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00:00Thanks so much for tuning into Profit Insights, a special episode because we're calling this
00:14as the power of 12% and you might wonder why 12% is so important.
00:19Some statistics viewers.
00:20So 12% earned as a compounded annual growth rate number over a period of six years doubles
00:28your money.
00:29You've heard about the rule of 72 effectively.
00:31This is what it leads to.
00:3212% CAGR leads to doubling of money in six years.
00:36Here's some other math.
00:37One lakh rupees invested becomes 1.97 lakh rupees in six years.
00:42One lakh becomes nearly four lakh rupees in 12 years and one lakh rupees becomes nearly
00:46eight lakh rupees in 18 years.
00:49Nearly 7x your wealth in 18 years with a very conservative return ratio of 12% earned
00:59year after year every year.
01:02Impressed enough?
01:03Well, if you are, then let's get in our guest to try and understand how do you do this predictable
01:09return of 12% year after year every year, because it's not certainly happening by the
01:14equity markets there.
01:15The returns may be higher, but the predictability is lower.
01:19Frankly, it was his idea and absolute delight to have Iman Daga, co-founder and CEO of NIO
01:24Asset Management with us in our studios.
01:26Iman, great having you.
01:27Thanks for joining in.
01:28Let's lay out this importance of 12%.
01:32I mean, why is it that 12% becomes so important?
01:34I've given the statistics, but surely you had some thoughts around it.
01:38So Neeraj, if you look at this, why did we choose this number 12%, right?
01:42Now, there has to be some logic to it.
01:45When you look at the Indian economy, I mean, returns can come to investors only if the
01:50underlying assets are generating those returns, correct?
01:53The Indian economy has been growing at a real GDP of 6.5% to 7%.
01:59And you add inflation to that, which is another 4% to 5%.
02:02Typically, when you add 6.5% to 7% and you add 4% to 5%, basically you end at a 12% nominal
02:09GDP, which India has delivered for maybe two decades now.
02:14And that is why investors in India are able to take benefits of these 12% returns, right?
02:18That is why in a very lighthearted way, we say 12% will be made, right?
02:22And how have investors played this?
02:25One of the ways investors have played this out very well is through equity markets, because
02:30that's an asset class people are understanding, more and more people are understanding and
02:33equity markets have delivered.
02:35But fundamentally behind equity markets is this phenomena that our nominal GDP is growing
02:4012%.
02:43And if you look at nifty returns, which is the headline index number, if you slice it
02:48over 10 years, 15 years, 20 years, it's ballpark 12% to 14% compounded returns, which is driven
02:56by the fundamental strength of the economy, right?
03:01But one of the things, you know, when we met and the other point that I was trying to highlight
03:04is investors look at only equity returns as one of the facets of making this 12%.
03:12But there is a beautiful facet which at NIO, we want to tell to investors, which we want
03:16to propagate is that there are so many assets in India, which are generating cash flows,
03:23which can generate 12% return.
03:25So just like equity markets are delivering returns, because there is nominal GDP, you
03:31can have other asset classes, which can deliver 12% returns to investors if the underlying
03:36cash flows are growing at 12%.
03:38And that is a business that we love.
03:40That is also a business that we love.
03:43So there is return on equity, which investors are exposed to, which investors understand.
03:48But there is something as simple as return on capital.
03:51I invested money, is this asset leaving 12% return?
03:56I think very, very basic question to be answered.
04:00And there are so many assets which generate 12% return on capital in India, an asset which
04:05is throwing out return on capital, very predictable, far more stable.
04:10Equity markets obviously come with their volatility.
04:13But this is a concept in India, if companies can earn ROE greater than 12, so many assets
04:18are earning return on capital of greater than 12%.
04:22And that's the power that we want investors to also embrace.
04:26Yeah, most certainly.
04:27Now, you know, it's important viewers to understand why is 12% important.
04:33So aside of the fact that in equities, you probably made 20-25% in a quarter, and therefore
04:38it may not look impressive.
04:39But the number of investment options available to an aam aadmi, the 12% benchmark is crossed
04:48by very few.
04:49A clutch of fixed deposits, savings deposits, even a public provident fund, for example,
04:56don't end up earning 12%.
04:57I think it's important to highlight that 12% is nothing to scoff at.
05:00Very, very true.
05:02And I also think, I think when you started, you know, when 12% gets compounded over a
05:07long period of time, I think in investing what, you know, a lot of investing is also
05:13staying par on course for long periods of time.
05:17And different investors have different mindsets.
05:20What return on capital as a concept does, it gives you far more predictable cash flows.
05:25So it's not that your entire portfolio should be there, but some part of your portfolio
05:29allocation should be there because that's far more stable, right?
05:32So for you staying par on course to earn that 12% is higher degree of chance, right?
05:39I mean, if I'm an equity investor, I entered equity markets in 2008, for example, I can
05:43enter equity markets in 2008, post that six years, no gratification.
05:49Will I continue?
05:51Maybe one out of 100, maybe two out of 100, maybe three out of 100, but that number is
05:56x people will continue, right?
05:58And if you have certain assets, which are far more predictable, because they are deriving
06:01returns from the cash flows, right?
06:04And if the cash flows are predictable, I will stay the path.
06:07And that is an important part in investing, which I think investors should also appreciate,
06:13which is the way humans are wired, right?
06:16Because we are emotional people and the balance in our bank, the profits that we are making
06:23influence our investment decisions.
06:25It all goes very hand in hand.
06:28And hence there is an asset class which can give you 12% compounded, but maybe with less
06:33heartaches with more predictability.
06:35And that is a business of return on cash flows.
06:38Exactly.
06:39Okay.
06:40And therefore, let's try and talk about some of these.
06:42So viewers, the idea of doing this small preamble before getting to the crux was just to make
06:47you understand that 12% is an important number.
06:50Why is it so important?
06:51And the fact that there are multiple ways to earn a predictable 10, 11, 12, 13, whatever,
06:5812% that we have chosen, 12% rate of return over a period of time to be able to get those
07:02predictable returns as well.
07:04The portfolio or your portfolio should have a good mix of high risk, high yielding return
07:10assets and stable assets, which can give you a better than a double digit or lower double
07:17digit return or better than just starting double digit returns.
07:20And that's the point out here.
07:21So in the presentation that you sent me to study this, you spoke about three ways to
07:29do this.
07:30Briefly take us through them.
07:33Sure.
07:34See fundamentally, the asset has to generate returns.
07:38In equity markets, the GDP is growing at 12%, which is why equities are generating those
07:44returns.
07:46So now if you look at the three asset classes that we were speaking about Neeraj, very briefly,
07:52there are companies which are generating 12% return on capital, and a lot of companies
07:57are there in India, right?
07:59So if I lend to these companies very conceptually, just imagine you are a corporate generating
08:0612% return on your capital, and just to give you a statistic to make home the point, there
08:16are 65% companies in India, earning return on capital greater than 12%.
08:24Got it.
08:25Basically, if I invest Rs 100 in a business, my Rs 12 is being generated in that business.
08:30Right?
08:31Now this is one bucket.
08:32Now technically, I can find many of these companies, if there are 65% of the companies
08:35in India doing this, I can give money to these companies, they can borrow from me.
08:41Why will they borrow from me is a separate discussion, which we'll have one day.
08:44But if they borrow from me, they have the ability to generate those returns.
08:48And hence, it becomes a powerful way for us as an investor to earn those returns.
08:54So the company requires money, it is already earning 12% greater ROCs, and I'm giving money
09:00to earn those returns.
09:01So there is one bucket which we call corporates, a lot of corporates are making return on capital
09:08greater than 12%.
09:11The second bucket, very interesting, all of you have experienced this, right?
09:16Which is hard assets.
09:18We call this hard assets.
09:20You've seen a building, you've taken a building on rent, how much rent would typically people
09:24pay?
09:25Maybe 8 to 9% rental yield, right?
09:28And there is a rental escalation of approximately 3 to 4%.
09:33So in total, how much can a fully operating commercial building generate?
09:39And we've done this, right?
09:40A lot of us take, when we do businesses, we pay rent.
09:44When you've done, when you, when you are taking this place, you are paying rent.
09:47So overall, you are, that asset is generating 12% cash flows, 8 to 9% is the contracted
09:55yield, 3 to 4% is the price escalation.
09:58Now if you, let me give you one more example, you think of warehouses, large companies like
10:03large e-commerce companies, they are taking large warehouses on rent, how much rental
10:08yields would they pay?
10:097 to 9% plus there is escalations.
10:13Then if you look at something as simple, and Neeraj, this is something that we were discussing,
10:16an operating road asset, right?
10:19Now there is an annuity road, which the government of India is encouraging to be get built.
10:25It's a fully operating asset.
10:26It's a hard asset.
10:27The government is saying build this road to a developer.
10:30It's called an annuity road project.
10:32The government of India today on that road project is paying bank rate plus 3%.
10:39So the government is paying 9.75% as cash flows.
10:43This is return on capital.
10:45So the second bucket is hard assets like buildings, hard assets like warehouses, hard assets like
10:52operating roads, and the list can continue, right?
10:56If I have access as an investor to a building, I can make those 12% returns because the underlying
11:03is generating those 12% returns.
11:06So the first bucket is companies generating ROCs greater than 12%.
11:12The second bucket is hard assets generating cash flows greater than 12%.
11:18And the third bucket, which is so interesting, just think of it.
11:23You are an individual, right?
11:25You take a loan against property, and obviously different banks will have different rates.
11:30But just to give you an example, you take a loan against property, you would be paying
11:34anywhere close to 11 to 12% on it, right?
11:38Now, finally, that loan against property is also secured by the cash flows that you are
11:43earning.
11:44What are the cash flows that you are earning?
11:46It's effectively your salary stream.
11:48Isn't that consistent?
11:49Right?
11:50Because you're living with that.
11:52Now I come to you and tell you, Neeraj, give me a slice of this.
11:56It's a great investment, right?
11:58I know Neeraj is a counterparty, and he's paying this interest rate on a loan against
12:02property.
12:03I want to earn that.
12:05It's a great.
12:06So there is this entire consumption boom in India, which is happening, where a lot of
12:10retail investors, individuals are paying somewhere close to 12 to 14 to 16%, whether it's a loan
12:16against property, right?
12:18Whether it is a SME loan.
12:20So many people doing SME businesses, they take SME loans at 12, 14, 16%.
12:26Credit cards, how much do we get charged?
12:28Closer to 30% on credit cards, right?
12:30Now, these are all cash flow streams, and there are credit card companies which are
12:34listed in the market.
12:35So if their mandate is to build a business on it as an investor, that's for an equity
12:40investor.
12:41But I just want those cash flows given to me.
12:44So now you have three buckets.
12:45You have the India consumption bucket, which is based on cash flows of individuals.
12:50It's a salary.
12:51It's like my salary, your salary, which is the underlying base of it, right?
12:55Because we are paying for that.
12:57Then you have hard assets.
12:58And the third is corporates, because they're delivering those return on capitals, right?
13:02True.
13:03So, well, multiple ways to do this.
13:04Now, viewers, what we do is we slip into a very quick commercial break.
13:08On the other side of the break, we try and ask Hemant about how do you or I as an investor
13:14participate in any of these three if we are visibly or fairly impressed with this steady
13:20predictable 12% rate of return?
13:22Remember the statistics at the start of the show, viewers, that your one lakh or one crore,
13:27as the case may be, doubles in about six years if you earn 12% CAGR.
13:33So at this predictability, the money doubles in six years.
13:36Stay tuned.
13:44Thanks for tuning back to Profit Insights.
13:50Now, we're talking about the power of 12% in this episode, and Hemant has spoken extensively
13:56about the return on capital that comes in from a business.
14:00Hemant, quick 30 seconds, rehash, refresher course.
14:04Why return on capital so important?
14:07I think return on capital.
14:10So basically, asset classes derive two types of returns.
14:13Either you can take equity returns, which is left to the last investor, or the asset
14:18is making those returns, right?
14:20And what we want to propagate, what we want to tell investors, there are so many assets
14:24in India that are generating return on capital greater than 12%.
14:28And as an investor, I want returns on those cash flows.
14:31I want return on capital.
14:33I don't want return on equity as an asset class.
14:36I want those returns because they are predictable, more certain, and as an investor, I can be
14:46in the course for a long period of time.
14:48Perfect.
14:49Okay.
14:50So the importance of that.
14:51Now, how do people bet on something like these?
14:54There are three options that you registered.
14:55How do people bet in this?
14:56Or how does a retail investor sitting out there listening to this bet or invest into
15:00some of these options?
15:02Very good.
15:03So we discussed three buckets, Neeraj.
15:06I think the first bucket is companies generating return on capital greater than 12%.
15:10Right.
15:11So the easiest way for investors to play this is through credit funds.
15:16You know?
15:17Now a credit fund can be with a mutual fund or a credit fund can be through a AIF format.
15:23What are credit funds doing?
15:24They in turn are lending to companies which are generating greater than 12% ROCE.
15:31So when they are lending to companies which are generating greater than 12% ROCE, so it's
15:36value additive for the company.
15:38So if it is value additive for the company, it will also be good for investors.
15:42So retail investors, if they understand, they can give money to credit funds to tap into
15:48this huge pool called corporates because corporates are generating those returns.
15:52Got it.
15:53Okay.
15:54Now the second bucket.
15:55So let's assume you running a credit fund so people can invest into your credit fund
15:58to do with this.
15:59Is there a minimum on this?
16:00So see, if you go to a mutual fund, the minimum is what it applies to mutual funds.
16:05In our AIF or a SEBI, SEBI has prescribed one crore as the minimum investors should
16:09put.
16:10Okay.
16:11But the good thing is in a lot of funds, the entire one crore is not needed upfront.
16:13It's needed over a period of maybe a year, a year and a half.
16:16But the good thing is it's stable cash flows that investors can expect.
16:20Perfect.
16:21Now the second way, we talked about hard assets as an asset class.
16:25I mean, finally, what is earning this 12%?
16:28Corporates are earning.
16:30Corporate assets are earning.
16:31I explained buildings earn, warehouses earn, you know, an operating annuity asset earns,
16:35malls earn.
16:36Yeah.
16:37Malls earn.
16:38Absolutely.
16:39The simplest way for investors to play this is there are already so many listed.
16:44You go to a stock exchange, you call your broker.
16:46There is already a listed infrastructure vehicle, which is called Invit, which is listed.
16:53There is a listed real estate investment trust, which owns commercial buildings.
16:58That is also listed.
16:59And the good thing is, see, finally, these vehicles are doing what?
17:03You know, like a company runs a business, a listed Invit owns transmission lines.
17:09The transmission line is generating the 12%.
17:12It owns roads.
17:13It's generating the 12%.
17:14Where will that 12% go?
17:16To the investor who buys the listed Invit.
17:19If I invest in a listed REIT, it's owning commercial buildings.
17:22It's generating the 12%.
17:23Where will that 12% go?
17:25To investors who participate in the REIT.
17:28And the good thing is, a lot of investors might be knowing, might not be knowing.
17:33But these Invits, these listed Invits have generated these returns in the last four to
17:39five years.
17:40So, the proof of the pudding is in the eating.
17:42Got it.
17:43Because the asset is generating the returns, these assets have delivered 12 to 15% returns.
17:48The good thing is, out of 12, 9-10 is predictable and 2-3-4% is the capital appreciation part
17:57of it.
17:58So, good returns with low volatility.
17:59Got it.
18:00So, 10% is nearly fixed and you get whatever 2-3-4% depending on how the hard asset itself
18:05appreciates over the lifetime.
18:06Absolutely.
18:07Because in India, you have inflation.
18:08So, hard assets are inflated.
18:10But how does an equity investor get access to that?
18:12Oh, that happens via the stock price appreciation.
18:16Because the stock price will factor that inflation.
18:21And the third way was, you know, the entire consumption pool.
18:25As individuals, you and me are taking loans.
18:29We are taking those loans at interest rates of what?
18:32Somebody takes it at 10%, somebody takes it as an SME at maybe 12 to 14%.
18:36If I am taking a credit card, maybe I am taking it at 30%.
18:39So, basically there are different pools at which you and me are borrowing.
18:42We are borrowing against what?
18:44Our stable cash flows, which is our salaries, right?
18:47And that's one of the most stable form of cash flows.
18:49Now, as a retail investor, how can I participate in this?
18:52We can buy into securitized debt pool instruments.
18:55And I'll just repeat it.
18:56Securitized debt pool instruments.
19:00What is this doing?
19:01This is saying, okay, it's very simple.
19:03There are 1000 individuals.
19:05So, it's very granular.
19:07Now, these 1000 individuals all have gone and taken a loan against property.
19:13Now, that loan against property can technically be packaged as a loan.
19:18So, the cash flows, so you and I are going to pay interest on that.
19:22That interest goes to our end investor.
19:25It can be done through securitized debt pools of money.
19:29And that's another way to play these retail pools of consumption.
19:33It can happen through a fund?
19:35It can happen through a fund.
19:36You can go and just buy a securitized debt instrument, even online nowadays.
19:40There are online platforms where you can participate in securitized debt pools.
19:44So, it's like saying, as an investor, I have access to a securitized debt pool, which is
19:50inherently earning 12% returns based on the salaries of 1000 people.
19:57And where are these platforms?
19:58Sorry, I'm not saying that you are recommending these platforms, but as an example so that
20:01people can go in and try and research.
20:03There are several online platforms in India now.
20:05For example, GRIP, WintWealth.
20:09There are funds like us who will offer these instruments to customers.
20:13And in online platforms, you can participate for a very small amount.
20:16In funds like us, maybe you can put maybe a larger sum of money once you get very comfortable
20:20with that.
20:21Got it.
20:22Okay, fine.
20:23And you know, so great.
20:24So, we've kind of crystallized these things, the three buckets, according to you, which
20:28are available, and how to go about investing in these to earn that 12% number that we're
20:33talking about.
20:34Why?
20:35I mean, there has to be a way in which an investor approaches this, because traditionally,
20:42people have been investing into banks, getting that fixed return.
20:45This is a new way of thinking that people need to imbibe, right?
20:47You want to elaborate a bit on that before we wrap up the show?
20:50See, basically, what I've been talking until now, all of this was and is being done by
20:59banks.
21:00Now, until now, Neeraj, what were we doing?
21:04You and I were giving, so assume 12% is this magical total return that is getting generated.
21:09Why is it getting generated?
21:10I'm repeating again, because the asset is throwing those returns.
21:13Now, when you go and give a fixed deposit to a bank, until now, what you were initially
21:18doing, you make 6% on your fixed deposit.
21:23The bank, after all the operating expenses, makes 4%, and 2% goes away in expenses.
21:29So basically, the 12 has got split as 6% for the investor, which is like a fixed deposit,
21:354% for the bank for doing all this, and 2% has gone into operating expenses.
21:41Now, the other way to do it is, as an investor, you say, no, I don't want to do this fixed
21:47deposit.
21:48Basically, I give this money to an asset management firm, asset management firm or an online platform.
21:56Now, what will that platform do?
21:58The return remains the same 12%, right?
22:00Now, the platform or the asset management firm in this case will give 9% to 10% to the
22:06investor, and will keep 1% or 2% as management fees for doing all this hard work, because
22:14they are also running a franchise.
22:18So basically, 1% to 2% becomes the management fees, and 9% to 10% becomes returns for investors.
22:26So what the bank used to keep, a part of it or a large part of it, now going back to
22:29the investor.
22:30Yes.
22:31So now just look at it for the investor.
22:32Earlier, it was 6% for the investor.
22:37Now it becomes 9% to 10% for the investor.
22:40So technically, the investor is making slightly better returns.
22:43Now, while he is making those better returns, fundamentally, the nature of the asset remains
22:48the same.
22:49The bank was giving a loan to a commercial builder, the bank was giving a loan to an
22:52SME.
22:53So now, what the investor is saying, okay, I know this asset manager, I know this online
22:58platform.
22:59They are also regulated by SEBI.
23:00We can trust them, we understand the business they are doing, let us give money directly
23:04to them.
23:05If we give money directly to them, then instead of making 6%, we have a chance to making 9%
23:10to 10%.
23:11But obviously, as all investments, you need to understand the risk, appreciate the risk.
23:16But the moot point is, the risk is there because the return is also there.
23:21The assets are earning those returns fundamentally, 12% cash flows are getting generated.
23:29And hence, it's a very logical way of playing this.
23:33Got it.
23:34Well, thanks.
23:35Usually, people don't pay too much of attention to a 12% number.
23:38But it is very important to understand the importance of this.
23:41So great having you in our studios talking about this.
23:45Much appreciate your time today.
23:46My pleasure, Neeraj.
23:47Thanks a lot.
23:48The pleasure was entirely ours.
23:49And thanks for tuning in to yet another episode of Profit Insights.