there is no doubt that the mutual fund industry is suffering from the after effects of Mr. Bhave and Don Quixote. However when Mr. Sinha came the industry was (perhaps) hoping for some relief. Well what has come has come out in a round about way and that is only fair.  If entry load was removed as a ‘good for the end user’ feature it will take a brave man to reverse it, so Mr. Sinha will not.

However SEBI is now making a great attempt to ‘inform’ the investor that he can hold the units in a demat form. This is a joke – anyway the units are NEVER held in physical form. I would want to demat something which I can ‘lose’ – like say gold, equity shares, etc. WHY THE HELL would i hold valueless ‘no. of units statement’ in demat form.

Well one of the important things a regulator does is in the name of the ‘common man – investor’ INCREASE THE REVENUES FOR THE players. So if you buy ‘units’ through a broker, you will end up:

1. paying brokerage

2. pay demat charges – sometimes going in, some times going out

3. some money will have to the stock exchanges, correct?

4. as volumes increase there could be some ‘service tax’ on some of the services, correct?

LOL ..so if you increase the number of intermediaries …IN THE REAL WORLD  the price goes up.

In regulator language, the ‘investor’ becomes safe.

Long live regulators! without them what would bloggers write about?

solution: put all your money in PPF. RIP

ps: do you get a feeling when Nomura and Goldman Sachs enter….industry ki vaat lagti hai? LOL

what will suffer: client’s net return.

why: costs will go up. …

God bless. Sorry for spoiling your weekend. Could not resist commenting on yet another stupid SEBI ad.

PS: what about a communication class for the shenanigans at the regulator’s office?

No, I am not looking for work, Sucheta Dalal and Debashis should do this work shop. Of course they may come out pulling their hair. Debashis does not have too much to pull, though. LOL

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Who is to judge whether you are doing the ‘right’ job or no? These are all so difficult to answer that many people do not attempt to answer it. Of course many people try to answer this question (at least to themselves) and it sometimes looks fine. For example a friend who works in the Atomic Energy program of the government feels that all  Chartered Accountants in the country only help in tax evasion, hence their role is not justified. One equity broker I know feels he adds a lot of value by helping a client trade. Then there are many life insurance agents who feel that they add value by helping people save money.

Is there a need to justify what you do? Actually there is no need to justify to the whole world, but many people think they need to ‘justify’ to their inner voice. The problem is quite simply “I am OK, you are not OK” syndrome.

In the US of A there is so much hatred against financial services as a sector that people may just tear up their credit cards and not make any payment on the same. However using all the government program money to pay their own staff far more than what the world considers as ‘legitimate’ sounds so corny!

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Financial planner: supposed to know everything about you PERSONALLY so actually called ‘personal financial planner’ who helps you with YOUR GOALS and the steps to achieve them. He tells you your asset allocation – say 70% equity and 30% Debt.

Portfolio Manager: He chooses in which shares and which mutual funds should your money be invested.

Broker: Executes transactions on the basis of the Portfolio Manager’s advise.

Demat provider: Keeps safe custody of shares, bonds, and now even mutual funds

Insurance BROKER: buys you the TERM life policy based on financial stability of the provider and the least cost basis.

Clerk: Enters all this in www.valueresearchonline.com, myiris.com or www.moneycontrol.com to keep track of all these transactions

CA: Files your tax return on the basis of the details provided by the clerk.

To add to all this you can have another financial planner who will whet the process and tell you things are fine (just joking? think again!)

Banker: Claims he can do all of the above.

Investor: Gets a 24% gross return..pays fees to all the above and then is left with a 7.9% return. May have actually been happier in a PPF

http://www.bookzone.in/newtopsellers10.asp?qs=30 feels good to be the bestseller of the month at a leading book store in Mumbai

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If you need bypass surgery, you should find the most qualified surgeon available.This need not be the most expensive surgeon. Some surgeons are better at PR so they command a higher price. Some surgeons are good but in smaller hospitals. You need to do some research to find them, that is all.

If you’re getting sued, you should hire the best defense lawyer in town. A cheap lawyer can be very expensive, so be careful.

These 2 are fairly obvious and I do not think you can do your own root canal surgery, brain surgery or heart surgery. Come to think of it, it is so inconvenient, is it not! Imagine lying on the bed with an overhead mirror and cutting yourself up – cannot be easy even for a surgeon. LOL.

Likewise, some people argue that if you’re planning to live well in retirement, you should hire the most expensive financial advisor you can find.

To me this causes a twitch! In the stomach.

I do sessions on financial planning and these sessions are reasonably well attended. Mostly at the end of the session the participants are unable to decide whether they can do their own financial planning or they need an outsider.And while people ask me questions on everything from momentum investing, auditor integrity, mutual fund loads, broker integrity, insider buying, etc. one question uppermost on people’s mind is

Can I do my own financial planning? AND
Can I do my own investing?

If you’re an investor who is seeking long-term capital gains, it’s crazy to pay a lot of money for a high-priced financial advisor who gives you an economic outlook and short-term market forecast with all sorts of commission-based solutions attached. However if you do not want to spend your Sundays poring over a lot of paper work, it may be convenient to get a person to handle the paper work at least.

To the best of my knowledge there are only a few (so few you cannot spot them) pure financial planners.Nor do investors generally need a “personal investment plan” based on their individual circumstances…

There’s Only One Objective for Long-Term Investors

A growth portfolio is designed to keep you from outliving your money. It should give satisfactory returns for a 25-year-old just beginning an investment plan, as well as a 55-year-old who may live three decades or more.

To quote Sir John Templeton, “For all long-term investors, there is only one objective – maximum total return after taxes.” Of course he forgot to say expenses, let me add it. So it should read “For all long-term investors, there is only one objective – maximum total return after expenses and taxes.” Let me add there are many shares in my portfolio – like Tata Motors, L&T, Cummins, Coromandel Fertilisers, Tata Power, Hdfc, MRF, Unilever, P&G,  – which have outperformed many mutual funds in which I have invested. These funds are not duds – Franklin India BlueChip, Hdfc Top 200. So I am not against direct investing either.

However I have had the luck of having a great investment advisor – and the skill to listen to him.

Of course, some advisors take generic advice and selling it as customized plans. For that reason, whenever I hear an investment advisor tell a client that he is drawing up a long-term growth portfolio based on that client’s “unique profile,” I’m invariably reminded of the Head of HR who tells his audience, “Never forget that you’re special… just like everyone else.”

But, as is fondly said, “It’s 97% of investment advisors that give the other 3% of us a bad name.”

So you may need a financial planner (whose functions are so comprehensive) that I shudder to think why would somebody want to be a financial planner on a just fee basis – unless he / she can charge Rs.25k a month – and this fee coming out of the ‘upfront commission’ if any.

Frankly if you wish to create wealth in the long term put your money in the cheapest index fund, buy the cheapest term life insurance, and go fishing. However in India there are index funds which charge 1.5% p.a. vs. 0.15% in the USA!

Leave your mobile, TV, broker…in the city and play with nature. You will return fresher and richer.

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Financial planner: Borrowing sensibly is a good way to build wealth. Do a disciplined borrowing and you will make money because the equity market moves faster than the interest rates that you pay on your borrowing. This logic can be made to look even more convincing with graphs and charts!

You should: Borrow cautiously, if at all. You have to worry about the total amount of debt too! The quarter-century leading up to 2007 wasn’t simply a golden age for stocks. It was also a bull market for leverage. (That’s Broker’s Bluff for debt.) Since 1999, mortgage rates have fallen, college loans have ensured that parents can hold on to assets while their kids borrowed. Cars, scooters, mutual funds were all available on loan! People responded to easy credit in a predictable way. Houses got bigger, shares were not for investment – they were for ‘call options’ and ‘futures’ – again naked debt! The personal savings rate fell, and household debt payments as a percentage of disposable income rose. Home up grades ensured that big houses were furnished big, EMI was bigger.

Looking back, retail investor (ok I should call them traders) borrowing binge was bizarre. But it didn’t feel that way at the time. There were retail traders who would have a leveraged position on the buy side on a single share and a leveraged position of a single share on the sell side. It was a brokers delight – surely the brokerage generated was far, far greater than the wealth created for all the investors put together. This was stunning, and RBI too should have been perplexed if the overall picture was available on one page! Forget the common man in India, Alan Greenspan thought everything was hunky dory.

If you watch Suzie Orman Show you cannot believe that nobody in USA was bothered about the leverage based on ‘ever-increasing’ housing price spiral. Indian bankers did not give Rs. 500,000 loan to a fruit seller with a Rs. 17000 annual income. In the US it was easy to get NINJA (No Income No Job Applicants) loans.

The obvious moral here is to be conservative. There are always good reasons to borrow, even today. You need to borrow to get a good education, you need a mortgage to buy a house, maybe a car loan – of an affordable size. However when buying a house you can always pay 50% down payment installment instead of 10% which the banker was asking for.

There’s a subtler lesson too. When leveraging keep an eye on the total borrowing. Lehman was so smart! They failed first. Bear Sterns did not get the bail out. The overall leverage hurts when EVERYBODY tries to give up the debt. Maybe your builder has gone under and he is pushing you for EARLY installments. Your employer may be laying people off to reduce leverage. Your equity portfolio may be doing badly – and your banker may be making margin calls on your mobile. Suddenly that PMS you could “easily” handle on your salary does not look like a great idea. You cannot depend on your equity or debt for help, because many of the companies you owned are revealing their true leverage and the market is furiously re-rating. And your extra bedroom which you bought cannot increase your cash on hand by selling ‘just that room’. Banks are no longer falling all over you to increase leverage – cards, cars or a foreign trip.

MUST DO: Be conservative about debt. Make that very conservative. Especially when your neighbors aren’t. Get a mortgage you can afford for the life of the loan, and put at least 35% down payment. Furnishing or home improvement loans make no sense – spend on consumables from your income. Just because a loan is available you do not have to take it. Taking a loan is easy – sometimes repaying becomes difficult.

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Secondly Pranab Da made the Income of the NPS ‘tax-free’. Again a joke – this should have been there in the original itself. NPS is a collective investment product, so the income in the hands of the organisation HAD to be tax free – like mutual fund income is exempt under section 10 of the Income Tax Act. So no big deal here also!

No dividend DISTRIBUTION tax on the dividends paid to the NPS! this will mean a higher dividend payout for the NPS to receive – impact at best marginal.

WHAT IT SHOULD HAVE DONE: Clarified that when you commute the pension the amount is received TAX FREE. For e.g. If i have Rs. 12 lakhs in the portflio when I retire – and I decide to buy an annuity for Rs. 9 L and take cash of Rs. 3 lakhs, CLARIFY that the Rs. 3 lakh is TAX FREE.

Allow me to partially buy annuity. If I am 60 years of age and the interest rates prevailing for annuities is 4 % p.a. I should be allowed to buy annuity with just say Rs. 2 lakhs. The other 10 lakhs should be in the fund. In year 2 interest rates for annuity is 6.3% – and I am happy, I should be allowed to buy annuity with Rs. 5 lakhs….so my annuity is also spread over a 5-6 year buying period thus covering all interest cycles.

Bring it on par with mutual fund pension plan – Templeton and UTI are both taxed at 10% – he could have introduced a 5% withdrawal tax and made it free of income tax. This would have ensured an easy and simple tax structure and efficient way of collecting. Remember 5% of the total withdrawal – capital and the appreciation is not an unfair rate. For the mutual funds it is 10% CAP GAINS only.

Amen.

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I explained that when you have too much of your money in one or 2 companies it was concentration risk. This normally happens when people have been investing for long periods of time. Let us say you put Rs. 10,000 in Infosys in 1993. It was a small amount at that point in time, but now it has grown to Rs. 1 crore. However now if your broker calls you and asks you to buy NTPC you dare to buy only 1000 shares – Rs. 200,000 BECAUSE you are too scared to put more than that in one company! This happens because you may not consider yourself ‘deserving’ that Rs. 1 crore! It is psychological, but if your total portfolio is today worth say Rs. 1.2 crores, you have A HUGELY concentrated portfolio.

However the risk of ‘over diversification’ is when you spread yourself too thin – you put a small amount in too many funds and many companies.

This investor was thoroughly confused. He thought either there could be a concentration risk or ‘over-diversification’ risk. How could this co-exist?

Well out of his portfolio of 52 direct investments, the top 3 made up of 54% of the total corpus. Most of the other shares were between 0.07% to 7% of his portfolio. In fact about 35 shares were under 1% of the total portfolio. His mutual fund portfolio was a bigger mess – he had too may schemes. This does not help reduce risk. Almost all his finance lessons seem to have come from questionable sources.

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Who can become a builder, who can become a broker, how much brokerage to charge, should prices be quoted for built up, super built up….NOTHING is even documented forget being regulated. You could go and look for a flat for Rs. 1.3 crores. On finalizing the flat you realize that the ‘other charges’ – loading, brokerage, stamp duty, parking charges, etc. etc. add upto Rs. 15 lakhs – about 12% of the so called ‘price’ of the house.

At least some of these costs are available upfront, while some of the costs is just a guess – like loading. Sometimes the neigbhouring building also seems to be in the loading – at least in big Indian villages like Mumbai.

The other real cost is the interest cost – let us say you borrowed the full Rs. 1.3 crores + the stamp duty + the life insurance charges – after all you want your wife to inherit only the home, not the home loan as the SBI life advertisement tells you! If you repay this as an EMI – for 20 years, the true cost of your house is Rs. 2.6 crores (without considering the regular maintenance and tear and wear that would have happened).

However if a person sells this house after 27 years, he will tell his friends “I bought this house for Rs. 1.3 crores (remembering the brokers words) and now I have sold this house for Rs. 4 crores – it is a 3 bagger in 27 years. I wish I had bought one more flat”. Mathematically I leave it to you to calculate the profits, and find out the IRR.

Amar Pandit has written a nice article in rediff.com about the list of ‘charges’ while doing a real estate deal. It is worth reading while finalising your house purchase.

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Recession, slow down, pessimism about the Indian economy (of course because of the recession in the U.S. economy) are words that become common place in local lingo!

Everybody and his aunty is now convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course many of these people were sure that the equity markets will touch 25000 – just about 12 months back.

Times are tough. People who had Rs. 20 lakhs as salary and Rs. 55 lakhs bonus, however forgot that the bonus may disappear. Now the bonus has disappeared (luckily the job may still be there) but the EMI refuses to go away! Similarly the friendly agent who said that Unit Linked Insurance policy is a 3 year plan NOW tells you that there is some more premium to be paid! Forget vanishing premium, the policy seems to be vanishing!

Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. This feeling is a little funny – today was just not like yesterday!

Let’s begin by examining the four biggest investment myths circulating right now:

Myth #1: The Market will recover in 3 months time

In case your broker, banker, relationship manager, – anybody whose job is dependent on the size of your cheque tells you that the market will recover in 3 months. He / She is praying loud. Like God, you can either listen to it, or ignore it.

Democracies, Free Markets, are the way to go. Even the Chinese believe in that! So the markets will do well – after all the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it. That is tough.

Myth #2: Indian Growth Rate is poor!

The reality is India will continue to grow at a decent rate – 6.5% – is a FANTASTIC growth rate. All the strength of the English speaking population, BPO, KPO, software, exports are all in place. The strengthening of the US $ is a boon, the falling prices of oil is a boon, the falling wages is a boon for the manufacturing and software sectors – so just chill.

Three years ago, most of us would have given an arm and a leg for 6% growth. You need to remember that the US has a strong ability to innovate and grow. India will continue to be an important partner for the US, and we are not in a gloom only scenario. Our balance sheets are not over-leveraged (the equity markets will punish the excesses – look at Cholamandalam DBS – the share has fallen from Rs. 370 to the current price of Rs. 40!) – which means our recovery will be faster than the US economy.

Myth #3: The FII money will not come back!

The strengthening of the US dollar is surely going to make Emerging Markets as a class less attractive. However, if you believe that the US cannot go on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.

The flip side is there are many people who believe that the lag in the FII investment will be taken up by the mutual funds and the unit linked plan collections. This looks good in theory, however in real life it may be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the Life insurance premium. This is a major cause of worry – as the BFSI sector is also a big employer. My take on this is very hazy.

Myth #4: Real estate and equity markets will take decades to recover!

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough. However, if there was an index fund available since 1978 (sensex base year), done a SIP, and re-invested the dividends, I dare say you would have got a great return (say 5% real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)

The Nikkei 225 in Japan, is down more than 65% from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.

In India the real estate mess is in the capital market – so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 – 80% from their peaks.

Also remember the market normally does things in advance – so the battering may have happened AHEAD of the real market events. So if real estate prices were to fall (say 30%) the shares of real estate may actually go up! Logic being “Oh! After all the markets have fallen ‘only’ 30%, we had expected 80%”.

So, let’s buck the trend together – and look forward to a happy, healthy and prosperous New Year!

Happy 2009, and happy investing

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First of all the market does not announce the starting of bull / bear markets. Pundits have chosen the names and almost always tell you “This was a bear market” after the event is OVER. Similarly in case of a bull market. Also people who have got the predictions correct may have got it by luck. They have no clue how long it will be there – and what rate will it come up. If it does come up, will it come up at the same speed at which it went down. Or let us say in case of Indian conditions will the journey from 14k to 22k take much longer than it took last time? Nobody has the correct answers to these questions.

However let us look at the industries which were directly put to inconvenience – BFSI. In the mutual fund space a beginning has been made. Lotus India Amc has been taken over by another new comer Religare. Similarly there are some talks about 2-3 other mutual funds being on the block. It may or may not happen. However, salaries will take a whiplash.

One large broker has recently cut salaries – in the trading team. Another large player has downsized aggressively. One shipping company (non bfsi) has not paid salary for September….the list is long.

At the end of a bear market, at least half the brokerage terminals have to be shut, mutual funds have to downsize their working force, while increasing their aum. This will lead to lesser amc charges – and hopefully to better returns to customers.

So is the bear market over? I Have no clue!

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