According to the central bank’s announcement on Friday, the Indian government has lately decided to phase out the issuance of 2000 Rs denomination notes. This action has sparked a rise in online conversations among financial influencers, experts, and news organisations, who are debating the government’s motivations, the underlying reasoning, the probable economic impact, and the larger consequences. However, in the middle of this debate, little attention has been paid to on-the-ground facts and genuine observations of the situation. We want to give insight into our firsthand observations and projected developments in this dialogue, which have resulted in the notion we propose today.
The termination of the 2000 Rs denomination notes causes problems for persons of various socioeconomic backgrounds, from regular people and small company owners with a few notes to big-scale businesspeople with a huge quantity of these notes. It becomes impractical for them to go to the bank, fill out the proper paperwork, deposit the cash into their bank accounts, notify their accountants to update their financial records with the deposited amount, and maybe face scrutiny from tax authorities about the source of the cash. The stress of explaining where the money came from becomes an extra worry.
Rather than dealing with the difficulties stated previously, many people, particularly those with lesser funds, may prefer to make purchases. Ordinary people may consider purchasing long-lasting things such as air conditioners, refrigerators, washing machines, or even smaller ones such as microwaves. If the sum is bigger, people may consider acquiring a car or anything of more worth.
However, rumours concerning the illegal exchange of these notes are proliferating. The exchange rates for such transactions are believed to range between 4% and 8%. This means that if someone swaps one crore of 2000 Rs notes, they may receive 92 to 96 lakhs in different denominations in return.
In the short term, it is expected that this move will result in a large increase in consumer expenditure. People with lower denominations may be more likely to dispose of them through purchases rather than depositing them in banks. It is vital to highlight that this is a subjective and speculative stance. While it is based on interviews and discussions with a variety of people, it may be wrong or incomplete. We recognise that our interpretation may be erroneous, and that there may be other views that provide a different understanding of the issue.
According to our analysis, if consumers opt to spend their available cash, the subsequent rise in consumer demand will have a broad influence across several industries. This increase in demand is likely to be spread across numerous industries, including consumer discretionary items, fast-moving consumer goods (FMCG), retail enterprises, white goods manufacturers, tourism, and any other industry that accepts cash payments. Increased consumer spending has the ability to spread far beyond a particular industry, increasing economic activity across numerous sectors atleast in short run.
Given the difficulties in identifying specific companies to invest in, we offer an alternate strategy: the “darkhorsestock” concept, which entails investing in the whole industry. This strategy arose from the realisation that it is difficult to precisely estimate the performance of particular enterprises in the present environment. Rather of devoting time and effort to analysing and selecting among hundreds of companies in a short period of time, it may be more advantageous to capitalise on the overall industry opportunity.
In this context, we investigate the possibility of investing in consumer mutual fund schemes. By doing so, we can possibly gain from the sector’s general development, regardless of individual company success. This method enables us to capitalise on the sector’s average profits while reducing the risk associated with depending on the performance of a single firm.
We have found two mutual fund schemes that are complementary to our strategy where we are considering to make lumpsum investment:
Idea – 1 | Nippon India Consumption Scheme
NAV as of May 19, 2023 – ₹ 141.38 (Direct Growth)
Idea – 2 | Tata Consumer Fund
NAV as of May 19, 2023 – ₹ 31.5 (Direct Growth)
It is worth mentioning that, while the SBI Consumption Opportunities Fund leads the category in terms of 5-year returns, we have opted to remove it owing to some companies in its portfolio that we have concerns about.
However, it is critical to emphasise that the funds we have picked are tailored to our individual investing tastes and objectives. Before making any investing decisions, we recommend that you undertake your own research, evaluate your own objectives, and talk with a knowledgeable investment advisor. It is critical to choose a plan that meets your specific needs.
Please keep in mind that the material presented here is not intended to be investment advice.
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