Protect the small investor…Or…

There is a big rush by the regulators to ‘protect’ the small investor from the big bad fund houses, insurance companies and their agents. The thought is surely laudable and one must appreciate the thought. However, most of the people involved see the markets and the investor with a very nice honorable telescope. They have all good intentions of ‘protecting’ the small investor. Even the language of one of the NPS champions was to say “at 60 you should pull your chestnuts out….”. Most of these people research equity markets and invest in bank fixed deposits. They are all ‘protected’ by an indexed pensions but can talk for hours on how good the NPS is great and that the amount withdrawn being taxed is just a reality and you have to accept it!

However this is not a tirade against the bureaucrat! I am just trying to find some major causes why a real investor (I am not talking about the trader) still lose money in the real world:

1.    Not writing down goals: If you do not know where you are going, it does not matter what turn you take. Most investors invest without knowing what product to buy – so the manufacturer cannot be blamed. In a bundled product like unit linked product which is a 30 year product and pay the upfront charges surrendering it after 3 years is clear lack of a clear goal. Clients cannot succumb to selling pressure – it is high time that they started taking care of their own money themselves – and responsibly.
2.    Lack of discipline: Trying to time the market, failing and trying again. Hope is eternal. Elizabeth Taylor married 7 times before deciding that marriage does not work. The retail investor tries market timing, portfolio construction, and all those things which he does not know. He would have made more money in public provident fund in most cases. One girl I know made money in a fund last year – and she was proud about it. She thought it was an equity fund – it was a debt oriented fund with 75% in debt. She refuses to accept that in this case making money was purely accidental.
3.    Lack of asset allocation: Your returns come from where your money is and how much is there. Most asset allocation is ad hoc. I have seen portfolios with shares in 53 companies, investment in 54 mutual fund schemes and still 3 companies were worth 62% of the total value of the portfolio. Beats me, beats me completely.
4.    Lack of attention to cost: I recently chased a 54 year old lady to get her brokerage statement from her broker. She mailed it to me. On a portfolio of Rs. 1.5 crores in the past one year she has earned Rs. 1.4 lakhs as trading income (hey man she is lucky), her portfolio has grown by less than 1%, and she has generated Rs. 7.6 lakhs as BROKERAGE alone. Her software analyses her expenses into brokerage, service tax, etc. and other expenses. Setting off all this, her Relationship Manager at the brokerage house seems to have had a ball! Similarly it is easy to find fund managers who churn their portfolios 235% – which means it is churned 2.35 times a year! The hidden brokerage costs (in a mutual fund or a life insurance company) hit your return real hard. Concentrate on advisor cost, fund manager cost, churning cost, chasing the leader cost, etc. Some times they ensure that your yield is far below the ‘index’ return. UK and USA have about 5% upfront load and 0.5% asset management charges – even that hurts.

The regulator must spend money kept in the “Investor education fund” and do sensible workshops in PSU units, defense units, schools, and other governmental organizations. Topics should include basics like goal setting, compounding, credit cards, housing loan pricing, National Pension scheme, keeping track of investments, etc. to create an aware buyer. Then they do not need these Mickey Mouse regulations of ‘controlling cost’. This feels like squeezing one part of the toothpaste tube – the total toothpaste in the tube remains same!

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