Many clients, students, readers and friends call back saying “This xyz person is offering me 36% returns on life insurance policies” is it possible?” Sometimes they send me a mail…and the company could be anything from A to Z…

My answer has been “The fact that you are asking me shows you do not believe it”. After all you do not call me every day for every thing, do you? – is my jibe!

I once told a client “here is a mutual fund where you will get 40% (CAGR) return, SURELY, in 36 years time”. He was a little stunned and perhaps a little amused. So I told him a story.

Once a poor man was sentenced to death, unjustly, by King Akbar. He came running to Birbal for help.

Birbal told him, please tell the king, “I can make your favorite white horse fly in 2 years time”. The poor chap did not know what to say, but trusting Birbal he went off to tell the client as instructed by Birbal.

Birbal’s wife who was standing nearby asked Birbal “How will you save this poor man…will the horse fly?”

Birbal’s reply was stunning.

He said “Look I have asked for 2 years time. In this period there a few things that can happen:

1. This man can die of natural causes

2. King Akbar may die, and this guy may get a pardon!

3. The horse may die or

4. The damn horse may fly!!

So similarly when I was telling the client that he will achieve 40% returns in 36 years time, the following things can happen:

1. The client may die during this period.

2. I will surely be DEAD by that time

3. The client may forget

4. The fund may actually perform!!!

So when clients ask you for indicative returns, promise them indicative returns over 40-50 years…but do not promise returns for 1-2 years!!

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Alas such options are not available. In fact not even a SINGLE pension product (disbursal stage) is available from the mutual fund industry, and that is a real big tragedy.

The Chairman of SEBI occasionally makes a noise that Mutual funds should ‘bring pension products’.

To me this is complete humbug. There has to be some clarity among the regulators about who will regulate what! If a mutual fund has a pension plan will PFRDA make norms for it? If a life insurance company has a pension plan without a life cover attached, should they be allowed to launch it at all? What is the role of IRDA if the ‘product’ call is taken wrongly by another regulator…these are all issues which the govt. will have to resolve BEFORE making holistic statements.

By the way I am convinced that there is no pension plan with the life insurance companies which inspires you to lock in the money for 60 years….

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- I have a lot of money, but so do my kids. They will not fight for Rs. 50 lakhs.

So true. I heard of a family which fought for Rs. 50, 000 crores, I am sure you did to!

- I am not like Birla…my money is not worth fighting over. NOBODY (REPEAT NOBODY) is going hungry because of the ‘Will’ fight between Birla and the Kedias.

I have heard of cases where the son has refused to pay for the younger brother’s college fees. I know of a brother who refused to pay for his sister’s marriage expenses.

Please clarify which investment is for which goal, make a will, specifically say Rs. 20,00,000 lying in ‘ABC mutual fund’ is to be used for Miss. S (my daughter)’s education, marriage,…etc. ONLY.

Remember you will not be around to answer the questions – so the clarity has to be fantastic….just a thought is not enough.

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He decided to cut the head – to save the expenses!

When it comes to philosophy or spiritual thoughts too – many people say ‘I am spiritual, not religious’ – sounds like a joke, really. I know ‘bhakts’ of Shankaracharya (of Kanchi) who would go there in grand silks (he was always against silkworms being destroyed), seeking his blessings for a wedding, and then asking for dowry. Selective acceptance of a guru’s advise is I think absolutely stupid.

This happens to many financial advisers too. Clients use half the advise and then make a mess of the what the adviser has told them. When I say do not take unit linked insurance. I am ALSO SCREAMING ‘take the cheapest term insurance that you can buy for your age, for a period you want, for an amount that is suitable for you’. If you just say ‘Subra says do not take insurance’ – bad luck to your nominee.

Sometimes it is easy to interpret what the adviser has told them. Sometimes it is not. I keep screaming that real estate is not a good investment over a long period of time (say 30 years). However it is true IF AND ONLY IF you keep the money in a good well performing equity portfolio (direct or mutual fund). If the money is lying in a bank fixed deposit – yuck you would have been far, far better off with buying the house.

There are tons of such examples. It is necessary to understand the advise in full. Remember I too have ULIPs – but I bought it when it was cheap, and I did reverse engineering to find out how the cost will hit me over long periods of time. However I am still planning to surrender it, because of fund manager issues….:-)

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In case of  INSURANCE, you are filling up a PROPOSAL FORM – you are proposing to the insurance company. You are saying ‘this is my name, this is my health, this is my income,……so please accept my form and issue me insurance.’ If your cheque is valid, the insurance company will call you for a process of underwriting.

Please remember the word Offer, acceptance, Proposal and CONTRACT come from the Indian Contract Act, 1872. Thus you are filling up a very important contract – more with insurance than with mutual fund perhaps. It is ABSOLUTELY necessary that you fill in the TRUTH – and not let some stupid, idiotic, half literate agent of wealth manager fill up the form. I am hearing of too many cases where the agent / bank manager found it convenient to hide illnesses – AS MUCH AS A CANCER PATIENT (with cancer having been treated successfully) was hidden. Obviously the claim was not paid (he was a celebrity from the film industry).

PLEASE do remember if you tell a lie on the insurance form, YOU ARE LYING to the beneficiary (parent, wife and / or kids) – because the CLAIM will NOT GET PAID. Insurance companies do not like to pay claims. Telling lies on the form is the stupidest thing to do – and a suggestion that many many agents will happily give you.

Moneylife Foundation (Debashis Basu and Sucheta Dalal) are organising a seminar on 10th Dec. at Dadar…in the morning. See if you can make it….I will not be able to make it, my loss

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Well for those who took up a job in 2007/8 (means born in 1985 or later) markets have not been a great – at best it has been lukewarm. All those who started a SIP in 2009 or later are still waiting to see some returns over the bank fixed deposit rates.

Those who listen to their ‘psu’ or ‘government’ oriented elders in the family even starting a SIP must have been difficult. Now they must be facing the wrath of the family saying ‘see your portfolio is down by 30% – in the bank you would have earned….’ blah blah blah.

So these kids are under tremendous pressure -on one side from parents who do not understand equity investments, media which loves action, and other classmates saying ‘see I told you not to listen to Subramoney (take your pick) see what has happened.

What should they do?

1. Remain calm: if you are investing for a long term (let us say for a goal 5 years away) just continue your SIP.

2. Remember if you look at equity on a daily basis, you could get scared – just stay away from the idiot box or the pink paper whichever is your mode of poison.

3. When somebody asks you to buy a Pension Plan, ask for the asset management charges. Recently one mutual fund has launched a Retirement Plan – and I have seen websites and ‘advisors’ doing a detailed analysis WITHOUT talking about the asset management charges. Did I say ‘It is difficult to make a person understand something if his livelihood depended on ‘not understanding it’ ? well here that is another problem…

signing off for now…:-)

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He tried his hand at fee based financial planning, but was not very happy with the experience, so has gone into a semi-retirement mode. I spoke to him, and though it was not exactly an interview some of the things he said hit home.

Vats – let us call him by that very name has an economic background which allows him to choose whether to be in the financial advisory business, has a good qualification and adds value to the family business too.  I thought some of the advisers who read this blog might benefit…so here is what he said:

- Too many people think my time is free and do not like to pay: this has been my experience too, so I can empathise. People call seek advice, and then decide to do what they want to do, but for Vats that is time spent. He spoke about a GM in a consumer durable company – married to a VP in a finance company. They spent an hour with him, spoke about the fees, made the changes and left. Then did not pay. Simple.

- ‘I will pay you if I use your advise client’: this is so funny. It is like going to a hotel and saying ‘I did not like the food, so I will not pay you’ or worse seeing a movie and saying ‘I did not like it’. And it is a cruel world – how the hell will the adviser know whether the advise is being used? He does not have an E-access to all your savings bank accounts, damn it!!

‘Subra, how do I charge for advise like making sure that the client does NOT invest Rs. 50 Lakhs in a hair brained scheme?’…I know that there is only downside. If the investment does well, the client will call up and say ‘see you told me not to invest’ however if somebody loses money, I may not even know…LOL

Vats also (like me) has a very small area of understanding – equities and a little bit o debt’. So largely our advise (fee paid or other wise) is restricted to equities and / or equity mutual funds. This means Vats too does not (cannot is also right) tell you what to do with your gold, real estate, other metals, trading in equities, etc. This is a caveat which he says up front, but people still ask him all these questions….

Well he had other things also…..I do not remember them all…

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I F A grievances:

1. Clients are short term pleasure seekers: both the IFAs have been in the business for more than 10 years and have upwards of 500 SIPs running. Even clients who claim to have a long term view (will it become Rs. 10 crores in 20 years kind of questions) will suddenly stop their SIP and also withdraw their money.

2. SIP returns look less exciting over longer periods! – clearly mathematically challenged clients are difficult to handle. It is really difficult to explain to a client that a 14% p.a. return over a 15 year period is really a superior return.

3. If a client has increased the SIP amounts, the returns look worse!- so true mathematically. If you have done a Rs. 5000 SIP from the year 1999 to 2001, then Rs. 7500 till 2005, then Rs. 12000 till 2008 and Rs. 25000 from 2009 to 2011, the %age returns cannot look too good. This is simply because impact of compounding has been on  smaller amounts and markets are not at new highs!

4. Choosing the right amount of SIP is impossible: For some Rs. 2000 is right for 3-4 years. Once it becomes insignificant they either want to stop or withdraw the full amount. For some clients who do a Rs. 50k p.m. SIP suddenly the accumulated amount looks attractive to make a down payment to buy a house! There is a complete refusal to do a focused event based investing.

5. Neither is the investing scientific nor is the withdrawal scientific! – Suddenly when the markets are down there is a need for ‘doing some attractive equity deal’ or an ‘attractive real estate deal’. Here the easiest money to withdraw is the mutual fund accumulation – so out it goes. This is also because the LIC agent says ‘there is an exit load’ or ‘it is a loan’ or ‘it is an assured return scheme’ – simple words. Customer signs a form or goes on the net and withdraws the mutual fund accumulation. Simple.

6. There are too many people who the client listens to: Immaterial of how good the mutual fund adviser the client listens to the whole world. Blogs, magazines, television, neighbor’s dog, dentist, doctor,….and does something stupid. When it comes to calculating returns, the schemes are blamed. LOL.

7. Clients are impossible to handle Sir: this was the scream of an agent, and I really pitied the agent. When the agent suggested a scheme, the client invested Rs. 5000 in a SIP – and the fund did well over a 4 year period. The client said ‘you did not say this fund will do well or else I would have done a Rs. 25k SIP’. Vow!! this client needs a Nostradamus perhaps?

8. ‘The businessman investor is led by the CA’: Completely agree with the IFA! The CA says ‘do not do a SIP for more than Rs. 16,200 p.m. – we will have to get more details. This forces the IFA to look for 12 schemes for investing Rs. 200,000 a month. I do not think with all my experience I can think of finding 16 good equity schemes for such a paltry amount!

sure there could be more…..but that is for another day!

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How should I invest this huge amount?

Well let us assume that he gets Rs. 3.5 crores after all taxes are deducted. The following steps are very important:

1. Invest the whole amount in a LIQUID FUND in a good mutual fund – the full amount: He might take some time to overcome the great feeling and he should start deciding on what to do with the money only after the euphoria has died down. Till then the money NEED not remain idle.

2. He will obviously want to build a house for himself and his family. Assuming he will want to build a big house for 2 of his brothers, parents and himself – he should set aside Rs. 30 lakhs for a 3000 sq ft house * 1000 Rs. psf cost of construction. Allow for cost over runs, money paid to goons, furnishing, etc – another Rs. 25 lakhs. Total Rs. 55 lakhs.

3. He should use say Rs. 100,000 to pay off all his family debt (assuming he and his family has debt, it cannot be more than Rs. 100,000.

4. Assuming that there are 6 children in the family, he should put aside Rs. 25,00,000 in a balanced fund like Hdfc Prudence – assuming that each kid will require it ONLY least after 8-10 years.

5. I hate saying this, but because he may not have access to good advise, he should buy a SINGLE premium pension plan for himself – and put aside Rs. 50,00,000. No doubt that he may trust only LIC (the assumption that it is government guaranteed helps) – and this amount of money will be beyond anybody’s reach.

6. He should open a public provident fund for all the 14-15 members and put away Rs.70,000 in each account. I would never suggest this for a person who has access to an adviser on a regular basis.

7. He should put away Rs. 1 crore in a bank fixed deposit – maybe in 4 banks (Rs. 25 Lakhs each) as a 10 year deposit and all paying quarterly interest. This interest will take care of the house hold expenses for the next 20-25 years EVEN AFTER inflation is taken into account.

8. He should go and blow Rs. 10,00,000 on his family, friends and others in his village.

9. He should put Rs. 50 lakhs in a MIP with about 20% in equities and 80% in debt.

10. The balance should be left in the Liquid account – Rs. 50,00,000 from which he should withdraw from time to time.

What he should not do:

1. Give away lumpsum to his brothers to do ‘business’. It is not easy Mr. Sushil Kumar! AND THEY WILL NOT EVEN FEEL GUILTY – they will look at it as ‘easy money’ – so it is all right to lose!

2. Listen to too many advisers. He looks very simple at heart – and will be quickly cheated of his money. Money is money – it is for God to decide whether Sushil Kumar deserves it or not!!

3. Give ‘loans’, ‘gifts’, etc to friends hoping it will come back. People who do not return the money will JUSTIFY saying ‘he got it through luck…it is ok if I do not pay him’ Awful logic, but it works. Sad, but true.

4. Not be in a hurry to invest – let the money lie in a FD or as a Liquid fund balance…

5. Make attempts to meet a politician. Remember even if Nitish Kumar is the CM, the state is still Bihar

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All the advise that you get must be saying ‘Look you jerk you do not know how to handle your money..give it to a mutual fund, life insurance company, brokerage house…and they will manage it for you’ …correct?

Well most of the financial media, the people who write, the people who appear on the TV have a vested interest in the Managed Money Industry. Hence there seems to be a bias against managing your own money without the help of fund managers.

Let us look at some of the solutions that I have seen people use effectively:

1. Buy a house and give it on rent: No planner will give you this advise – unless he is a builder or at least an agent! I am not even saying this is a good idea or a bad idea, but such ideas are rarely considered as feasible!

2. Build your own portfolio: I am dead against direct investing by the ‘retail guy’ . However I have seen many very successful investors too. One such person is now a very senior person in a big group. He has created a Rs. 10 crore corpus – apart from his real estate holdings and his ESOPs. Alas he has very little investment in debt products – except the customary PPF, nsc, etc.

3. Invest in Equities in their ’70s: My father is an investor beyond the age of 82…simply because he has a full equity portfolio and his dividend income is far greater than his total expenses…giving him a surplus. Debt instruments and debt  mutual funds have accumulated enough for him and my mother…..

4. Buy a house in a place where older people are treated reasonably well and servants are available. In a worst case scenario the house can be sold, along with the furniture -and you can shift to a smaller place. Makes sense to downsize the house..as you get older.

5. Create your own pension like buying National Savings certificates – every quarter and knowing that 7 years from now it will mature every quarter.

Unfortunately none of these ideas make money for the distributor…and some are so tightly priced that you will not see any money being made by any of the customers…

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