Me: Sure..what is it regarding

Caller: a mutual fund NFO

Me: You know my stand…why are you even THINKING of coming…?

Caller: No sir need a favor…

The caller is a small time mutual fund and other financial products distributor who does some general insurance, life insurance, and some miscellaneous work. Since I know him for about 12-15 years, and he does some odd work for me, this conversation went so far.

So he came and said “I need all the 5 names and 5 cheques from your house – Rs. 1000 each in an NFO.

Me: No way how I am investing in one nfo with 5 applications of Rs. 1k…not worthwhile. It is painful to fill the form, issue the cheque, keep track of the application number,….too painful.

He said: Sir I have taken a target at the highest slab. I am getting Rs. 750 per application – this is more than enough to set off the loss that you will make in case there is loss on listing. You need to just sign, my software has all the details and can print out the form – and since you are Kyc compliant, there is nothing to be attached. So Sir, please 5 cheques, 10 signatures…and I will make Rs. 7000….really nothing to lose for you!!

Another successful Mutual fund sales call had been closed. Everybody is happy….so let us all be happy!

I wrote this EVEN BEFORE the issue that if NTPC was priced at Rs. 240, the correct price for a new company should be in the range of Rs. 75, not Rs. 450. Of course many people laughed. N0w there is a new gimmick of merger….none of the actions by this group is helping the cash flow situation of this group. It is making losses in Rcom, the Media companies are still investing. The lucrative Bombay franchisee is seeing intense competition from Tata Power which has a cost of production of Rs. 1.8. Reliance insurance and mutual funds will not make money – there are no more NFOs anymore….God bless the market capitalisation.

Also for me this was a good example – the promoters had taken the shares of Reliance Power at Rs. 16 (not sure). I used to tell my friends the price is Rs. 450, and the value is Rs. 16.

Now if you have LIC, SBI, Hdfc, Icici, …each with a few ‘000 crores of stake in the insurance business and Mr Bhave on the other side, who thought that Mr. Bhave could win? Well I am not sure.

The media went to town saying ULIPs are bad, so many life insurance companies changed the name of the product to ‘Endowment Fantastic ‘ or something which dropped the unit linked. Simple.

Not sure about whether the amount raised by ULIP is 10, 100 or 300 times the amount raised from the RETAIL investor in mutual funds since the entry load was banned.

FRankly it does not matter what cnbc, ET tv, UTV bloomberg, or the other print media say, if a product is sold, it will sell. Afterall McDonalds, Coke, Pepsi and Lays can spread diabetes and ITC can spread cancer without any problems, can they not?

The government requires millions of rupees for divesting (by the way if we the people are the owners of the public sector, does it matter at what price the IPOs are given to us?) and this can come from LIC. Imagine the LIC chairman calling the FM and saying…’Maalik…Power Grid ka issue ke liye paisa nahi hain…ULIP is not collecting money..”. The FM had to bring this ordnance.

See the Direct Tax code. Only pension plans of the government are allowed a deduction under 80 C (or its equivalent)…OMG the govt’s greed sucks.

Sebi has many good things like cap on expenses, trustees, custodian, r&t agents registration, etc. It is time IRDA accepted that they do not know how to regulate ULIPs and does a ‘cut and paste’ of the Sebi rules and regulations for it s ULIPs. Limit on how much can be invested in one group, in one industry, the advertising norms, who can be a broker, broker’s registration, etc – many rules  should be as much applicable to the Ulips, so I hope the investors benefit…sebi or no sebi.

Reminds me of Rajagopalachari’s (Rajaji’s) statement when the PSUs were started …”Raja bane vyapari, praja bane bhikari”.

When the IRDA was formed, the rules were favoring LIC….now the government is favoring the money bags of the insurance companies.

Over to you Mr. Bhave, will you bring back the loads in the mutual funds?

L O L.

PS:  ‘we are committed to protect the small investor’ …ROFL, LOL, ROFFFLLLL

“Fee based advisory is the cure for all evil”. This brings us to the question – what is evil you all know who is now evil, do you not?!!

We have been going to a doctor (we choose a doctor whom we can afford) and paying him a ‘fee’ based on the time that he spends with us. Therefore there should be no worry about being sold a wrong solution. Correct? LOL.

For a fee based service to succeed (it is still not a success in any part of the world for the mass market) there have to be some pre-conditions. The fee based adviser is like a doctor, so he should wear a white coat – AND NOBODY else in the market should be allowed to wear a white coat. He should not be tied to any ‘house’ for any product. A doctor who is tied to a nursing home which has a chemist shop is a deadly combination.

Now if a fee based adviser decides that his wife will be an agent for all mutual fund and tie up with a broker for insurance….it would be a case of going to a quack who is operating from an authorized dispensary! During inspection you see the doctor, post inspection the doc goes away and the quack comes in.

Will this happen? Ask yourself whether it is already happening?

Myth No. 1: I am too young to plan for retirement: This is a very very wrong statement. The earlier you start the sooner you reach the goal. What happens if you are not able to earn from the age of 54? You thought you will save very well in those 7 years did you not?

Myth No. 2: I can never be as good as Vallabh Bhansali or Rakesh Jhunjhunwala so why try? So stupid. Of course I cannot write as well a zillions of good to great writers, but I have been blogging, published a book…and till date nobody has called my blog lousy. So what if I cannot be as good as Vallabh in investing or Swaminathan Anklesharia Iyer in writing? Come on I can manage my own portfolio (lot of value copying from Warren and Vallabh, but my money does not know I have copied, does it?).

Myth No. 3: It is too late for me to start planning for retirement: same as point no. 1. Start today, of course yesterday would have been better. However today is still better than tomorrow.

Myth No. 4: Planning for retirement is very difficult. Not at all. Invest some time first – the rest of the pieces fall into place. Sorry to use this post as a plug – ‘Retire Rich Invest Rs. 40 a day’ is my book and a good place to start.

http://www.subramoney.com/book-written-by-me/

PS: there are only 3 myths – the 3rd one is just like point no. 1 and the 4th is a plug.

Ask a distributor, it is far more attractive to sell mutual funds than sell life insurance products if YOU ARE A OWNER of a distribution business. However if you are a manager who is judged on the quarterly commissions then the life insurance business is better. However to understand this you need to understand ‘compounding’ and trail commission calculation. If you are in the media you have to make your voice shrill and say ‘IRDA is a lobby not a regulator’ or ‘School boys cannot take on Cowboys’ – surely looks sexy .

For the past 55 years LIC paid 40% commissions to its agents. If it was so attractive a business why is it that no self respecting MBA becomes an agent to sell life insurance? After all if you can bring Rs. 1 crore as premium, you can take home Rs. 40 lakhs, correct. LOL. MBA students in ‘G’ grade schools HATE attending a sales interview even if it pays Rs. 5 lakhs. Difficult to reconcile all this data, correct.

Let us get the facts. Is there any life insurance product with 40% commissions? Theoretically yes, but today it hardly sells. Does any media article tell you this? NO.

What is the lowest commission in selling a life insurance product? Assuming the worst in this are is Hdfc Standard life insurance, the minimum commission is (believe it or not) about 1%. Has any media article told you about this? NO.

Have life insurance companies paid settlement claims and kept many children in school, repaid many home loans (and kept families in houses), paid for weddings of children, etc. Has any media article told you about this? No.

Why do so many questions have NO as an answer? Simply because negative news sells far, far, far better than ordinary news or good news. How many people will be excited if a child is kept in school? Not many. How many people will be excited if a teacher beats a child? Maybe many.

After all North East West South is about excitement is it not?

Journo: Subra do you not think the life insurance guys get pampered?

Subra: Why do you say so?

Journo: 40% of the contribution as a commission is too much, do you not think so?

Subra: What about products with 122% commission?

http://www.subramoney.com/book-written-by-me/

J: Not possible in the financial service industry…..at least not in India

S: In India, in financial services, existing product, ….dekhnewala chahiye that is all.

J: Which is the product?

S: Mutual fund….

J: Will you please explain…???

S: take an excel sheet calculate for an SIP of Rs. 10,000 per month for 30 years…fund growing at 12%..0.5% trail…see the commission from the 21st year to the 30th year…it ranges from 41% to 122%.

J: OMG! This cannot be true…why is the media not talking about it?

S: You are the media…why are you asking me. Just do your homework…use excel

J: what is the catch in what you have said….can I do a story.

S: First understand..then write. What is wrong is the Time value of money has not been considered, nor has tax been considered. However anything that you do…mutual fund commissions are better than life insurance business. The smart online distributors like (they did not want to be mentioned) know that..

J: Such a revelation sir….

S: Imagine you spent Rs. 7 lakhs on an MBA degree….

Get a good degree ——> It will lead to a great job—-> You will earn a lot of money —-> You have got rich.

This is one route. Well there are some issues – every body cannot get a good degree..so the scheme is torpedoed at the very beginning itself.

Set your goals, invest in a mutual fund, do a SIP in a good fund, review your portfolio every 3 months (monthly is bad you see), shift portfolios, churn managers, subscribe to the bank’s monthly magazine. We will tell you how to invest every month…and then sit back and relax. Well have you heard this before? I bet you have. It does not work, at least for most people this does not work.

If you ask me the most important step in getting rich is in getting a good financial planner. A guy or gal who is on your side. Fully on your side. This means a fee charging planner who does not sell the product – directly or indirectly. Such a person is difficult to find.

Once you find him ask him how much TIME he is willing to spend with you. And what fee does he charge. Too low is scary (how long will be here?), too high is not worth it (catch 22!).

Stick to simple things – low cost large funds in equity, a term plan, one credit card, that is all…after all like Leonardo Da Vinci said “Simplicity is the ultimate Sophistication”. KISS works here too….so if your Fin Planner suggests, Nifty linked debenture, PMS, F&O, commodities, …you know what to do, do you not?

So when a small distributor of mutual fund (or life insurance) compares himself to a big distributor, it is unfair. If a small distributor (let us say he mobilizes Rs.0.2 million a year) for one fund house) thinks he should be treated the same way as a bank which mobilizes Rs. 1000 million a year he is being foolish.

If the regulator thinks that by one piece of legislation he can change the market from a ‘commission’ market to a ‘fee’ market, well the regulator is being naive.

Things do not change because there is somebody sitting in Delhi (with no knowledge of the markets) wants there to be some change.

Change happens when the industry and the players want to change. A mutual fund is allowed to charge ‘bank charges’, ‘custodial charges’, ‘advertising charges’ ….etc. to the scheme (yes not to its own p&L). All it has to tell a banker is ‘If you collect Rs. 1000 million for us in one year, we will pay you slightly higher bank charges’ – is it a commission? I do not know. Even better, if the banker is told – Please collect our cheques ‘At par’ from all our customers in all your branches and remit it to us in a week’s time….till then you can enjoy the float.

How many regulators or auditors are sniffing out such ’soft rupee’ commissions (of income foregone) from the mutual fund to the bank – who provides banking services, custodial services, distribution services, ….etc.?

Sadly, but Frankly, none.

Infosys: My investing guru asked me to buy it when this share was available at Rs. 100, I did not. Luckily for me met him again when the price was Rs. 300. I bought 300 shares. Then in a very short period it went to Rs. 700. I sold. Then did not buy Infosys again. Oh la la la!

Learning: Held on to Hero Honda from Rs. 40 till date, but sold a few shares in between. Holding period: 24 years +

Bharti Airtel: The same person asked me to buy this share at Rs. 80. I told him…Oh God I missed it at Rs. 30. He said you WILL tell me the same thing at Rs. 400. So I bought at Rs. 80 and sold at Rs. 1200. Why am I cribbing? Bought only 200 shares.

Mistake: Betting too little.

Learning: Really nothing. For me betting 10% of my net worth looks IMPOSSIBLE. However if a share grows to that level, I am comfortable holding on to it. Sounds stupid? Behavioural finance at work!!

Ask Parag Parikh what this means…ppfas will have the answers…

Gujarat Ambuja Cement: Bought at Rs. 18 held for 2-3 years sold at Rs. 40 or Rs. 50 (not sure)…maybe even Rs. 70. Mistake: Selling too early.

Financial Technologies: Same adviser asked me to buy it at Rs. 50. Ignored the advise. He sold 3000 shares at Rs. 2500. Nice lesson.

Satyam: Was asked to buy it at Rs. 30. Did not buy it. Reason: Did not like the broker who recommended it. He has never been trustworthy. Frankly no regrets.

DLF: At various prices many people asked me to buy it (even at Rs. 200 when it hit its low). Did not understand the balance sheet. Still do not understand land banks…no regrets though.

Missed all the KP shares – because they were in the portfolio of a mutual fund – most people who have been around long enough know which fund! No regrets, have my pants intact!

So many mistakes made – some cheap, some expensive, some not so stupid in retrospect!!