On the 1st of Jan 3 wise men came on a television channel and spoke about investing. Obviously they are very wise and they have a role to play when they come on television.

One was the head of a big life insurance company, one was the head of a brokerage firm, and one was the head of a big mutual fund. To me the biggest kick in life is when people contradict themselves or make claims which are fantastic sounding, but miles away from reality. Thankfully all 3 of them obliged.

The head of the life insurance company said “people are not shifting from unit linked plans, but the shift is from long term committment to short term committment”. Thus people are shifting from long products like unit linked plans to bank deposits. Now these are difficult to argue against unless you have numbers on your side. The growth of the life insurance business has just changed hands – LIC and Max New York life have imporved their market share at the cost of some of the other players.

The other thing he said was ‘2010 will see the importance of the ‘adviser’ and all life insurance companies will spend more on that direction. I find it amusing – the better that an advisor gets, or the more informed a customer gets he moves away from unit linked plans to term insurance. This is not good for the manufacturer or for the distributor. Think of conflict between advising and selling – it is at its peak here. In the same breath he said that the ‘other’ sales channels – like bancassurance, mall insurance, tele insurance, etc. will be very imortant. LOL. Advising is the role of the advisor, pushing products is done by these other channels….sorry sir, did not understand what you said.

The other person was from a brokerage house – equity share broking is one area that the current SEBI chief has not yet touched (of course he has no clue what to do with the media, so like his predecessors he is ignoring the media). He said how the end customer benefits by ‘E-broking’. To the best of my knowledge difference between knowing the broker and dealing with him was a far superior way of investing. E-broking has widened, and deepened the market, but wealth creation stories are from holding, not from trading. The beneficiary of E-broking has been the brokerage houses, banks, nsdl, demat service providers, and perhaps the end user. If he has benefitted, I have not been able to see it :). Then he spoke about buying mutual funds through a brokerage house. This is another amazing feature – and am surprised that nobody has yet come out with the total cost of hold and buy strategy of a mf through a brokerage house. Oops it hurts 🙂

The third CEO was from a mutual fund – this fund could have been described as a NFO factory, but Dhiren of Valuresearchonline.com used this apt title for Tata Mutual fund, so i will not re-christen this fund house. He said the last decade has seen the top 5 schemes giving 20% returns over the last 10 years, but investors may not have participated. This brings us back to ‘Investment returns vs. Investor returns’. The question is not whether these fund schemes gave such a return, but whether a customer would have invested only in those schemes! The fund houses have bombarded people with new schemes. One of my senior customers whose money I had ‘advised’ to be kept in Icici Prudential Discovery fund was ‘re-advised’ to keep in a infrastructure fund of the same house :). More interestingly this CEO also said since these funds have given 20% return over 10 years a clients investment of Rs. 100,000 would have become Rs. 25 to 30 lakhs in 10 years. My excel sheet says it would have become Rs. 515,978.

So for me the year 2010 has started on a humorous note, except that I was watching a personal finance show!

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  1. Seen from inside of both insurance and mutual fund. Cannot agree with you more. Best low cost option for equity investment is ETFs. Unfortunately not many small investors are aware of this, nor mutual funds are doing anything to sell such products as they do not earn them fat margin. This organised financial industry is a racket to fleece the gullible investor.

  2. Based on the Compound interest calculation for 100000/20%/10yrs it should be 619173.64(total) with the interest (519173.64)..how come it is 515,978.Am i Missing something ?pls clarify

    Assumption: Compounded annually.

  3. You have not taken the asset management fee, over a 5 year period.Assuming an amc fee of around 1.8%, the total amc fee over 5 year period would be around 51000/-.

  4. there can be a difference if you use the irr – i used irr not the compounding formula. Even whether normal annuity or annuity paid at the beginning of the year should make a difference..I used the irr try that.

  5. ETF is not the cheapest option unless you are doing reasonable size of transaction – my calculation says Rs. 50,000 per transaction. This is because ETF is subject to brokerage (and the taxes on it) + demat charges + bank charges while buying / selling the etf units. So if you wish to invest say RS. 5k per month, it becomes expensive. Also funds like hdfc top 200, hdfc equity, reliance growth, dsp 100, birla..(not sure which plan), franklin india flexicap, prima plus are all miles ahead of their benchmarks. Do not see any need to be in an index fund till these funds underperfrom for 3-4 quarters at a stretch…

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