Sebi has been making a lot of changes in the mutual fund business – there is a good chance that the size of the industry will shrink. Same thing about RBI and IRDA.

Just hold on! Is the industry shrinking in size? No. Not at all.

Some re-arranging will happen. If you have been wondering why there were 44 players in the mutual fund industry, but only 4 were profitable, well now there will be more.

Fidelity is planning to sell its stake (according to ET, but then ET has said this many times in the past, and frankly I have no clue whether they will or whether they are planning to).

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/fidelity-set-t

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It takes a lot of hard work, luck, government lobbying, team building – to create companies like Tata Steel, Hdfc, TCS, Infosys, Reliance, Honda Motors. It takes years, if not decades to create good companies too!

However a few people feel (and they are fed such nonsense by the ads) – pick up a penny stock (also called micro cap) – and it will double in a few months. One ad about which I had written about earlier gives you a game plan by which your US $ 200 becomes a few million – and how you do not need a Retirement Plan at all!

Only if life were so simple! Alas, it is not so. Not so at all!

Cheap stocks – by whatever name called are cheap because:

- NOBODY IS BUYING THEM!

- NOBODY ELSE IS talking to those companies, analysts do not track it, responsible media does not know about them, their boards are unknown,….

-NOBODY IS interested in them! – these are companies which are so small that it does not excite big investors, mutual funds, life insurance companies, etc.

Leave such companies to the big people – let the Enams, JM, Dsp, Kotaks of the world invest in such companies.

If you do not know how to manage your money, being a Venture capitalist is not a great idea, what say?

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I have no clue whether Mark Twain, Warren Buffet, Peter Lynch, Taleb, or anybody else has made this statement…if they have not, here is a original statement from Subramoney. As originals are very rare, please remember you read it here first.

One risk that all of us HAVE to understand is the risk of inflation. So for all those experts who think a portfolio containing public provident fund, national savings certificates, bank deposits are ‘No Risk Portfolio’ please think again.

The youngsters whom I meet have got the following advise….

1. Over the next 3 years nothing good will happen in this country so keep your money in debt.

Vow…why should a 24 year old worry about ’3 years from now’? Beats me. Ok let me stick out my neck. Over the next 3 years (starting Nov 2011) Hdfc Top 200 would have out performed the best FD that is available today (let us say SBI FD – not some risky debentures).

2. You will not incur a loss if you are in a debt portfolio. Correct.

You will NOT RETIRE either. My dad’s dividend income today is HALF the amount that he got as PF for his 37 years of service. If he had not invested his money in equities, he would not have the lifestyle that he enjoys today WITH HIS OWN MONEY staying in his own house.

A kid of 24 today runs the biggest risk of inflation and will not be able to RETIRE AT ALL (leave alone at 60) if he has a portfolio sans equity.

3. Invest in Real Estate – God does not make it any more.

Look at the 30 year figures, put it in excel and then take decisions. Maths and logic should prevail – not parental pressure – just heard of a 25 year old committing to buying a house because she was emotionally blackmailed by her mom to commit to a house.

Mom’s Logic: It is her house – at least it is forcing her to save by paying the EMI…

Like the depression babies of the US, India has the ‘Harshad Mehta’ and ‘Ketan parekh’ babies. These people keep talking of ‘My father lost his 3 lakhs in the market…or some such stories. Take a closer look – it is YOU who is to be blamed.Not the market, not Harshad Mehta, not Ketan Parekh, not SEBI…JUST YOUR LACK OF KNOWLEDGE..of course risk also comes for people who think websites and blogs can replace good advisers. For such people risk comes from reading too – because understanding is not a given, is it?

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It is not easy being a layman today! The amount of ‘advise’ that is dumped on you is stunning. Advise on where to travel, when to travel, how to reduce weight, how to impress your girlfriend / wife / boss/ …, grow your hair, colour your hair….the list is endless.

However the guy who can really get all your ATTENTION is the banker. This is because he has all your money, though theoretically you think you have all the money. So here is a guy who has seen your life bare (RBI jokes once in a while saying this is illegal, but what the….). Let us see what he says:

1. Sir It is nice for you to keep all the transactions in one place: Complete bull. You pay a very heavy price for this so called convenience. The interest rates even on Fixed deposit made online is not as good as you think it should be! They also have some small boxes which say ‘renew automatically’ – which means for exactly the same period it will be renewed. Most times this is suboptimal.

2. We have the full range of products: Complete bull. All banks may not give you the full range of services that you need. Take the Indian example Axis bank sells Axis mutual funds, Icici bank sells Icici Prudential mutual fund, SBI, Hdfc,….and the story is the same! Life insurance is again a known story – THEY CANNOT SELL ANY insurance other than their own parent companies’ product!

3. Our advisors are here to help you. Complete bull. A bank advisor has sales targets, not relationship targets. They have great ‘products’ meant for ‘prospects’ which are nicely couched as ‘solutions’ for ‘customers’. Actually their greatest benefit is when you keep a lot of money without doing ANYTHING in the SB or Current accounts! However nowadays (10 years) ULIP has made them more greedy.

4. Our Advisors will give you optimal solutions: Impossible. There are advisors who will make you invest your money in a ULIP and at the same time give you a loan against shares – even using the same money to pay the premium! Get the transaction reviewed by a friend, and you will realise that you are holding a lemon!

5. We are here to help :  Of course yes! Not sure help whom? well join the gang, I am also wondering. It is surely not me!!

6. We will give you the finest rates: Impossible.: Banks which talk less, have poor customer service (they are almost anti customer) have better rates. Banks which call you a dozen times, wish you on your birthday, wedding anniversary, dog’s birthday…are likely to charge you for all the calls in some form or the other! All rates, charges, services, are negotiable. The more you move around, the better off you are. Take a simple example if you issue a Hdfc bank cheque to your Icici bank credit care it will take 2 days for the debit..but if you issue a same back cheque the debit will be immediate..simple na? Thanks to technology, keeping all the money in one place is not necessary to get the best rates.

7. The Relationship Manager is your friend. I refuse to say anything further…..correct?

some more …later on!

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1. I will invest in education much before I invest in the markets: Nothing to beat the classics like Random Walk down Wall street, Warren Buffet (pre 2000 he spoke more sense, but still he is a fountainhead, make no mistake), John Templeton, Ken Fisher, – see the ‘must read books’ – appearing somewhere on this blog.

2. Market patterns are difficult, almost impossible to predict: this is a pattern finding part of our brain (fully exploited by the media) which makes us think we can find patterns. The earlier you learn that you cannot, the better it is for you.

3. Trading, is NOT Investing. Trading is not Investing. Please repeat this a zillion times every day. This is Surya Namaskar No. 13.: Hold your ears and put your face between your knees, while keeping your back straight. If you still do a trade which you do not know is a trading transaction or investment transaction, repeat this asana 20 times. Next mistake 400 times. Power of compounding! Once you do this asana 400 times, you will not repeat this mistake. Hopefully.

4. Start today and do a SIP in an index fund: for starting to invest you do not wait for your education to be over, start TODAY….do a SIP..when you finish your education, you can invest in other places! Remember there are many people in the market. Beating all of them is a stupid target. If you can allocate assets intelligently, you may have won the game already!

5. Invest in rock solid business ideas which have worked. A new idea is for Rakesh Jhunjhunwala, Vallabh Bhansali and Uday Kotak to invest in. You are well off investing in Grasim, Hdfc, Sbi, Colgate, TCS, ITC – what has ALREADY worked. If you understand a business, see how it works, understand it and then decide. Like Warren Buffet says ‘create your competency circle’ . Everybody cannot know everything.

6. Focus on your investing – unless it is the index. If it is the index you can chill.

7. Long term is ONE BUSINESS CYCLE – which means FIVE YEARS PLUS. Not one year like the media keeps saying! Media may not know the Capital Market definition of long term and the Income Tax definition of Long Term.

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Wealth creation is a time consuming, easy to understand and very difficult to implement process. There are no cut fast rules on how to create wealth.

Deepak Parekh, Uday Kotak, Rashesh Shah, Nirmal Jain, Raheja, Hiranandani, are all people who have created wealth by the greatest method. Run a good business, leverage with people and brand building. Leverage with geography and borrowed funds….then take the company public. By doing this every rupee of earning gets valued at 30 for Mr. Deepak Parekh (Hdfc has a p/e of 30) and similar numbers for the others. These people made their money from equities, debt, commodities and of course listing their companies!  I am not talking that league, yet.

Let us see what all you should know – we will start with 10 steps:

1. Understand the Power of Compounding: it looks odd to realise that the power of compounding is NOT taught well at school! They give you some simple examples – rarely are you taught the POWER! Even people working in financial services do not appreciate the power of compounding. Ignore this only at YOUR OWN PERIL.

2. Understand the Power of NOW: LEARN the power of starting to compound as soon as possible in life. If you have not understood, NO TIME LIKE TODAY..pick up the pen, call the advisor, click on the net – whateva…just start, NOW, TODAY.

3. Understand the Power of Regularity – start a SIP AND make sure you do it regularly – not missing a single month. If by chance you do miss a month of investing, immediately pick up a cheque and send it in! At the end of a YEAR you should have invested 12* Amount being invested every month. If suddenly you have money, top up the SAME account.

4. Understand the power of Not Touching the Money for ‘n’ years: Capital and Wealth creation needs long periods of growth. If you do not touch the money for any sundry purpose, leave it untouched. This helps in compounding. REmember this for life!

5. Understand the power of LEARNING: If you are willing to wish to invest in equities – directly or through mutual funds,    learn as much  as possible about equities. Invest in learning, before you invest your money.

6. If you do not (or will not) learn about equities, never mind, learn the power of indexing in equities!

7. Learn simple things like keeping your accounts in an excel sheet and keep track of the paise….the rupee will take care of itself. Track your income, collect all monies due, track your expenses, track your investing and returns.

8. For events which you know invest. For sad events which MAY happen, insure. You never know….

9.Remember delayed gratification may not be easy, learn it. Food which gives 30 seconds of pleasure on the tongue stays in your waist for 30 years. I understand this….but when I see a sweet I still fall for it. Knowing and implementing are completely different animals. Alas!

10. Invest in education, training, health, travel and fun. Very important to remember do not forget the present for doing something great in the future. The future is important, but the present is vital.

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I said house – I have no clue, but have friends in Hdfc and I can give you their numbers…and they may be able to help on the builder feed back…

She said….No, no, I have chosen the builder and the house too…just tell me what to look for in a loan (mortgage as the yankee would say)…I thought for some time and said:

Interest rate.

She said what in interest rate: So I said

Flat rate or Reducing balance.

Rests: Monthly, Quarterly or Annual.

Floating rate or a Fixed Rate?

If floating rate, then linked to what rate.

Is that rate independent of the lender?

then how often will the reset change?

will she have to check the reset…

and the reset will increase her term or her EMI….

she said ‘I thought the TOUGH job of buying the house is over…..now it is the ‘EASY’ part.

Sounds complicated, does it not? L O L.

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Personally I wish he had done an analysis with just the equity fund – as one of the tables- which could perhaps also been an indicator of  fund profitability. However that does not take away from the detailing that he has done with the data that is publicly available. The conclusions may be different for different people – but the ‘big getting bigger and small getting marginalised’ theory is well researched. He has shown mathematically at least  there is not much difference in the growth / fall in the AUM. The whole industry seems to have grown at the same pace – however Hdfc, Reliance, UTI, etc. have grown at a rate different from the whole industry! Worth reading the report…

here is the article….

http://www.wealthforumezine.net/Industrytrends100111.html

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If you are a shareholder who started an asset management company and /or a life insurance company hoping to make money, God bless you! For those of us who are shareholders with the Birla, Hdfc, Tata groups – remember we are all funding the insurance and mutual fund businesses indirectly.

Kotak bank, Hdfc ltd, SBI, are all very profitable businesses (banking is the most profitable business in the world -ask Goldman Sachs, J P Morgan, Citibank or all the psu banks). However the mutual fund and the life insurance businesses are not making sensible money in India – and do not show any chances of making money for the next FEW years. It is easy for people who have not much at stake to say that ‘these changes were necessary and it is for the good of the customer’ but the shareholder will bleed. The bank promoted life insurance companies have it very nice – here is a good retail product whose commissions can be used to subsidise new branch openings. That itself makes Hdfc bank and Kotak bank good shares to buy. One will have to see how Yes bank and Axis bank play out the life insurance business piece. Of course older banks like Hdfc have the ‘trail commission’ which can be used to grow the mutual fund business, but newer banks do not have that luxury.

SEBI has not been able to do anything to regulate the PMS business, the brokerage industry, or the media covering the financial services industry. It is difficult to believe that there are 20 personal finance magazines, websites, etc. depending on the advertising by the financial media. It is difficult to know how all the magazines will make money.

Experts in the life insurance business  forsee a 30% cut in the total salary bill, a dramatic cut in the number of branches (rent gone), travel will be cut down (Jet Airways will make more losses), lesser recruitment (MBA schools will wonder how to cover fixed costs), lesser hiring (students and banks will wonder how the money will come back), and some Mergers and Acquisitions.

And now I R D A wants to regulate agents…OMG…it is scary.

Currently the best place to be now in the financial services industry is in the media. Salaries are good (did I hear Madhu Soman say very good, not sure), there are some regulatory changes every 32 hours (either by SEBI, IRDA, Supreme Court, RBI …or the fin min!!). Talk to a few people in the industry and do a story. However it is not worth being a contributor of stories. The Job is better for the butterfly .

Amen.

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Not sure? Ask MBA colleges – the financial service industry is a big saviour. Whether it be ICICI, Hdfc, Kotak, Indiainfoline, – all their arms banking, life insurance, asset management, etc. are all big employers. They create jobs which the fresh MBA hates -but still takes up anyway.

The seniors …or somebody has created a feeling that only those who are good for nothing are FORCED to go into sales. So even as the media on one side is screaming that life insurance agents make 40% commission, it is not getting anybody in sales. Paradoxical is it not?

But what about the industry? What does the Great Warren Buffet think? Remember his story? No? Read on..

http://www.fool.com/investing/general/2010/05/28/wall-street-is-robbing-us-blind.aspx?source=ihpsitota0000001&lidx=3

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