It is very common to see people seeking investment options only when the need arises, which is at the end of the financial year for tax saving purposes. At the eleventh hour, many salaried people are anxious about investments and “receipts management”.
New joinees might find it particularly daunting. Perhaps, this is because they find it too complicated or too boring to give it time.
But there are a number of good investment options available for the retail investors to put their money in, and reap good returns. The only thing that one should keep in mind is the trade-off between risk and return.
Let us have a look at some of the investment options. First in the list is mutual fund. It is a basket of more than one security (equity or debt). Depending on the desired returns and risk appetite, investors can choose a suitable mutual fund.
A diverse portfolio can help one mitigate risks and ensure good returns. But, these investments are “subject to market risks”. In the current scenario, there are a number of schemes being launched under the umbrella of Government’s “Make in India” plan, which appears to be a top priority plan of the Government. If this is true, mutual fund schemes associated with it will give extraordinary returns in the coming four to five years.
Equity Linked Savings Scheme (ELSS) is a tax saving mutual fund scheme, which is also a top option available for the retail investors. ELSS not only gives the tax benefit, but also provides very good returns if one considers past performance as a measure of the same.
One of the tax saver mutual fund schemes has given more than 100 times returns in last the 18 years. Mutual funds also have the Systematic Investment Plan (SIP) option where the investors can invest small amounts at regular intervals instead of paying the entire sum at once.
A benefit of SIP is to gain an average price of the investment when market linked price are not certain. Mutual funds such as ELSS and SIP are good options, particularly for salaried employees, who are ready to take a little risk and “save-tax” at the same time. ELSS is the thing to look for.
Another popular and conventional option is Public Provident Fund (PPF). During the FY2015-16, investors can reap interest at around 8.7% on their PPF account, which is almost the same as the interest offered on fixed deposits. PPF is one of the safest investment options.
However, fixed deposits offer lesser tenure than the 15 years lock in-period for PPF. Further, if one is risk averse and satisfied with relatively low returns on investments, life insurance is also a good option. It not only gives a return, but it also assures the family in case of any unfortunate events.
To add to the options, if one wants to set aside money towards retirement plans, National Pension Scheme (NPS), a long term investment plan, is a good investment. And in case one plans to buy their dream house, big banks like SBI, HDFC, and others have cut down the interest rates on home loans. Hence, home loan can also be an attractive option. Home loan has its own tax benefits, and one can get deduction of interest amount under section 24 of the Income Tax Act.
However, if one is disinterested in the conventional plans and is ready to take big risk in consideration of big returns, this may be the time to invest in the stock market, especially in the infrastructure, energy, banking, and capital goods sectors.
The writer is director, Aristotle Consultancy Pvt Ltd
“As far as I remember, the most common bane I heard was –Instead of focussing on product & customer satisfaction, most of my time goes in grappling with these compliances, taxes, regulatory affairs”, says Deepak Dhamija, co-founder of Aristotle Consultancy, when asked about the number one problem afflicting entrepreneurs.
Prior to starting Aristotle, Deepak had worked in Ventureast for a couple of years till late 2009. His role as an Investment Manager in Tenet Fund II, a seed stage fund for technology start-ups, gave him the chance to interact with a number of budding entrepreneurs. The most common problem among entreprenurs was finding a solution to their routine regulatory framework issues. “And along with it if someone could present the broad view picture of financial status of the company, it would be a divine intervention” spoke an entrepreneur during my venture capital days mentioned Deepak while telling about the inception of the idea.
Come 2010, Deepak wanted to reverse roles after working with so many gung-ho entrepreneurs. Deepak knew there was a gap in the market for integrated and professional accounting, financial and corporate advisory services for start-ups and SMEs. At the same time, Sanjeev Lamba, CFO Inca Informatics, an IT Company in Noida, was looking for a more challenging career role. They met over a cup of coffee and the idea was born. “I would like to say that I had all planned it out before leaving Ventureast, but it is not true” laughs Deepak.
Although there was no business plan and concrete targets, the vision was clear – To provide end-to-end financial and advisory cost-effective services to start-ups and SME’s, helping the founders and MD’s focus on their core business. Right from the start, Deepak was clear on some of the tenets of startups “Number driven business plans are good for corporates where the operations have been stabilized. For start-ups, they look nice on paper and give you an illusion of control – they don’t have much value beyond that” says Deepak. “My underlying philosophy in life and business is simple. One should give before you get and growth will happen if organization’s focus is customer satisfaction. And it has worked wonders for our business. Once you have invested in the client’s business and you provide excellent services on an ongoing business, clients would give you repeat and additional business.”
Right from the beginning, the founders were focussed on building the right team. Deepak says “The initial team, along with the founders, sets the culture of the business. They help attract the right talent and their relationships with people and businesses provides the feed stocks of leads and clients to scale up the business.”
“We wanted to be in new and fast-growing industries for three reasons. One, as a start-up, you face challenges in getting into accounts of established industries with established relationships. Two, new industries generally have young people at the helm, and young people are more open to new ideas – like outsourcing your finance and accounts department. We do not even want to try selling our idea to first generation entrepreneurs nearing their retirement. And finally, fast growing industries give us a chance to scale up with our clients.” says Deepak.
Aristotle hit it big with Jabong. “I proudly say that we have been associated with Jabong since they were 3 employees old and an unheard of name in India. And our continued relationships with almost all our clients is our biggest testimony to our client satisfaction”. Today, after just 3 years, Aristotle counts Jabong, Fabfurnish, Tolexo (Indiamart), Foodpanda, OfficeYes, Printvenue, Phone Warrior and PressPlayTabs among its clients. “My single biggest advice to start-up service companies is to follow the Trojan Horse principle” adds Deepak “Get inside and work”.
On Future Plans and raising capital, Deepak says – “We wanted to grow organically initially and see if we have an expandable proposition in our hands. And it’s not easy for a service venture to raise capital. Initially, we did not want to be limited in our experimentation by targets from investors. I think, unless the business model demands it, entrepreneurs should try to use their own funds. Also, most of the times, external funding makes entrepreneurs relax on cost controls and cost discipline is vital. We might seek funding in future, but we are sure we won’t be going to raise capital just for the sake of it. Now after streamlining our delivery model, we are planning to expand to different cities. Hopefully, you will see our offices in Bangalore and Mumbai in this year.”
Deepak Dhamija shares his insights on the E-Commerce industry in India, published in this article in India Retail Report titled – Impact Of Budget Announcements On E-commerce Space on Sep 2014. Complete article given below. (Download PDF )
The concept of market in this part of human civilization can be successfully traced back to Harappan era. Since then, markets underwent different kind of progression and adopted various forms over centuries. But even then for ages, physical presence of buyers, sellers and products at same place has been the main characterstics of a market. With advent of Internet and Mobile, and moreover with increase in their penetration in recent times, this main characteristic of market is also becoming redundant with each passing day.
These Internet markets, more commonly known as ecommerce, are spreading their wings in global industry from last decade or so. According to projections by Interactive Media in Retail Group (IMRG), a U.K. based online retail trade organization, global business-to-consumer e-commerce sales reached US$ 1.2 trillion mark by 2013 and is expected to grow at 18-20 per cent annually. While India According to Report of Digital–Commerce (IAMAI-IMRB), e-commerce industry in India has witnessed a growth of US$ 3.8 billion in the year 2009 to US$ 9.5 billion in 2012.
The market is expected to grow at 34 per cent year on year. Industry survey also suggests that by 2020, ecommerce industry will be contributing around 4 per cent in GDP of the country.
Even with this kind of numbers and growth prospects, ecommerce industry in the country is still longing for much more attention that currently provided by the policymakers. Unfortunately for the sector, despite its substantial weight in India’s economic engine, the sector has received scant regulatory support and clarity in terms of conducting business by the previous UPA government and in Budget 2014.
The most signifi cant and talked about regulation, which impacts ecommerce is FDI. As per existing law, FDI in ecommerce is not allowed for single brand/multi-brand retail companies. Though 100 per cent FDI is allowed under the automatic route in wholesale or B2B e-commerce or for companies providing “technology platform” services for retail transactions. The potential of Indian ecommerce market has ensured that big retail/ecommerce players from European and American markets cannot ignore it while FDI regulations did enough to not let them enter in orthodox style. So, this single regulation has single-handedly decided the structure and business model of all e-commerce players in the country. Walmart, Amazon, E-bay deployed different strategies to capture the pie of this slowly growing market but each one is on their toes egarding the FDI regulation. Different business models were tried by different players to test the waters. Amazon adopted the model of providing technology platform for retail transactions. While Flipkart, myntra and other Indian commerce startsups have both B2B e-commerce and market place also in their arsenal.
With new government at helm and high expectations from it, led to lot of speculation regarding regulations. And there were announcements, which were hailed as victory for foreign investors/brands. The most pertinent one mentioned that a company with FDI engaged in manufacturing activity would be allowed to sell its products on a B2C basis, including through e-commerce platforms, under the automatic route.
The industry has been gung-ho about the declaration, heralding the unbridled arrival of e-commerce in India. But a closer look at the statement and its implications show that the benefi ts if any, of this statement, would be negligible.
E-Commerce platforms are already allowed 100 per cent FDI in India under the automatic route. Currently, MNC’s having manufacturing units in India like Samsung, LG etc. have a direct online presence through their local franchise stores. Now, they would be allowed to setup their own storesand can sell directly to the end-customers without the need of local franchises.But it does not mean that multi-brand e-commerce would now enjoy 100 per cent FDI. On July 18th, the Commerce and Industry Minister – Nirmala Sitharaman – clarified that there is no change in the extant policy w.r.t E-Commerce activity in India.
Given the limited time that the NDA government had in preparation of the budget, it was not expected to spell out a clear, detailed policy on E-Commerce. However, by making the above statement, the government has given a clear signal that its thrust is on local manufacturing and it would allow the carrot of e-commerce to those companies which satisfi es the government’s interests. The NDA government is also trying to balance the thin line between its voter base of small vendors, big businesses interests in E-Commerce and the need for thrust in manufacturing – one of the reasons for its rather ambiguous statement. It is likely that the Government would be most opposed to multi-brand retail, as it is a direct and visible assault on its voter base, but would try to gradually allow E-Commerce liberalization without giving out any strong and sudden negative signals to small vendors.
There were other announcements in the budget, not directly related to E-Commerce, but which would indirectly have an impact of the sector. Two major announcements effecting the sector are those related to GST and Online Ads. Government has clarifi ed its intent to roll out GST and is seeking to resolve all issues w.r.t. GST by the end of this year. GST roll out, would help companies having a national presence to streamline their supply chain and simplify their tax structure. Almost companies have a national presence. On the other hand, introduction of service tax on mobile and online advertisement is going to negatively impact the sector, though the extent is yet to be seen. Apart from these major annoucements, other announcements pertaining to thrust on rural infrastructure (Rs. 500 crore allocated for Digital India initiative – which among other things promotes broadband penetration in rural India), railways support to e-commerce logistics (byproviding designated pick-up centers at identifi ed stations, though details are yet to be seen) and removal of special additional duty on tablets would support the industry. With this unparalleled kind of growth in sight, e-commerce industry is here to stay. There is still hope in heart of these big players that sooner or later there will be steps taken by government to liberalize the organized retail and e-commerce sector. In the meantime, they are playing to their strengths and prepared to make the jump when opportunity comes. Walmart has developed the supply chain infrastructure and would jump into retailing when Government liberalizes the sector. It also realizes that customer-buying behavior has changed and is therefore ready to tap into the online channel too. Amazon too has developed its back-end infrastructure – software, warehousing and last-mile delivery- and would get into direct selling to customers once the Government liberalizes the sector. Both the companies also have access to vast amounts of customer data.
So far, these regulations have ensured that there is enough innovation in creating business models and company structures. Despite, not so friendly environment, the companies are able to enter and start their operations in the country. Though these regulations are also helping lot of small vendors to sell through marketplace created by these big players.
As of now, it appears a different kind of market is being prepared. Customers are enjoying a different kind of luxury they never imagined a decade back. Now, all eyes are set on the future announcement to see which way this newly arrived market goes.
The year was 1999. For the first time in India a company was trying to sell musical CDs online. This was the first reported attempt to sell anything online. There were around 3 million internet users in those days and buying or purchasing anything over Internet was never heard of. The company was named Fabmall.com, which later on became Indiaplaza and as per rumors, it has shut its shop in 2013 after not receiving any funding.
Coming back to the present, Flipkart has raised $1 billion in a single round of funding. This was followed by a I-wont-back-down message from Amazon, to invest an additional $ 2 billion in its Indian arm. Flipkart’s $1 billion funding is the largest ever single, private equity transaction by any internet company in India and second only to the $1.2 billion private equity funding of Uber, the largest PE funding in the internet space in the world. Flipkart is now valued at $7 billion, more than six fold of what Just Dial was valued in its much-touted-IPO last year.
The industry has come a long way since the likes of Indiaplaza’s boomed and busted. Indiaplaza was like the Orkut of the Indian e-tailing market – a promising star falling to the wayside. And just like the internet search and social media industry, the etailing industry is consolidating to a few players – who look to stay in the business for good. Still, there are naysayers criticizing the forces of consolidation and sustained losses faced by almost all the etailers. Our argument is that the forces of consolidation are good for the industry and the industry has been most beneficial to the largest and most important stakeholders in the chain – the small businesses and customers. The Indian e-commerce story is one of persistent and adaptability by the major players in the business. Let us look briefly at each of the major aspects of the business and see its holistic impact.
Let us start with operations. Plastic card penetration is very low in India, and in 2010 Flipkart introduced cash on delivery – an unheard of concept in developed economies. No doubt, cash on delivery is a costly route for the business. Similarly, the big etailers introduced extremely liberal sales return policies in 2010. However COD and Sales Returns turned out to be a very effective marketing strategy; get the consumer to try online shopping and build the trust and traction with the company and has rapidly expanded the target market for e-tailers. The timing was perfect – internet penetration was booming and the first mover advantage helped a lot.
Business models adopted by the players are also a hallmark of evolution and adaptation. The marketplace model was widely believed to be adopted by players to be compliant with the law of the land (Amazon) or to switch to a model which was less capital intensive and immune to the funding environment (Flipkart, Jabong). It is interesting to see how the utility of the marketplace model has evolved. Flipkart and Jabong realized that with increased marketing expenditures they had incurred and the traction they had with customers, trust and eyeballs were their biggest strengths and a marketplace model made business sense, irrespective of the funding environment. Amazon has also adapted and is playing to its strengths. Amazon has completely developed its back-end infrastructure i.e. software, warehousing and last-mile delivery and most importantly customer data – and is ready to make a complete jump into direct selling the day the government liberalizes the sector, which someday it probably will.
But the biggest winner of the marketplace strategy are the small manufacturers and wholesalers. Retail rents are highest in India (some of the highest in the world), operating expenses from staffing to generators eat into margins and small enterprises can’t invest too much in customer pull. Such players are finding the additional sales channel of online retail extremely useful. And in the spirit of developing the ecosystem, Flipkart and Amazon are investing in educating these small vendors in computer skills, supply chain management and digital literacy. A recent study by AT Kearney has unearthed that, even in developed markets like USA, online and offline shopping compliment each other.
One of the big advantages that e-commerce has over brick-and-mortar is reduced inventory carrying cost. Inventory can be stored centrally – for categories with a broad range of SKUs and unpredictable SKU demand, like apparels and gifts, called long tail products – that is a huge advantage. The practical and visible manifestation of this theory would be that just like India jumped straight to mobile internet bypassing broadband, there is a strong probability that rural/Tier III cities in India would bypass some of the modern retail formats which are a cornerstone of the developed world retail market/urban markets in India and it would jump to e-commerce directly.
With intense competition, the low-hanging fruit of urban India no longer remains low-hanging – and players will increasing look at the relatively untapped rural markets. Already, Amazon is experimenting with Indian Postal Service to make them a delivery and COD partner in its bid to reach the rural hinterland and typing up with BPCL’s In&Out stores as a collector point for Amazon deliveries (instead of directly to their homes).
Without the forces of consolidation and the concentration of funding to a few large players, none of these beneficial effects would have happened so fast – the development of multiple categories, the market place model (which requires large marketing budgets), the expansion of markets through COD and liberal sales returns, beneficial usage of “big data”, the support to small businesses and manufacturers to get their presence online and the penetration into the hinterland. Consolidation has allowed the large players to try new things, hire top talent, test and explore new ideas and push the boundaries of the market – which has directly or indirectly been beneficial in creating and sustaining the overall ecosystem – See more at: http://www.businessworld.in/news/business/internet/oh-so-indian-so-tier-ii/1502624/page-1.html#sthash.TqB5w9jC.dpuf
E commerce industry with such breakneck growth rates needs to give importance to processes and guidance in place to sustain fast growth without committing fatal mistakes and heartburns for employees and customers. It’s imperative to also look at the issues faced by the companies in finance and related sectors.
E-commerce’s growth story in India has been phenomenal. The e-commerce market was worth $14 billion in 2012. It is expected to grow at a pace of 57% annually till 2016, the fastest in the Asia-Pacific region, according to Forrester, a leading market research firm specializing in technology. More importantly, a large ecosystem of specialized service providers have sprung up to support the growth of e-commerce companies: this is an ecosystem that is beginning to sustain itself.
With such breakneck growth rates, it is important to have systems, processes and guidance in place to sustain fast growth without committing fatal mistakes and heartburns for employees and customers. It’s imperative to also look at the issues faced by the companies in finance and related sectors.
The most critical issue faced by the ecommerce companies, as is typical of most Indian firms, is compliance and sound financial advice. In the absence of these factors, companies can grow but after some time start facing issues which not only stall their growth but can also lead to much bigger threats. In most cases, ecommerce entails pan-India operations, which throw up unique problems. For example, tax- and labour-related laws vary from state to state. Under labour laws, Labour Welfare Fund registration is required in Maharashtra but not in Haryana. Professional Tax is applicable in Maharashtra but not in Haryana. So, these companies have to either resort to tailor-made solutions as per state laws, effectively meaning employing more effort and human resource or they tend to adopt the strictest compliance practice, the lowest common denominator, to be compliant with all states. Adding to the complexities, the big firms typically sell across multiple categories: again, it means having specific tax treatment and compliance for each category.
This kind of complicated tax structure makes right advice indispensible for long-term growth of business and reduced litigation costs. The right advice at the right stage is required to ensure that companies do not pay hefty fines and get it right the first time.
Another major problem area is financial controls. The product based e-commerce is a transaction-heavy business, compared to other industries. The return volume of sold products is quite high across this industry, going as high as 40 per cent in certain cases. There are two main reasons behind this: (i) liberal return terms – for example, cash on delivery, returning the product in 10 days from the date of purchase – set by companies to gain the trust of end-customers, a lot of whom are shopping for the first time; and,
(ii) a lack of physical touch by end-customers, which quite often leads to a mismatch between the client’s expectation and the product.
These kinds of unique terms and conditions increase the probability of mistakes in finance and accounting. So, companies require robust financial controls to ensure that daily transactions are being accounted properly.
Another major problem encountered by e-commerce companies is the complicated delivery/transaction model. Typically, a product is shipped from a manufacturer/wholesaler to the company’s warehouse (for big firms) and is shipped out to a third-party e-commerce logistics company, which handles the last-mile delivery. Depending on the transaction model, the product can be billed directly to the company or the vendor. In most cases, it involves multiple transactions: a purchase order being issued by the company, inwards/goods received by the company, quality control rejections, shipping to the Logistics Company, sales returns, and commission paid to payment gateways, etc.
This makes systems and financial controls the need of the hour. It requires multiple and independent verifications to be done to ensure that chances of fraud are minimized. Time-to-time reconciliations with vendors is a must to ensure the accounting books are closed on time and disputes do not arise between vendors and the company months after a transaction is completed, which is a common malaise in all big companies, e-commerce or otherwise. Inventory audit, an oft-ignored area by small companies, should be done for complete reconciliation between physical and accounting reality. Also, daily cash reconciliation for cash on delivery payments, a customer payment model unique to developing companies, is a must, because (i) the chances of fraud are the highest in cash dealings and (ii) it will make way for the minimal blockage of working capital.
One mistake most companies make is not taking care of the financial work flow in their ERP systems. E-commerce is a relatively new sector and its business models are evolving. Already available ERP solutions are still under development and there is no standardized ERP solution available for the e-commerce industry which can handle all of its concerns. Hence, companies need to customize their ERP solutions at the commencement of their operations. In the beginning of operations, companies require sound financial advice to customize the ERP solution which can suit the requirement of the finance function. The problem is further compounded by the fact that most companies focus on core operations, and finance being a support function is typically neglected. Also, companies need to upgrade their ERP systems as the number of transactions increase, at which point sound financial advice is required again.
E-commerce is a reasonably capital-intensive business. Since most firms are new, vendors are unwilling to commit credit, epically to smaller firms, and many demand advance payment terms. Due to the high number of SKUs and higher margins in long-tail items, the working capital is blocked significantly. As most firms are burning cash, an eagle’s eye needs to be maintained on minimizing the working capital. A strong MIS system is required to undertake any analysis to improve business profitability, for which a real-time bookkeeping system needs to be maintained as a backbone. This fact is often ignored by smaller firms.
Due to high operating burn rates and sporadic funding, a lot of companies have partially or fully adopted or are in the process of adopting a marketplace and light-inventory model, where a vendor ships the item directly to the end-customer or a third-party logistics warehouse, bypassing the company’s warehouse. However, from a financial perspective it increases complexity, as (i) the number of vendors increases multiple folds and (ii) there is a lack of control on the item’s quality, as the item bypasses the company’s warehouse (although some large firms adopt the practice of having back-to-back shipping from the vendor to the company’s warehouse for QC check and then to the third party logistics provider).
The mantra is simple: do not ignore critical support functions; get right advice at the right time; avoid silly mistakes which lead to large penalties and delays; and, set up the system right the first time.
About the author: Deepak Dhamija is co-founder, Aristotle Consultancy. The company is a provider of end-to-end finance and accounting outsourcing services to startups and SMEs.