Subramoney

Two or three days ago I had done a post saying “golden rules of investing”. Today I am going to add a few more:

1. Do not abdicate financial understanding: “I trust my adviser” is not always a statement of faith. In many cases I know, it is a matter of laziness or convenience. Do not do it. It is necessary for you to know why somethings are being done, how, and what are the implications.

2. Ask sensible questions: Ask your adviser why certain things are being done. If you do not understand and you do not ask, you might be in trouble later on. Do not assume, ask.

3. Trust your adviser: trusting your adviser should be an exercise that is done diligently. Do not think “he looks fine”, “he dresses well” “goes to the same club”. Also to remind you of what Ronald Reagen (late President of USA) said “trust, but verify”.

4. Do not issue cheques in the name of the adviser: Asking the adviser to pay the premium on your behalf is not a good idea - but people routinely do it, and then repent.

5. Choose your adviser carefully - read Deepa Venkatraghavan’s book ..(What your financial agent will tell you, and you should not listen) regarding about your agent’s lingo (or relationship manager of a bank) and then chose your agent.

6. Ask the agent about conflict of interest: Check who is paying him, how much, etc. - and check out whether that is more than what you have been told.

So these if you ask me are the Golden rules - the real ones!

If the market goes up 3 days in a row, i get emails / queries asking “Is this the end of a bear market”. UNfortunately I do not have any simple answers.

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!

If you have wondered what makes mutual funds less risky than direct investing is the fact that a fund manager has to construct a portfolio. However, the fund manager should not get carried away and put too much money into one company..or cause such harm. So the law has put some restrictions as follows:

Minimum portfolio diversification norms:

Investment in equity shares or equity related instruments of a single company are restricted o 10 % of       assets

Investment in “rated investment grade” debt instruments issued by single issuer to 15 % of NAV scheme &
may be extended to 20 % with prior approval of Board of AMC or Trustees

Investments in unlisted shares to a maximum of 10 % of NAV scheme for close end scheme
& 5 % of NAV  in open end schemes.

Invest abroad in ADR/GDR’s within an overall limit of US $ 3 billion for all funds together. There is a sub     ceiling  for individual MFS which should not exceed 10 % on net assets managed by them as on date of last audited Balance Sheet, subject to maximum of US $ 50 million per MF

MF’s under all its schemes taken together is not allowed to own more than 10 % of any company’s paid up capital carrying voting rights

A scheme may invest in another scheme under same AMC or other MF without charging any fees, provided that aggregate inter-scheme investment made by all schemes under the same management does not exceed 5 % of NAV of MF.

MFs are required to  buy & sell securities only “for delivery”

MF’s may invest in short-term deposit of schedules commercial banks, pending final investment of funds pursuant to scheme objective

MF’s not allowed to advance loans, except securities in accordance with SEBI’s stock lending scheme

MF’s prohibited from investing in excess of 25 % of net assets of any of its schemes of fund in case of listed securities of group companies of sponsor.

Inter scheme transfers at current market rates and investment objective conformity to scheme to which transfer is made.

This headline is so contagious that everybody will want to know what is inside this! However, tips on which share to buy does not create wealth. So if you were expecting me to say “Buy Hindalco, Tata steel, Tata Motors, etc. you will be disappointed. Sorry!

Here are some tips however, on how to behave in a falling market. Well you need to remember the following:

1. Why did you do your SIP: Most SIPs are done to meet some target - child’s education, own retirement, etc. so if that goal is intact keep paying your SIP amounts. One big advantage of an SIP is it allows your investment to be free of emotion (emotions are perhaps your worst enemy, not market behavior). So keep your SIPs going.

2. Failing to follow through your ideas cost you more: People promise themselves that they will buy when the market falls - but when it falls they keep waiting till eternity. Do not do that. Just let your SIPs run…do not panic, do not over do - in a bull market or a bear market.

3. Do SIP in mutual fund portfolio NEVER IN A SINGLE SCRIP. If you were (are) doing SIP in Biocon, MindTree, Silverline, Crest Animation, ….you will be in the RED…and you may lack the conviction to do follow through purchases. This fear is increased when the media says “Breaking News….markets have fallen 7%….” etc.

4. A fund with a high beta is something most investment advisors avoid. However from a SIP POINT of view, the more volatile a fund, higher impact of Rupee Cost averaging.

Many people know that Saraswathi (Saraswati) is the Goddess of Learning. Learning of course is important. On google you will find a lot of articles which say “what i learnt from Warren Buffet”, “what I learnt from Peter Lynch” or what I learnt from Rakesh Jhunjhunwala” or “what I learnt from Charles Munger” or “What I learnt from Vallabh Bhansali”. Good learning is always a nice thing, but is it enough?

Many people know that Hanuman is the Guru according to Hindu mythology (for the very philosophically minded, Hanuman caused the Atma (Sita) to join the Parmatma (Ram) - and that is the essence of Ramayana. So you need a Guru to teach you from the learnings of all the great people mentioned above. However is that enough?

Many people know - and many others may not know - that Parvati (Uma) is the Hindu Goddess of Wisdom. Wisdom is about doing what you know. This is the crucial link. Training, Learning is all fine - but for it to translate into action, you need wisdom. That is the crux.

So knowing that compounding creates wealth, living a simple life gives peace, tobacco free, alcohol free, stress free living gives peace is not enough.

Seeking a simple life, doing a simple sip (and sitting tight during turbulent times), having a term insurance, one credit card, IS ABOUT DOING all that you know. That will give you nirvana. So as Nike says, Just Do it.

In every class on retirement planning one question which I always get a wrong answer is: “Will you buy big assets like house, car, etc. AFTER you retire?”

It is met with an “obviously no. why do you even ask”. Well the obviously no is said and ‘why do you even ask is in the body language.

I tell them, if you get used to using a car for, say 3 years, you have a problem, do you not?

Let us say you retire at the age of 55 (highly probable) and live up to the age of 90 (sad, but again possible). This means you have about 35 years in retirement. If you use a car for say 5 years (instead of 3 at present) you will need to buy at least 5 cars (assuming you drive till 80, then, start using a driver). Also buildings that are constructed today may not last 35 years. So if you have bought a house when you are 45 years of age, that may last say for 35 years. So at your age of 80, you will have to BUY a new house!

My father bought a house in Pune - Athashree (see www.paranjapebuilders.com) - which is a beautiful place for senior citizens to live. It has fantastic assisted living facilities. My mom’s brother bought a place for himself in Coimbatore. My Mom’s sister bought herself a nice house in Bangalore - where they liked the weather compared to their Chennai residence. All of them were above the age of 70 when this 2nd house purchase was made. The funding came from their mutual funds, ppf, sale of equity shares.

All of them had kept their primary residence - just in case they had to come back!

So in your post retirement age you will end up buying at least one house, a few cars, a few mobiles, a few white goods appliances, a few vacations (optional), medical care, assisted living, long term care, etc.

The question is no loans will be available for these purchases. You will pay cash - and the cash will come from redeeming your mutual funds, ppf, ulips, equity shares, etc. So apart from providing for your food, medicines, etc. provide for purchase of all these assets.

If you are a reasonably well off individual living in India’s metros, at some stage a “relationship manager” or a “wealth manager” would have approached you with an offer to “manage” your wealth.

You may have recoiled in horror, or been pleased that somebody thinks you are now in the “wealth” category.

However, do not be too impressed by the caller. The definition of wealth has come down substantially! That is all. Portfolio Management for example is now available even for Rs. 500,000! This is a poor joke because serious fund managers would not consider this amount for fund management!

You would surely have started wondering what exactly is “wealth management”?

Well, it is the process of systematically and simultaneously building wealth and protecting it.

Thus the person who is offering the services of wealth management to you should be well versed in - financial planning, asset management, insurance, tax management, and estate planning.

Apart from this he or she should be well versed in economics, and have nice soft skills. He should be persistent enough to make sure you invest your time and money in the right direction. But not so pushy that you get put off.

Clearly, Wealth Management is as concerned with the defensive nature of protecting assets as it is with building asset value. Due to its more complex nature, it is typically not available to individuals with low asset values.

Telling a Doctor how to plan purchase of assets and what records to keep for income tax may not exactly be a wealth manager’s job, but he should appreciate that a doctor needs help on these areas also.

However, stock brokers, life insurance salesmen, mutual fund salesmen have normally got a bad press! So many Wealth Management companies are merely a re-labeled stock broker. Typically brokers have a reduced scope and talent set than a person providing Wealth Management services.

How can you tell the difference? Ask your broker/ financial advisor how they are compensated. Those who are compensated only on the basis of time spent is a far superior idea than a commission basis reward. Even the planner who is compensated by a fee for time spent plus a commission on sales is slightly suspect. This is because given Indian conditions the commission structure is far higher than the fee portion – this is bound to bring bias even to the way they talk!

Brokers don’t always have to meet a high standard of care - unless they are acting in a role that demands it. Brokers should make it clear (to a client) about the capacity under which they are operating.

Ask them to elaborate on their financial planning education and whether they offer services based on developing a comprehensive financial plan that integrates views on tax , estate, investment, insurance planning, and asset protection. Ask them will the advise be the same if you were to execute it with another person and paid them for their time spent.

Do you honestly believe an hour spent with you, and the use of a company financial plan generator will meet your needs?

God bless you, if you do

You may have been told by the electronic media how SIP (rupee cost averaging or dollar cost averaging) has failed its investors in the past 3 years. If you have seen such programs / read such articles, you may have panicked, right? Well do not panic. Here is a list of reasons why a SIP FAILS.

1. When the market comes down, your advisor asks you to stop. Well replace the word advisor with father, mother, son, son-in-law, …..it does not matter. In case you are swayed by that person, you will commit the biggest INVESTING mistake. SIP is in existence so that the emotion is removed - you invest when you have money! When the markets are down you invest, when the markets are up you invest. Simple.

2. Forgetting to keep the account going on for a long run. This happens when you sign up for SIPs for a year or two. Once the term is over, you are too lazy to renew it. This is sad. Because Jan 2008 to Sep 2008 the market returns may have been abysmal, but the SIP returns may have been good!

3. Choosing to do a SIP in direct equity instead of a good fund house. It is very, very difficult to do portfolio construction…so it will be a brave person to add good companies to his “portfolio” and make money for himself. He is better off being the unit holder.

Many of my posts are based on the Financial Planning / Mutual fund training class that I do. One question that normally people ask me about where to keep their emergency funds. I do give a variety of answers, but here is what I have done:

A friend who is an investment adviser has a brother who is a builder - and at any point of time he is my CASH of first call! Other than this, you could keep your cash in the following places:

1. Your mattress/ cupboard / rice container: in an absolute emergency the only cash that you can really access is the cash on your hand. Decide where you wish to keep it!

2. Savings bank / Current account: This may not earn much interest but is available by just inserting the atm card whenever you wish to have the money. However, please remember that there could be a limit of say Rs. 20k per DAY.

3. LIQUID FUND: Money not immediately required can also be kept in Liquid funds instead of a savings account - the net return on investment is surely higher in a liquid fund than in a SB account (net of tax).

4. Bank Fixed deposit: More liquid than a liquid fund, but less than a savings or current account.

5. For the bigger people gilts, etc. could also be an alternative.However my recommendation is smaller investors should stick to alternatives 1-4 and leave alternative 5 to the more adventurous investors.

PHASE I – 1964 – 87

• Mutual Fund Industry started in India in 1963 with the formation of UTI
• Launch of First Scheme - US 64 - it was a very popular scheme, largely perceived as a debt fund with assured returns. However, it never had to declare its NAV and ran into problems in 1991, since then it has closed down.

PHASE II – 1987 – 93 (Entry of Public Sector Funds)

• Establishment of State Bank of India MF – the first non UTI MF.
• Followed by Canbank MF, Life Insurance Corporation MF, Bank Of India MF.
• UTI still had leadership

PHASE III – 1993 –1996 - Entry of Private Sector Mutual Funds

• Entry of the Pvt. Sector funds in 1993
• Morgan Stanley, Templeton, Zurich, Alliance, Pioneer, Threadneedle, all entered India
• Many Indian houses started looking at this area of business
• Clients started becoming selective
  

PHASE IV – (SEBI Regulation for Mutual Funds) 1996

• SEBI -the regulatory authority
• UTI comes under SEBI regulation voluntarily
• Sebi regulations were enacted and implemented