India has changed since my youth. There were three classes then: the rich, the poor and the middle class. The rich were generally maharajahs, zemindars and industrialists. They had palaces in Bundernagore and bungalows in Bulleypore. They could be identified by their cars. The poor, who cooked for them, swept their driveways and cleaned their toilets, could be identified by their dirty, skimpy clothes and bare feet. The middle class either lived on salary or manned shops. The salary-earners wore trousers, polished their one pair of shoes every day and took a train or a bus to work every morning. The shopkeepers wore topis and dhotis, sold kirana and counted cash at the end of the day.
Since then, the three classes have come closer. The rich have shrunk and moved down into the middle class. They no longer wear phetas and pugrees, mojdis and churidars; they have adopted the middle-class uniform of shirts and trousers. They no longer live in palaces; they have joined the middle class in apartments. The only distinction left is between those who advertise their fair daughters in matrimonial columns and those who marry their children off abroad, between those who take their holidays in Ooty and those who go abroad.
The merger of the middle class and the poor has gone less far. Much fewer poor do manual labour now, since much of it, especially in agriculture, has been mechanized. Many of them, especially in cities, have adopted the middle class uniform of shirts and trousers. All have footwear, and their children have taken to sports shoes. Both the middle class and the poor aspire to own property, though the choices of the poor are limited to slums. And both struggle through their lives to build up a nest egg for old age.
I was not rich; but I have shared the middle-class angst about having enough for the day when I would be out of work. There was a time in the 1980s when I worked abroad; the objective seemed easily achievable then. Then there was a time when I was inveigled into the finance ministry on a salary of Rs 12,000 flat, no allowances; if I had then had the time, I would have been seriously worried about my future. Luckily, my duty to the nation did not last long. In 1993, I was offered an editorship in Business Standard which made me India’s highest-paid editor. My perch on the pinnacle did not last long, for friends soon found out what I was earning and got similar breaks from their employers. But I could live comfortably on my writings.
That bred complacency. Now it is time for me to count my pennies and worry about loaves and fishes. I know there are many younger men and women who do so too. Some of them have consulted me, and I know what terrible mistakes they make; I still remember an assistant in the finance ministry who, impressed by my free-market rhetoric, had invested the few thousand he had in the stock market and lost most of the money. So I thought I should share my thoughts with them.
Once one gets past the need to feed oneself and one’s family, the first priority should be insurance. By that I do not mean an insurance policy, but being ready for a catastrophe. Loss of job is the biggest one, for ours is a capitalist economy, and one can no longer be sure when one might lose one’s job or stop earning an income. Everyone would have read about Kingfisher Airlines suddenly ceasing to pay its employees while its owner partied on a luxury boat in the Mediterranean. He is not the only one; yours may be next. Hence one should always have enough cash to survive without a job. How much would depend on how long it would take to find something else: it could be a month or six months. The contingency reserve should also cover emergencies like illness and hospitalization. This money should be kept in easily realizable assets, such as bank deposits. One should think of investing only after one’s savings exceed these minimum cash requirements.
These deposits will yield a certain income. What one needs for safety is sufficient minimum income to survive until one gets another job. So an additional sum should be invested in financial assets that yield higher income at greater risk, such as company deposits. This asset class is not well developed in India; the options are few, and information about them is not detailed or reliable enough. So it is best to invest in these assets through mutual funds — and to spread one’s investment between two or three income funds.
It is only after one has a surplus beyond the above investments that one should invest in equity. All advisers promote equity investment, but its risks are insufficiently understood. It is obvious that the prices of shares as well as dividends on them can vary. What is important to remember is that most Indian companies are controlled by promoters and run in their interest. They obstruct raids of hostile investors in two ways: they ensure that a controlling proportion of shares is in their and their friends’ hands, and they bid up the share prices to make the purchase of a controlling stake expensive. These tactics make Indian shares expensive (that is, their dividend yields are ridiculously low) and volatile (that is, their prices fluctuate unduly).
In these circumstances, the simplest strategy is to buy into two or three equity funds of varying degrees of risk. But it is also possible, if one is internet-savvy enough or has a good stockbroker, to invest in company shares. To do so, one must study individual companies, read their accounts, and look for companies whose promoters are financially clean, outstanding entrepreneurs and fair to shareholders (that is, raise dividends as their profits rise). There are not many, but there are enough for an individual investor. One can start by looking at companies whose shares are held by equity funds, whose holdings one can find out by buying into the funds.
Then comes property. It is Indians’ favourite asset, but to my mind, the least attractive for three reasons. It is difficult to buy and sell, it may require black money, and renting it out adds to the risk. The latter risk can be eliminated if one lives in one’s own property. But that greatly reduces one’s geographical mobility. So those who cannot resist property investment should first consider property mutual funds. If they do buy property, they should go for mass-produced one- or two-bedroomed flats in popular localities.
And finally, an option which has just opened up, namely mutual funds that invest abroad. They yield no income, but they should be considered once one is comfortably off because one can be sure our government will generate inflation and follow other policies that lead to intermittent depreciation of the rupee; every depreciation increases the value of assets abroad. However, anyone who is rich enough to invest abroad can afford an investment advisor, or is too expert to need my advice.