Tag Archives: Thursday Trivia

Thursday Trivia ~ XIRR v/s CAGR

CAGR and XIRR are the most commonly used investment terminologies in the financial services industry while describing the investment returns to an investor. At times, an investor tends to get confused whether the two are same or carry some stark difference.

Let’s start by looking at the definitions.

Compounded Annual Growth Rate (CAGR) 

(source: Investopedia.com)

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its balance in the beginning to its balance at the end of the tenure, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

CAGR is nothing but the geometric mean of returns for all the years you stayed invested. So for to find out a CAGR for an investment over 10 years, one needs to find out annual returns of 10 years. Each annual return is then added by 1 and then multiplied to find out the Compounded Annual Growth Rate.

Extended Internal Rate of Return (XIRR)

XIRR or extended internal rate of return is a measure of return which is used when multiple investments have been made at different points of time in a financial instrument like mutual funds. It is a single rate of return when applied to all transactions (investments and redemptions) would give the current rate of return.

Surprisingly, the definition of XIRR is not given on Investopedia.

CAGR and XIRR will be the same in the case of a lump sum investment.

Scenario 1: Rs. 1 lakh invested at the beginning grows at 5% in the first 5 years and 10% in the next 5 years.

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Scenario 2: Rs. 1 lakh invested at the beginning grows at 10% in the first 5 years and 5% in the next 5 years.

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Observation:

A reader would notice that in these 2 scenarios, Mr. X’s investment of Rs. 1 lakh will generate the same amount of corpus after 10 years. Compounding at different rates for different time periods don’t have any impact since there are no cash flows.

CAGR and XIRR are same in both the cases.

Only difference is that in Scenario 2, the investment will compound at the faster rate in the first 5 years and in Scenario 1, investments will compound at a faster rate in the remaining 5 years.

CAGR and XIRR will be different when there are multiple cash flows due to which annual returns for each cash flow is variable.

A brief background

Extending on the context of above two scenarios, suppose Mr. X, an investor decides to invest Rs. 10,000 every year for a period of 10 years. In the first scenario, the investments grow at 5% in the first 5 years, then 10% in the next 5 years. In the second scenario, the investments grow at 10% in the first 5 years and then at 5% in the remaining 5 years. Here, we are trying to figure out whether the CAGR and XIRR will be similar or different in both the scenarios. 

As part of the exercise, we recommend you to do a quick calculation in your mind as well.

Scenario 1: Investments grow at 5% in the first 5 years and then at 10% in the next 5 years.

Scenario 2: Investments grow at 10% in the first 5 years and then at 5% in the next 5 years

Observation:

In the first scenario, Mr. X makes a decent Rs. 1,60,596 at the end of 10 years with an investment of Rs. 1 lakh. Whereas, in the second scenario, Mr. X makes Rs. 1,43,729 at the end of 10 years. A reader would observe here that the magic of compounding can lead to a better experience when the investments are compounded at higher rates towards the end of the tenure. 

Whereas the interesting part here is that CAGR in both scenarios remain the same, in fact a reader would notice that CAGR has remained the same in all 4 scenarios, the reason for this is that CAGR is a geometric mean of returns and has nothing to do with cash flows during the period. Hence, a reader might feel that Mr. X will end with the same corpus because the CAGR is the same. That is clearly not the case.

Yet, there is a difference in XIRR. Sequence of returns matters, in case of recurring investments (or multiple investments).

How does an investor with a layman approach to finance looks at returns?

‘Returns’ is the most important part of conversation for any investor. The objective is simple; money should make more money. Let’s say for example, a person born in 1960s or 70s has a very different way to think about investment return. The conversation with such a person is pretty straight forward, he or she bought a house in 1990s worth Rs. 10 lakhs which today can be sold at Rs. 1 crore. In their conversation, Rs. 90 lakh is their investment return. No second thoughts. But if you ask a person who understands finance, he would take out his calculator, run some numbers and say it’s just 8% Compounded Annual Growth Rate (CAGR) in a period of 30 years.

Since, a lot of investors tend to use CAGR for a house since they look at point to point investment returns as there is no cash flow in between.

In case of investments in mutual funds for instance, an investor tends to have multiple cash flows in the form of Systematic Investment Plans (SIPs) or partial redemptions for different periods of time. At such a time, an investor can calculate CAGR for each SIP which will be for a different duration at a different rate than other SIPs or XIRR can be simply used to ascertain the investment returns for the same.

In a nutshell, an investor should look at XIRR when there are multiple cash flows and returns generated. But in case of point to point investment, CAGR can also be looked at since the XIRR too will remain the same.

– Saurabh Mittal and Jinay Savla

Thursday Trivia ~ The Rise of Quick Service Restaurants, Burger King IPO and Cafe Coffee Day wind up!

When the malls first arrived in Mumbai, I distinctly remember sitting with my uncle and discussing the way small shop owners are going to be impacted due to it. He was too casual around the subject and mentioned that it’s just a matter of 5 years, Indians are price conscious and they won’t buy expensive things. On the contrary, he would go on to tell me how costly it is to build a mall and that too a profitable one. Well, fast forward 2 decades and you see a very different story. My uncle was partly right, say around 20% that malls aren’t really a profitable business for everyone. But the fact that he got wrong was about change in tastes and preferences of Indians, which is 80% of the story.

Taking cue from another industry that has impacted our life in the most significant way is the mobile phone industry. In 2001, the most expensive phone that I had seen was Nokia Communicator which used to cost some Rs. 45 thousand. The phone was highly advanced and ahead of its time. Buying a Nokia 3310 or Samsung R220 which used to cost less than Rs. 5,000 was a costly affair. Why? Because the phone calls were chargeable. Internet was practically a luxury only a few could afford. Reliance Communications changed the game for incoming calls by making them free and Jio recently has changed the way the entire telecom industry operates. Now, buying a phone worth Rs. 45,000 isn’t a luxury anymore. The game has changed completely. Nokia was late to understand that just like my uncle and due to their own short-sighted approach, both are out of their respective businesses.

Coming back to the mall culture, several years back when Crossroads, the first shopping mall came to Mumbai, it had McDonalds at the ground floor. For some of us it was a weekly ritual to go there, do some window shopping and have some French fries with coke. If at that time, had anyone said – that food service business in the form of quick service restaurants will be the next big thing then people would have simply laughed and never given it a single thought.

Back then, Sunday dinners meant going to a few fixed places where right from waiter to restaurant manager knew you really well. But this has changed. So has the spending habits. It’s the millennials that have given these quick service restaurants its due. Places such as McDonalds, CCD, Barista, Burger King, etc. are more than about food now. Millennials want to hang out, have long romantic conversations, share a business idea, business meetings of startups when an office isn’t feasible.

Crossroads mall in Haji Ali changed the way Indians perceived malls. The second blow to small shops was delivered by Big Bazaar which was opened in Phoenix Mills, Lower Parel. It was a gigantic success. Weekend rush was a terrible affair to deal with. This is one thing my uncle missed out on contemplating that people usually get tired after shopping for long hours. So they simply enter a quick service restaurant (QSR) like McDonalds, Dominos, Pizza Hut, etc. for their dinner. After a few times, it’s the McDonalds that become the center point due to a distinct taste in food and priced at a reasonable rate. Hence, it sort of becomes a combo offer! Add to it movie theatres such as PVR and Inox, combine them with Café Coffee Day and Starbucks. A perfect Sunday hang out plan is prepared!

Millennials don’t spend their weekends like baby boomers (predecessors). They spend more on experiences which result in instant gratification. With easy access to bank loans and credit, they are able to fulfil their goals much faster than baby boomers. They won’t wait for 10 years to buy a SUV or sedan. When the loan is a go, they will book it immediately. Now whether this is the right approach and what are its repercussions, is an entirely different subject which we will discuss some other time. 

This spending culture has definitely given a rise to the food services business in India. Let’s have a closer look at the numbers. 

The Indian food services market is classified into two segments – organized and unorganized. Total market has grown by 9% CAGR over the last 5 years. Organized market has grown fastest. Standalone organized outlets have grown at 13% and chain restaurants have grown at 18% The unorganized market constitutes 62% of the total market. However, this is on a declining trend. Right from 69% in Financial Year 2014 versus currently 62% in Financial Year 2019. 

Out of the organized market, quick service restaurants which we were talking about earlier holds 46% of the market which has grown fastest by 18% over the last 5 years. It’s close cousin casual dining restaurants, hold 34% of the market and has grown by 15%.

Let’s talk about Burger King! A company that has given Mumbai a VIDESHI Vada Pav!

Burger King was founded in 1954 in the United States and is owned by the Burger King Corporation, a subsidiary of restaurant brands international inc. Burger King has a global network of over 18,000 restaurants in more than 100 countries.

Burger King India has a master franchise and development agreement with Burger King Asia Pacific, which is an affiliate of Restaurant Brands International Inc. The master franchise agreement is valid until December 31,2039. The company operates in the QSR segment and was a late entrant in the Indian markets. It opened its first restaurant in November,2014. And now the company has 216 company owned and 8 sub franchised Burger King restaurants spread across 16 states and UTs and 47 cities across India.

You will be surprised to know that 60% of Indians eating out are millennials. Add to it increased internet and smartphone penetration, or we can say it’s the Jio effect. Plus, the menu of burger king is not heavy on the wallet too. For instance, the company has a lot of products which are under Rs 100 and runs promotions like 2 crispy veg burgers for Rs 69. The incremental pricing between products is also kept low – 10-20 Rs, this enables the customer to upgrade easily. 

The combination of tech and food is going well for Burger King right now. As it files for an IPO. This simply indicates the confidence of private investors in the food service business of India. It’s for the millennials, by the millennials and of the millennials.

Although all is not well in the food services business. Few months ago, we witnessed the tragic death of VG Siddhartha, the founder and CEO of Café Coffee Day. Apart from the fact that the company never made a profit and was buried in debt, people actually came out and refreshed their memories about the first time they had a coffee in a CCD outlet either with a friend or someone special. CCD certainly changed the way Indians consumed coffee.

CCD was the place which showed millennials the experience of drinking a coffee. Starbucks too is riding a similar wave. Different versions of coffee and its pricing is something baby boomers wouldn’t have thought about in 1990s or early 2000s. Spending Rs. 500 on a coffee is now an experience. Consider the most popular Starbucks at Fort which was the first store in India for the company, it has spent a fortune on its interiors. When you compare it blatantly with some South Indian restaurants that have filter coffee, you would look at me and say, come on – there is no comparison. The coffee is completely different, right from its brewing technique to the flavors, it’s a different world. But for baby boomers who were born in 1960s, a cup of filter coffee equals a latte or a mocha. That’s the gap!

Quick service restaurants are here to stay. There is no going back. Technology has changed the way we approach our food completely. Swiggy and Zomato are simply giving the QSRs the much required push that they are about. Millennials will spend their money. Weekends will be about fun with friends and not about staying at home and cooking dinner for family plus relatives. The World is much closer now due to internet where QSRs can market themselves and millennials can reach out to experience something new, something different. Money is not about saving anymore, it’s about YOLO – you only live once!

Please note: We don’t recommend any investment in Burger King and neither do we hold any position in Café Coffee Day or have recommended to anyone in the past. This blog is for information purpose only and not an investment advice. We only talk about the trends of these industries and what sort of impact it has on our lifestyle and personal finances.

– Jinay Savla

Thursday Trivia ~ Book Summary – The 7 Habits of Highly Effective People by Stephen Covey

Author Stephen Covey is regarded as the Self Help Guru and rightly so as his teachings are timeless. The 7 Habits have been widely regarded as the foundation for personal effectiveness and a must read for everybody regardless of their age. Being effective is till today an underrated skill that everyone must develop. To be effective author suggests the following 7 habits

  1. Be Proactive
  2. Begin with End in Mind
  3. Put First Things First
  4. Think Win / Win
  5. Seek First To Understand, Than To Be Understood
  6. Synergize
  7. Sharpen the Saw

Key Takeaways!

  • The book has been divided into two parts. First part is Personal Victory (first 3 habits) while the second part is Public Victory (last 4 habits).
  • We are born proactive – as a child we learn walking proactively. Although overtime we become reactive due to social conditioning and stop taking the first step for anything.
  • A proactive person always keeps an end in his mind when he starts a project. He knows the outcome beforehand and works hard on achieving it.
  • Personal victory comes before Public victory.
  • To attain Public victory, it’s important to Think Win / Win in situations when dealing with others. There is no point in having a situation that is Win / Lose, Lose / Win or Lose / Lose.
  • To create a Win / Win situation, a person should learn to empathize with others. Understand others first before putting a point across.
  • Pubic victory is a matter of a lot of outcomes coming together. A leader always looks to synergize with those outcomes. Such outcomes are a matter of a lot of people coming together for a common cause.
  • Synergy is present when everyone in the team strives to achieve the desired vision and mission of the company.
  • Practice! Practice! Practice!
  • These 6 habits must be practiced repeatedly to a point where they are ingrained into the nature of the person.

Steve Jobs is one of the greatest leaders our generation has witnessed. He was proactive who never settled down with success of his products. That’s why we saw fantastic iPhones, iMac, iPods and iPads releasing every year. In his biography, the author speaks about how he was sure of iPod changing the world and needed to be as small as possible. Every employee of Apple works for the common vision statement and creates a product that everyone loves. Needless to say, Steve understood what the world wanted even before the world knew it could even exist.

– Jinay Savla

 

Thursday Trivia ~ Senior Citizens Savings Scheme

 

‘Dad has received a few lakhs from his company, must be his Provident Fund, Gratuity, etc. It’s his hard earned money, where should we invest?’ Manish asked Jay while sipping a coffee.

‘No clue. Fixed Deposit (FD) maybe’ Jay said while putting his coffee down.

‘FD is great but doesn’t offer a good rate of interest.’ Manish replied.

‘Yeah. One of my friend was also talking about Senior Citizens Savings Scheme (SCSS)’ Jay said while he picked up the bowl of potato finger chips.

‘SCSS sounds good.’ Manish replied.

‘At this age, he will also look for some regular income coming in his bank from his investments. Do you remember the last time, we offered him to buy new spectacles?’ Jay was relishing his coffee and potato finger chips.

‘Yes, I can never forget that day. He said that he can still take care of himself and our children too. He is a self-made man and we need to respect his freedom.’ Manish said while recalling that incident. He almost had tears of respect for his Dad in his eyes.

‘Maximum of Rs. 15 Lakhs can be deposited in this account. Dad has received Rs. 14.50 lakhs, so we are well within the deposit limit to opt for this scheme.’ Jay was searching about the Senior Citizens Savings Scheme.

‘Great. Shall we open this with a Bank or Post Office?’ Manish enquired.

‘Bank! They have better service and will take good care of Dad when he visits there. Post office usually has long queues which are never ending. And Dad being Dad, he will himself go and do all this work. So for him Bank will be the best option.’ Jay was looking at his bowl of potato finger chips which Manish was about to complete.

‘Okay. So as I can see SCSS can be opened in any bank. Dad will go for a Nationalised Bank because he has a lot of faith in them. The irony! Let me write down what’s required.’ Manish said.

Documents for opening a Senior Citizen Savings Scheme Account

  1. Form A has to be filled.
  2. Identity proof – PAN card /Passport. (Self-Attested)
  3. Address proof – Light Bill / Telephone bill / Aadhar card. (Self-Attested)
  4. Age Proof Document is required – Passport, Senior Citizen Card, Birth certificate, Voter ID.
  5. 2 Passport size photographs.

Rate of Interest– 8.60% p.a. payable on Quarterly basis

Tenure– 5 years with an option to extend it for further 3 years. (Only 1 extension is allowed by filling Form B)

Premature Withdrawal

  1. 1 year lock-in period and no withdrawals allowed.
  2. Withdrawals after 1 year but before 2 years, Penalty of 1.5%
  3. Withdrawals after 2 years, penalty charges are a percent of the amount withdrawn.

‘What about Tax? Dad is more concerned about Income Tax then who will World Cup this year’ Jay said.

‘Yes, although the interest income is taxable but a deduction of Rs. 50,000 is available under Section 80TTB for Senior Citizens. Dad can also avoid TDS by filling Form 15H as his total income will be below taxable limits.’ Manish said.

‘So Dad’s interest income would be Rs. 1,24,700 from which Rs. 50,000 can be deducted under the section. He will be very happy looking at that’ Jay said.

‘Also, investments in SCSS is tax deductible under section 80C. So if Dad doesn’t want to invest at one go, then he will also be able to take advantage’ Manish said.

‘Yes. Let’s leave that decision to him. Right now, regular income would be more of his concern’ Jay smiled as he finished his coffee.

‘So let’s go through the list of Forms now. We should be prepared if he asks us questions on them’ Manish mocked Jay while finishing his last potato finger chip.

Form A – To open a SCSS Account

Form B – Extension of SCSS Account tenure for further 3 years

Form C – Nomination

Form E – Closure of SCSS Account at Maturity

Form F –Premature Closure or Death of Depositor / SCSS Account holder, then Nominee to carry out the process of Closure of Account

‘Okay! Time well spent. Dad will be really happy to see that we did our homework before speaking with him’ Jay said.

‘Yeah, we never used to do our homework anyways and he would get so upset’ Manish replied.

Jay and Manish got up and hugged their Dad. Their smiles were big and eyes were with filled with pride.

– Jinay Savla