Subramoney

Which is a good product to take? Mutual fund + term insurance or unit linked insurance plans?

Well it depends on the knowledge level of the buyer, and the smartness of the salesman (in India calling people who sell also financial planner is a regrettable fashion statement).

Well, let us take a case of you wanting to take a 23 year old kid who wants to take a Rs. 25L life insurance to cover a home loan. Most “honorable” advisers would suggest a term insurance of Rs. 25L.

However, it can be also structured as a Unit linked endowment plan with a much lower (yes you read right) TOTAL RISK COST.

Wov, how is this possible:

Pay a premium of Rs. 50k and get a sum assured of Rs. 25L (50 times the premium). Pay the premia for 5 years at least and then decide whether you wish to continue the same. In the meanwhile the amount of money in the policy would be building up. On death of the person, the amount payable should be SUM ASSURED OR policy value which ever is higher. (Be careful the operating word is OR).

How does a ul get cheaper than a term policy?

Ask your mutual fund advisor to tell you the TOTAL CHARGES (load + amc charges) on a fund growing @ 22%, monthly contribution of Rs. 100,000 for 30 years. (entry load 2%, amc charges 2.5%)

Compare this with a ulip plan with a 30 year run, growing at 22%, monthly contribution of Rs. 100,000 for 30 years (for a 23 yr old) (first year entry load 60%, amc charges 0.8%, and a TOP UP of Rs. 300,000 every year for the first 5 years.

If your consultant cannot …do the calculation, learn it yourself. You will be doubly blessed. The learning will pay for itself in the 3rd call from your RM.

Ben Bernanke, Alan Greenspan, P Chidambaram - all three are men with above average intelligence, and reasonably competent in their jobs. However, one thing common to all 3 of them is all of them are trying to play with the rules of economics. They do not let market forces play to the fullest extent.

Alan Greenspan bailed out LONG TERM CAPITAL MANAGEMENT - not very long ago in the USA. Ben bailed out (i have called it a burial in another post) Bear Sterns -both Investment banks which were above oversight!

PC on the other hand is playing around with the word inflation. He says that the inflation is 7% or thereabouts while holding petrol prices low. He calls up steel, sugar, cement manufacturers to hold the price line while giving a nice salary revision to his government employees! Then he plays dirty with the farmers by banning the private sector from procuring wheat. All these steps are likely to cause extreme pain to the new government that is likely to come in after the election. God save the next FM. But till then if you are a shareholder of IOC, HPCL, BPCL, Tata Steel, you have to bear the brunt and hope for a quick election call!

Yesterday a simple question in the parliment made Icici bank scrip lose about 10% of its value - and recovered 5%. What really happened is a simple accounting necessity for marking down the investment. Let us take an example, I have “bought” a CDO (collatarised debt obligation)- this is  a bunch of borrowers of a bank securitised by the bank and sold to me. Now if the change in interest rates happens, the value of the CDO can fall. HOWEVER, if I am holding a good CDO where i trust the bank and the underlying borrowers - and their ability to pay, I will hold on till maturity I need not worry. Accounting requirements - SAROX - ensures that the short term fall has to be ”marked to market” - and that is what ICICI Bank has done. I am not saying this alone. Warren is saying this in his letter….here i bindaas quote him, verbatim…   ”Second, accounting rules for our derivative contracts differ from those applying to our investment portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a derivative contract, however, must be applied each quarter to earnings.

Thus, our derivative positions will sometimes cause large swings in reported earnings, even though Charlie [Munger] and I might believe the intrinsic value of these positions has changed little. He and I will not be bothered by these swings – even though they could easily amount to $1 billion or more in a quarter – and we hope you won’t be either. You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well.”

So when Chanda Kochhar says she has only done “mark to market” believe her!

Ps: this is one of my most popular posts. I have no clue whether anybody from Icici has read this post. Posted on 4 june, 2008

There are many companies which have given fantastic, scorching returns. Microsoft, GE, Berkshire Hathway….are some examples. Berkshire Hathway, well er is a fund..or so you thought. Let me tell you, it is not. Mr. Buffet is a brilliant businessman, fantastic stock picker, (fantastic bargain picker - look at the recent offer to pick good bonds at bargain prices), a great human being, a great philanthrophist, BUT not a fund manager.

He runs a big, huge 800-pound gorilla of an insurance company, where people like Mr. Jain can buy an risk -at the appropriate premium. In fact Mr. Buffet can buy a small stake in a company, can buy more stake, can merge it with Berkshire Hathway - things which a normal fund manager cannot even think of doing.

Berkshire Hathway is a fantastic company with a great 28 year track record. However over the past 2-3 years it has underperformed the index. Yes you read right, it has underperformed the index. How come it is not there in the index - well it is not traded enough, so perhaps the impact cost could be an issue.

So in my finance class if I ask you to name a great fund manager, you will get a zero if you said “Warren Buffet”. However if I asked you to name a great businessman, a great philanthropist, or a great business communicator and you said “WB” you would get a 10/10.

What is a Systematic Investment Plan (SIP)?

As is customary I have I have started with describing what an SIP is. Let us break some myths on SIP.

1. Investment in equity mutual funds or unit linked insurance should ALWAYS be done in SIP mode: I remember in 1999 when Templeton Mutual fund talked about SIP – the market looked at it skeptically. And it would take a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (ALWAYS) invest using SIP. If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, AND you have a lump-sum, you can afford to give the SIP route a go by. However if your horizon is less than 5 years, you MUST do an SIP.

2. I do rupee cost averaging in a single equity – that is a kind of SIP is it not? This is a question I face every day. NO a rupee cost averaging in single scrip cannot be equated to an SIP. When the market brings down the price of single scrip it is giving you information. You need to react to that. Let us take 2 examples – Lupin laboratories – has moved from a high of Rs. 700 to Rs. 100 and back to Rs. 700. The question to ask is not whether SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through the period. Silverline technologies moved from 30 to 1300 to 7! If you had started the SIP at a price of Rs. 1300 – today you would be licking your wounds. SIP works in a portfolio, not in single scrip.

3. You CANNOT invest a lump-sum in the same account in which you are doing an SIP. I have no idea why this myth has got into people’s head. Many people think if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account – far from it. In case you are doing a sip of Rs. 10,000 per month in equity fund, and suddenly you have a surplus of Rs. 100,000 and clearly you have a 10 year view on the same, just push it into your SIP account. SIP is just a payment mode, not a scheme!

4. If I miss investing for a particular month, will they prosecute me? This is the EMI fear that people have. In an SIP you are buying an investment every month (or quarter) – there is no question of prosecuting you for not missing one investment. As a matter of discipline, you should not miss any month; however, missing one month’s investment is not a crime!

5. When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a SWP! No. you should keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis – say deciding to sell 20% of your portfolio in a year that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund!

6. SIP works for everybody, but does not work for me! Another myth. SIP works in a well diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.

7. SIP is only for small investors. Nothing can be farther from the truth. I have a client who has invested Rs. 42.66 lakhs using SIP – starting from Jan 1998 till date. Obviously he has invested much more in later years as his income went up – and the funds together are worth Rs. 127 lakhs – substantially higher than his provident fund.

8. Market is too high to start an SIP – I have heard this when the index was 3000 also. I have no clue where is the market headed, but I know SIP works!

9. All fund houses are now charging a full load on the SIP, so now SIP will not work. Why not time the market? Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges – 2.5% in most cases is a bigger threat to compounding!

10. If a do an SIP in a tax plan, can I withdraw ALL the money on completion of 3 years? Another regular question almost all day! The answer is every instalment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules which say that a tax saving scheme should have a 3 year lock-in.

You cannot escape that by doing an SIP!

I have been in the markets for a real long time. As a friend says when we entered the market flying was considered dangerous and sex was considered safe! I started learning about something called PRICE-DIVIDEND RATIO. I was told dividends are the only thing that a small investor knows for real, so he should be interested in that. I liked it. However a little while later my “juniors” told me PDR is so old fashioned, you should be looking at PRICE EARNINGS RATIO. With some difficulty I understood that PER stands for quality of management, what the market expects from the company, etc. I had barely mastered that when I was told to learn about PER to Growth ratio. A ratio more than “1″ was considered aggressive.

Then suddenly I grew old. A new gen was born and they told me “P” is relevant but “E” has now been redefined. Now it is called “EBIDTA”. Wow! that was a mouthful. When I found that it stood for Earnings Before Interest, Depreciation, Tax and Ammortisation, to my CA mind and naked eye it looked like what we called “Gross Profit”. Now these kids told me “Uncle may be you should rethink. You know this time it is different”. I gulped maybe I was not learning fast enough. However by the time I was learning this Mr. Mehta told me (actually, personally) that when you are seeing a company you should see what is the “replacement cost” of a company’s assets. And the Market Cap to Replacement Cost ratio is the most important ratio.

Then by the time I recovered I found a new valuation tool. It was called “Eye-balls” based valuation. Vow! I was now grey. All my old tools told me that a person invested money to get returns. Now that was turned on its head. I was told that a company was measured by its….balls! So what if it was “eye-balls”.

By the way anybody out there knows what is DCF? I was told this is a very old tool which was once used to measure company’s share price. I just lost it. I must have known it when I passed my CA exam!

What a sensational rumour! The sensex is down because a big group which was holding a lot of share across various counters today continued selling! There was a vested interest for a lot of people - a big power IPO has many stakeholders you see. So all the kings men and all the kings horses held the market up till the IPO numbers came in. Now that the nos. have come in, they just let go…and down went the market. Ha ha what a joke