75709 SIP myths you must know!

No discussion about February is complete without the Big B, the Budget. This year, much as I enjoyed listening to the budget, I also enjoyed hearing the Economic Survey presented a day before the budget, presented much unlike an economics speech, with stories, anecdotes, and even examples from 3 Idiots.

The Budget has already been discussed threadbare, and while the discussions typically centre on policies, the micro of taxation, and deficits, this year, what I took away from the Budget and Economic Survey were powerful principles of how we should think about money. Just as the nation has a budget, each of us has our own personal budget, our own income and expenditure, to which these principles apply just as beautifully.

Principle 1: Growth allows debt, but not the reverse

“The state collects tax for the greater welfare of its citizens in the same way as the sun evaporates water, only to return it manifold in the form of rain.” — Kalidasa’s Raghuvansham

Given the COVID-19 crisis, there is a need for the government to spend (funded by borrowing), but in such a time, the conundrum is: Does austerity foster growth, or will growth make borrowing sustainable? In the Indian context, it is the latter, because the interest rate paid by the government has historically been less than India’s growth rate (not the case for all nations), and a growth-oriented budget is justified in this context. Similarly, in personal finance, when we debate debt versus income, it is important to realize that if there is income, debt will become sustainable, but debt without income leads to a debt trap.

Principle 2: The importance of being counter-cyclical

As the government makes a choice for fiscal expansion, it is accompanied by concern about the implication for growth, sovereign ratings, and external vulnerabilities. The Economic Survey makes the point that fiscal policy and governments must be counter-cyclical, essentially spend when the chips are down to smoothen out economic cycles. In fact, the fiscal multiplier, which is the return derived by the economy from an additional rupee of spending, is unequivocally greater during a crisis than during a boom. This is not different from investing in a crisis, which has a higher multiplier on wealth creation. The investor who entered in March 2020 earned much more than the ones who invested in January 2020.

Principle 3: Emergency medicine should not become a staple diet

The Spanish philosopher George Santayana reminds us that, “Those who do not learn from history are condemned to repeat it.” Emergency times call for unique measures, including forbearance on bank loans in the COVID crisis, and a relaxation on norms for restructuring assets for banks during the Global Financial Crisis (these restructured assets no long had to be classified as NPAs). While this measure helped borrowers tide through temporary hardship, it extended its welcome by many years, and should have been discontinued when the economy recovered, leading to detrimental consequences. Similarly, in personal finance, investments can be redeemed in a crisis to help tide through, but redeeming long term investments in normal time for impulsive needs makes for a bad habit.

Principle 4: Productive vs. Non-Productive Expenditure

A bold feature of this budget was to focus on increasing capital expenditure that goes into building infrastructure rather than traditional revenue expenditure that typically affects current consumption like subsidies. Money will be spent on building long term assets, that has a multiplier effect because it creates jobs, brings new consumers into the economy and helps growth. Revenue expenditure is quick and convenient and helps in the short term, but capital expenditure is painful in the short term, but builds value in the long term. In personal finance, we all have to define and focus on capital expenditure – spending in building long term investment assets that improves our future income, rather than just current consumption. Ask yourself if the money you save should go into buying a car that adds to your monthly expenses and depreciates, or an education that adds to your job prospects.

Principle 5: My Problems. My Solutions.

The final and overarching takeaway from the budget, was that India as an economy is unique in its per capita income, population density, and economic conditions, and cannot be compared to economics with ten times the per capita GDP. Neither in its response to COVID or how it chose to impose a lockdown, or in how it chooses to revive its economy, India’s problems are unique and need its own solutions, that are not a copy of the West. In investing too, we say that personal finance is first personal, and the right investing answer is the one that works for your goals and your circumstances. Resist the urge to copy and do what is right for you.

Just as we hope India recovers and charts a new course aided by a landmark Budget, we at Edelweiss MF also wish you the best as you plan your own personal budgets. Thank you for trusting us with your hard earning money, and happy and peaceful investing.

(The writer is MD & CEO of Edelweiss Asset Management Limited. Views are personal)