dixon and Naval Ravikant talk about — The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs. [Listen In]
  • We’re increasingly seeing investors (mostly VCs) being extremely media-savvy while going about their business. Is this a new phenomenon or is it how things have always been? Read: The Rise of Media-First Investors
  • One thing everyone seems to be finding everywhere is – Value. In stocks, crypto-currencies, IPOs, NFTs, and whatever verse Mark Zuckerberg was talking about. This brings us to wonder about – The Gentle Madness of Value

TLDR – A short take on things that made us go 🤔

Whistleblower allegations at Indusind Bank

On Nov 5th, senior employees of Indusind Bank alleged that the bank was evergreening loans. According to them, there were governance & accounting issues on the Bharat Financials (BFIL) books, a 100% microfinance lending subsidiary of Indusind bank.

Ok, what is evergreening?

Evergreening is the shady practice of granting new loans to help borrowers repay old loans. This helps control NPA (Non-Performing Assets) and so under-report the actual stress on the books.

Back to Indusind Bank.

  • On Sep 15th, 2021, the then Non-executive chairman of BFIL, Mr MR Rao, resigned, stating process failures in BFIL. In his letter to the board, he alleged BFIL had given 80,000 loans in May 2021 without customer consent.
  • On Nov 5th, 2021, the bank’s senior employees wrote a complaint to the board & RBI, highlighting the evergreening issue in BFIL.
  • The stock fell -12.4%.
  • On Nov 6th, 2021, the bank issued a clarification to the exchanges calling the allegations grossly inaccurate and baseless.

However (this is interesting), BFIL admitted to disbursing nearly 84,000 loans (the same number mentioned by Mr MR Rao) in May 2021 without customer consent due to a technical glitch.

The best index fund, IndusInd whistleblower, Musk sells stock and more

So, they deny the allegations but not the disbursals.

How bad is it for Indusind Bank?

Nothing big, as of now. Indusind Bank loan book is ~10x the size of BFIL. The MFI loan book stands at 28,000 Cr as of Q2FY22. If we write off 10% of the book, Indusind Bank has to take a hit of an additional 2,800 Cr.

The bank is well-funded with Tier 1 capital at 16.83% (~35,000 Cr), has an investment of 1.36L Cr (excluding advances of 2.2L Cr). IndusInd made a pre-provisioning operating profit (PPOP) of ~11,700 in FY21.

Overall, the bank is in good shape, even considering a potential hit from BFIL.

However, from past instances in RBL, IDFC First Bank, AU Small Finance Bank, to name a few, asset quality issues may not impact the depositors or the bank, but the stock may continue to languish for long after.

How a Twitter poll decided the fate of $5 Billion of Tesla stock

A tax on unrealized gains in the US capital markets, specifically those with $1 billion in assets or $100 million in income for three straight years. If adopted, it will impact ~700 taxpayers & raise about ~200 Billion in revenue over a decade.

The best index fund, IndusInd whistleblower, Musk sells stock and more

If you’re the richest man in the world, you will pay attention.

On Nov 7th, 2021, Elon Musk ran a Twitter poll asking if he has to sell Tesla stock to abide by the upcoming tax on unrealized gains.

3.5 million participated in the poll. 58% said yes. Musk offloaded $5 billion worth of Tesla in his first stake sale in more than five years.

Why did he sell stock?

In his own words, Elon Musk is financially illiquid. He doesn’t own a house & chooses not to take a salary. His fortune of ~$270 Billion is tied up in Tesla & SpaceX.

Musk owns 17% of Tesla plus ~$92 billion worth of stock options. Some of these ESOPs expire in August 2022. If he exercises the options, he has to pay tax, likely around $10 Billion (state and federal taxes combined).

How does Elon Musk pay his bills?

By borrowing money.

If he takes a salary, you have to pay 37% tax. If he sells assets, he pays 20% capital gain tax & potentially loses control of his company. Instead, he takes a loan at single-digit interest rates and pays almost no tax.

Elon Musk had pledged 92 million shares of Tesla worth ~$65 billion as collateral for personal loans. This strategy helped him to reduce the tax bill significantly.

In 2015, he paid $68,000 in federal tax. In 2017, it was $65,000, and in 2018 he paid no federal income tax. Between 2014 and 2018, he had a tax rate of 3.2%. Think about that the next time you’re submitting your 80C investment proofs to get your tax deduction.

After all the hullabaloo, Tesla stock was down -13% from its all-time high.

5 years after Demonetization – Cash is back

Demonetization was supposed to reduce the cash in the economy and make us “cashless”. It has not. Because this is how cash has grown since demonetization:

Cash in Circulation Growth

(We’ve removed the growth numbers for the Nov-2016 to July-2018 periods as the period was an outlier during demonetization.)

The total currency in circulation was dropping to 10% or below from 2010. In 2016, when it hit 20% there was demonetization, and the next time it rose was during the first Covid lockdowns. Basically demonetization did nothing to “root out” cash from the economy, but the growth in cash is more likely to be 10% a year or so.

Cash is an intrinsic part of the economy and it will keep growing, demonetization or not. However, UPI transactions have skyrocketed to over Rs. 27,000 cr. per day on average!  In comparison, cash drawn from ATMs is about Rs. 8,000 cr. per day.

Cards add up to only Rs. 4,600 cr. a day (2,500 cr. for credit cards, and 2,100 cr. for debit cards)

UPI and Credit Cards

Effectively, even though more people use cash than credit or debit cards, UPI has now reached 300% of cash transactions per day!

What demonetization did, perhaps, was to destroy the growth of credit or debit cards, and replaced it with UPI. Cash has only degraded from “king” to “prince”.

Have a great weekend!


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