Festivals Around the Corner: Should You Borrow & Spend? Or Invest & Spend?

Aug 22, 2022
Author: Ajit Dayal

There was a time when you needed money, your family and friends disappeared. But you no longer need to worry about being 'distanced' from 'distant relatives' or ignored by family for that point in time when you need money. The financial services industry is solidly by your side with a largesse of cash - whether you need it or not.

The tide has turned in your favour. You are now a member of the Great Indian Middle Class and are classified as 'the next engine of economic growth'. This should explain why you are flooded with messages and emails proclaiming that you are 'pre-approved' for a loan. The messages will tempt you to take the loan by stating all you need to do is text *GiveMeMoneyNow* and a hefty sum of money will be deposited to your account. It may be a personal loan, a loan against shares, or a EnjoyNowSufferLater new age loan popularly known as BuyNowPayLater. While there is an interest rate and a cost of servicing and other such dumb details to worry about, that dims in comparison to the joy you will experience from your new Smart Phone, Smart TV, Smart Refrigerator...

Is it Dumb to borrow to buy Smart?

A loan can be seen in 2 ways:

  1. A loan is a bridge to help you leap from what you can afford today with the money you have today to allowing you to enjoy today what you could have enjoyed tomorrow with your own money. You advance the date of your consumption and satisfaction. In practical terms let's say you do not have enough money to buy the house you want today with the money you have today. However, you are sure that you will have the money tomorrow to enjoy that house - but you cannot wait till tomorrow. So, you borrow to bridge the time and money gap between the money you have today and the future money you are 'sure' you will have. Your confidence in that 'sure' is crucial and may be justified by the expectation of a larger salary over time, a bonus for your work, a sale of another asset such as a land in the village you will probably not return to live on. You can also borrow money against shares or units of mutual funds. If the 'sure' factor of that future source of income is high, then this is probably a good loan to take. But if that 'sure' factor is based on an investment in bitcoin, the share market, or your ability to buy the next winning lottery ticket, then taking a loan to bridge the time and money gap is a bad idea.


  2. A loan is a mechanism to continue the addiction to consume without having any idea of where I will get the money from tomorrow to repay that loan. There are many individuals who are easily influenced by what they see, read, and hear and have this urge to spend all the time - irrespective of their current or future level of income. They watch an influencer flaunting new clothing line and they rush to buy it. They see an ad for a new car, they must own it. They see an ad for a vacation home in Alibag, they will find a home loan to finance it. This will always lead to disastrous consequences - unless Lady Luck smiles on you and showers you with money from a lottery.

Taking a loan is not, by itself, 'bad', but it is important to understand why one is taking the loan and assess the confidence in your ability to repay the loan from a predictable, future source of income based on criteria such as your education, profession, job prospects - or from the sale proceeds of a future asset such as the sale of land in your village. The borrower should make a distinction between using the proceeds of a loan for an investment - or for consumption. Taking a loan to buy a laptop, for example, may be an investment for some (a good reason may be "my children and I will study and learn") or for consumption (a bad reason would be "it looks so good, and I will be able to shop faster with the powerful microprocessor").

As an aside, it is not only individuals but many governments who are also obsessed with this urge to look good today through excessive consumption and spending (living beyond their current income) and have future generations pay the bills. Just like individuals, governments need to understand why they are borrowing and how the debt they take on will be repaid and whether the port or railway or airport being built will generate future cash flows and profits to pay off that debt.

Investments can free you from loans.

While we may look down on the 'dark ages' that our parents or grandparents lived in between 1947 and 1991 - an era of shortages and suppressed needs - there are certain principles they followed which should not be discarded. Our parents knew how to save. Admittedly, they had fewer choices of where they could invest their savings pool which was limited to a Fixed Deposit, Postal Savings Account, gold, and land - or they used their savings to pay for our education. But there is no denying the fact that they knew how to save.

There is a simple, mathematical formula of compounding which we see all around us in nature. When you plant a seed, it grows into a sapling with a few leaves on a few branches and no fruits. Then, nurtured further, it grows into a larger tree with many secondary branches and tertiary branches each of which will have their own leaves and bear their own fruit. Compounding, as legendary investors like Warren Buffet have noted, is the most powerful concept in investing.

Here is what a one-time investment of Rs 1 lakh in the BSE-30 Index made on August 1st of different years would have increased to over 1, 5, 10, 20, 30 years. Of course, if you added a little bit more every year it would have further added to your overall wealth.

Table 1: The practical aspects of compounding would have brought you more financial independence

How many years ago was the investment made? Rs 1 lakh invested on Aug 1 Average annualised return per year over that time?
1 year Rs 1,10,740 10.77%
5 years Rs 1,87,250 13.42%
10 years Rs 3,81,000 14.33%
20 years Rs 26,10,330 17.68%
30 years Rs 29,71,590 11.96%
Source: Bloomberg; assumes your investment date was August 1, 1992

As Table 1 indicates, Rs 1 lakh invested on August 1st, 1992 (30 years ago) would be worth Rs 29,72,590 on July 31, 2022. On average you would have made an annual return of 11.96% each year, compounded, for that 30-year period. That 11.96% is not the highest rate of return from the select time periods given in Table 1.... but money-making money over a 30-year period gives you a nice, leafy, and shady tree - with many fruits.

But stock markets are fickle and dance around too much: markets can surge - or they can collapse.

That is why, in addition to the investment in stock markets, it is recommended to follow a 12-20-80 (baaraa, beess, aur assi) approach. This will smoothen the return and ensure you don't get a heart attack reading about all the ups and downs of stock markets.

A sensible and thoughtful investor should NOT be an investor in one style of investing, in one approach, in one asset class, and you must allocate your savings across a few asset classes to build long term wealth. QuantumAMC has built an easy-to-use calculator which has a base suggestion of 12-20-80; namely, 12 months of expenses kept aside in safe, liquid, and lower return Quantum Liquid Fund; keeping this money aside you have a residual pool of money; from this 20% of the balance could be invested in the Quantum Gold Savings Fund and then the 80% in a bouquet of equity funds. For those investors who prefer the index-hugging, low-cost solution, the QuantumAMC's Passive option is a click away. You have the freedom to choose your path forward.

Table 2: Passively managed and factor-based equity funds cost 60% less than Actively managed equity funds

Asset class allocation illustrations as per QMF 12 20 80 % weight in an Actively Managed portfolio Expense Ratio % weight in a Passively Managed Portfolio Expense Ratio
Liquid Fund, safe money 12 months 0.16% 12 months 0.16%
Gold, after Liquid Fund 20% 0.06% 20% 0.06%
Equity, after Liquid Fund 80% 0.72% 80% 0.27%
Of which Equity Fund of Fund 75% 0.51% 0% -
Of which Value Fund 15% 1.29% 0% -
Of which India ESG Fund 15% 0.94% 15% 0.94%
Of which Nifty Fund of Funds 0% - 65% 0.20%
Source: www.QuantumAMC.com

Despite my bias for value investing - a style that was taught to me by the late Tom Hansberger, the co-founder of Templeton, Galbraith, and Hansberger, I have diversified my own investments in the Quantum Mutual Fund complex. This approximates my holding and planned investments as of July 2022.

Table 3: Baaraa, beess, assi (12 20 80) - and my asli allocation as of July 2022

Asset class, QMF Base Suggestion Ajit Comment
Liquid Fund, safe money 12 months 21 months Partial Switch to Q Nifty ETF FoF
Gold, after Liquid Fund 20% 25% --
Equity, after Liquid Fund 75% I have the Multi Asset Fund that has some equity exposure
Of which Equity Fund of Fund 75% 25%
Of which Value Fund 15% 44% I have a 'Value bias'
Of which India ESG Fund 15% 30% I have a 'Values' bias
Of which Q Nifty ETF FoF Pending allotment
Other: Multi Asset Fund 0% 5% Alternative to an FD

So, yes if you feel you need that bridge to fulfil an immediate need go ahead and consider a loan. But do try and build your path to long term financial freedom by using the easy-to-use calculator 12-20-80 (baaraa, bees, aur assi).

A few clicks on www.QuantumAMC.com and, while the world is asleep, this simple tool will help you rise to your financial freedom!

In summary, stay Thoughtful and Deliberate and try to avoid loans for unnecessary consumption. Make balanced investment decisions for your family and you. Embark on your journey of protecting your capital and enhancing your wealth with the powerful tool of 12 20 80 (baaraa, bees, aur assi). And tell me what you think about it...

Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFN. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.

Sign up for 'The Honest Truth' now, and get it delivered straight to your inbox.

Add Comments