Subramoney

For most Americans, Christmas has been Hijacked. Or whatever was left of Christmas after the dreaded R word, the non-bail out of the auto giants, but the top most question is: In the fraud dictionary,

Has Madoff replaced Ponzi?

Every year, I watch, good, honest, hard-working people go and lose a lot of money to some Ponzi scheme or the other. This year it is Madoff. Of course all this has happened in the US, and many Indians do not identify themselves with the Madoff problem.

However, please remember all the characteristics that are present in the Madoff problem are there in India just as much. Some important questions to ask are – is my advisor competent and trustworthy?

It is not sufficient that he is your neighbor, boss, relative, etc. He should be both competent and trustworthy.

Does he walk the talk? Does he himself invest in similar asset classes that he advises you to invest or does he keep his money else where. Typically you are looking for a restaurant where the owner himself eats!

After executing the deal, do you really need him to access the investments? This is a little tricky question. In case you have anything less than Rs. 10 million to invest you should be using vehicles that have public access – like a mutual fund or a unit linked insurance plan apart from ppf, national savings certificate and bank deposits. Normally you should be able to access these investments without any intervention with the executor. The exceptions to this are of course some banks which do not allow you direct access of your mutual funds, your PMS, etc. In case you have invested in a PMS with a broking company and the DP is the same brokerage firm that should be a red flag.

If something was to go wrong, and you get falsified statements, you will not know till there is a huge scam.

So if your bank, broker or advisor gives you only his “view” of your investments and you cannot deal with your investments the way you want to deal with it when you want to deal with it without the intervention of your Relationship Manager that should be a big red flag. Madoff is proof that big social names are not a protection! So the agent belonging to your society, your club, your swimming pool, your walking club, etc. should not let you cloud your decision of choosing a professional. Treat your money with respect, please. It is hard earned!

Are my investments liquid without the need for the person through whom I executed the purchase? The answer to most PMS schemes, real estate partnership schemes, private equity deals, art, etc. the answer is no. So if you sour relationships with the guy(s) with whom you did the deal you can safely kiss your money good-bye. Take the case of art – the person who sold it to you does the valuation and keeps telling you that it is doing well. Frankly this is scary. Many buyers, many sellers, 3rd party valuations, are all not just nice things to have, but mandatory if you have put serious money into it.

And for heaven’s sake ask all these questions BEFORE you put your money, not after. Stunningly, in India well regulated industries open to public inspection can be sold only be ‘qualified’ people. However, F&O, PMS, equity broking, real estate PMS, real estate partnerships, etc. which are perhaps subject to less (or no?) regulation than mutual funds and life insurance can be sold by anybody.

If you remove the words Madoff and Ponzi, this article can still be suitable. So forget which part of the world you are. Forget that you are dealing with a ‘big’ bank which never lets you sleep, please learn to ask these questions. Surely SEBI, IRDA, RBI, Dr. Manmohan Singh, are all there.

However, when it is your backside that we are talking about, take care yourself!

and if you want to know about the oxymoron sophisticated investors who invested in Madoff, please read wsj. Specifically    http://online.wsj.com/article/SB122912266389002855.html

No, this is not a class on futures and options, nor equity. However long term bonds also have a put and a call option.

An option that can be exercised by the issuer of the bond whereby the bond can be extinguished prior to the date of expiry is called a CALL option.

An option that can be exercised by the investor of the bond whereby the bond can be extinguished -by repayment BEFORE the expiry date - is called a PUT option

YOU may have heard of LIBOR - if you replace London by Mumbai, you will know what is MIBOR. A committee was set up for the development of debt market. According to their suggestion, NSE had developed MIBID (Mumbai Interbank Bid Rate) AND MIBOR (Mumbai  Interbank  Offer  Rate)  for the overnight market. This was launched sometime in 1998. They are reference rates. Then NSE launched the 14-day MIBID/MIBOR and then the one  month and the 3 month MIBOR AND MIBID. Thus all the 4 categories of MIBOR AND MIBID are now available.

It is the simple average of the quotes by the various participants in the market - banks, PDs, institutions polled on a daily basis.

If you have wondered what is a CDO, CMO, CP, CD…welcome to the first lesson. A commercial paper is a short term unsecured negotiable issuance promissory note instrument issued by corporate bodies to meet short term requirements of working capital.

It was issued for the first time (I think) in 1991 - maturity varies from 90 days to 364 days. Almost always issued at a discount. Recently it was made mandatory that the issue should only be in demat form. Can be held by individuals, banks, corporate bodies, etc. Can be issued on a non -repartiable basis to NRI - am not sure about whether there has been any change in repatriation guidelines - please check the RBI site.

Now that you know what is the money market and debt markets, you will want to know who are the participants, won’t you?

Here they are:

Banks of all categories

Financial institutions

Primary Dealers (PDs)

Satellite dealers

Firms

Companies

Mutual funds, Insurance companies, FIIs, State governments, Nepal Rashtria Bank, Provident funds, trusts, research organisations, Individuals, Nris, OCBs, Intermediaries, brokers, RBI, and of course the most important player - the Central Government.

Cash Reserve Ratio (CRR) is a regulatory reserve requirement under section 42(1) of the Reserve Bank of India Act, 1934 which is to be maintained as CASH or CURRENT ACCOUNT balances with Reserve Bank of India, along with gold by all Scheduled Commercial Banks as a percentage of its Net Demand and Time Liabilities (NDTL).

The CRR has to be maintained on reporting Friday.

One of my popular posts is “life insurance simplified” so I thought I will continue to use the same tag line for all my 101 lessons! The number of journalists I know is going up, and the questions I get from them is stunning. The latest - “If Hdfc bank pays 3% interest on a FD - how does it matter if I keep it for 7 days, 10 days or 14 days? If I keep Rs. 100,000 and take it out after 7 days, I will get Rs. 103,000 will I not?” I had to just simply tell him, “Sir, it is 3% PER ANNUM, and not an absolute figure”.

So if you do not understand SLR, CRR, Repo, ytm, current yield, plr, sub prime, pda, real rate, benchmark, rbi, sbi, reverse repo, basis point, g-sec, sgl, ocbs, nsdl, - if all these look like an alphabetic soup to you take heart. I will try to explain some of these words under this heading. Like I am doing a “mutual fund” tutorial, I also plan to do a “debt markets simplified”….so keep reading this space!

Mutual fund regulatory environment

REGULATORS IN INDIA

· SEBI - The capital markets regulators also regulates the mutual funds in India. SEBI requires all mutual funds to be registered with them. SEBI issues guidelines for all mutual funds operations - investment, accounts, expenses etc.

· RBI as supervisor of banks owned mutual funds - As banks in India came under the regulatory jurisdiction of RBI, bank owned funds to be under supervision of RBI and SEBI.

· RBI as supervisor of Money Market Mutual Funds - RBI has supervisory responsibility over all entities that operate in the money markets. Hence in the past Money Market Mutual Funds scheme of Mutual funds had to be abide by policies laid down by RBI.

· Ministry of Finance - (M o F) supervises both the RBI & the SEBI and plays the role of apex authority for any major disputes over SEBI guidelines.

· Company Law Board - Dept of Company Affairs - Registrar of companies AMCs of Mutual funds are companies registered under the companies Act 1956 and therefore answerable to regulatory authorities empowered by the Companies Act.

· Stock Exchanges

Stock Exchanges are self-regulatory organizations supervised by SEBI. Many of closed ended funds of AMCs are listed as stock exchanges and are traded like shares

· Office of the Public Trustee

Mutual fund being public trust are governed by the Indian Trust Act 1882. The Board of trustees or the Trustee Company is accountable to the office of the public trustee, which in turn reports to the Charity commissioner

· Unit Trust of India

Unit Trust of India formed under UTI Act 1963.The Management of the Trust is under a Board of trustees, which has names of RBI, IDBI, LIC, SBI with the chairman appointed by the Government of India in consultation with the IDBI.

· What are Self-Regulatory organizations?

A Self Regulatory organization (SRO) is an association representing a group of market participants, which is empowered by the apex regulatory authority to exercise pre-defined authority over regulation of their members.

Welcome the Bear Markets!

Although we saw a furious short-term rally last fortnight, we have entered into official bear markets territory as of early this month. (In the US bear markets are defined as a drop of 20% or more from a previous high.)

This is a good thing. Smart and Legendary investors understand this. Ordinary investors don’t.

If you haven’t spent much time buying stocks getting excited about a bear market doesn’t just sound counter-intuitive, it sounds nuts. After all, how can you feel appreciative watching the value of your life-savings grind lower? Life was so much fun when you were buying at 19000 and the index went to 21000 was it not?

However, if you are an investor, think a few months ahead. Or even years ahead. Think of Viswanathan Anand as you financial advisor! The kind of returns that you can get after a 30% fall in the market is phenomenal. Do not trust me. Ask your investor about a paper made by Mr. Prashant Jain of Hdfc mutual fund. That document is available on the Hdfc mutual fund site and in the inbox of your advisor. Since I was not sure about copyright issues, I did not reproduce it here.

Every stock investor knows that you’re supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low. So if you are 22 years of age and are planning to buy stocks for the next 45 years, you need more bear markets than bull markets J .

If you want to prosper during the next bull market - the one that will propel the averages to new highs in the years ahead – MAYBE now is your chance to pick up some bargains. This is not to suggest that the markets have finished their fall. Maybe they will fall further, but hey investors - Don’t Let Bear Markets Scare You

Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low. In fact a friend calls it a family hobby – buying high and selling low!

Yes, the market has fallen sharply over the past eight months – Jan to Aug ‘08. And it may fall further in the weeks ahead. Still, this is an enormous opportunity for long-term investors. Too bad most of them don’t see it that way.

We give too much credit to the guys with white skin – and that is stupid. Indian banks have not leveraged 1: 30 times like a Bear Sterns had done. Or like Lehman brothers or like Citibank. Reddy of RBI has not put 91 Indian institutions on “watch”. However, we have beaten down our companies by a similar margin as the American companies!

Read Dr. Jeremy Siegel, author of “Stocks for the Long Run, Read John Templeton, ….see how Warren Buffet and Peter Lynch have celebrated bear markets.

• Remember 30% falls can be followed by 30% gains! However it can fall for some more time before it rises.
• Take any rolling 7-year period over the last 30 years, and stocks have outperformed bonds.
• Take any 10-year rolling period and shares have given a positive return even adjusted for inflation.

Bear in mind, no one when can tell you when the next bull market will begin, how long it will last, or how high the market will ultimately go.

At Berkshire Hathaway’s annual meeting in May, Warren Buffett said “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Why? He knows he owns great businesses. He would like to own them even cheaper.

During bull markets you hear “buy, they do not make stocks anymore” and in bear markets they tell you “sell, or at some time there will be no buyers”. Both are wrong. Completely wrong. Markets go up and go down. Do an SIP. That makes sense. Do it now. It makes more sense.

Now that the Pay commission recommendation has been accepted, inflation gets a nice leg up :). Now you can see inflation at 12.5% this week and perhaps at 13% the next week. This will increase the interest expectation of the people and therefore the reluctance of people to participate in RBI auctions.

Thus if you have money in savings bank account, rejoice! Keep money in liquid funds / short term floaters (accrual funds instead of duration funds as a fund manager would say). Do not lock in your funds into 36 months FMPs unless you wish to clearly not worry about interest rates in 6 months time. You are better off to keep small amounts in FMPs of a lesser duration. Ideally a short term floater - and in about 6 months time start doing a STP in an equity fund.

So have fun investing…..