Simple Equation

Simple Equation has moved

2009-09-30T07:09:00Z

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Confidence or Expertise?

2009-08-26T18:36:00Z

When engaging the services of a Financial Advisor / Investment Counselor, what is it that you value most? Confidence or Expertise. (click below to listen to a podcast with Harish Rao on choosing an investment advisor)

Most Investment Advisors (IA) I have spoken to seem to be convinced that it is Confidence. Some reason that Confidence stems from Expertise. Fair enough.

In my judgment, I would tend to agree with most Advisors. Yes, the Indian investor seems to place more faith on the Confident Advisor than the Expert Advisor. After all, investment management is really about expectations management. You will always have a sour faced investor with 25% compounded returns and a cherubic one, content with 10% CAGR.

A successful IA combines high achievement drive with high empathy. This enables her to get maximum share of wallet from her clients. The High Achievement Drive - High Empathy combo is an all-season winner. These are IAs who are determined to help you achieve your financial objectives, while achieving theirs too. They believe every investment road-map has to be win-win. Usually, they exhibit superior emotional intelligence and can handle ambiguity with more calm. Invariably, an investor would refer his friends to such an IA.

However, the road to the Investment Selling glory is littered with the corpses of the High Achievement Drive - Low Empathy practitioners. These are bull market stallions whose gallop turns into a wobble when the cycle turns. They are ideally suited for Used Car sales, but have sauntered into Investment Advisory services, complete with bespoke shirts and fancy Blackberrys. Their spurious confidence has over time caused so much havoc, with their destructive advice evident in so many forms - PMS, ULIPs for kids, structured products and a heavily churned equity book. In the end, post-expenses, many such portfolios would be underperforming the index. (But to be fair, these journeymen love their customer's life : they prescribe so much of insurance - usually ULIP or Endowment, but rarely Term).

So, is there something that is more important than Confidence and Expertise : INTEGRITY.

Lest you get me wrong, the bad ones exist not just among the smart set. In fact, many amongst the smart set are really very smart and hard working. There are quite a few dubious advisors amongst those hawking traditional / legacy products. These folks will want to sell you stuff that earns them the highest brokerage, while saddling you with expensive long term products that are financial handcuffs.

So, if you think your IA has the highest level of Integrity, than let Confidence and Expertise take a back seat. It's on Integrity that you got to strap the seat belt.

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Will you pay a fee for Mutual Funds?

2009-07-29T15:53:00Z

Winds of change are blowing at hurricane speed in the Mutual Fund industry.

From Aug 1, 2009, investors would not have to pay any entry load in any Mutual Fund Scheme. SEBI has recommended that instead, they - the investor - would have to compensate their financial advisor a suitable amount for advisory services. This means that for every Rs. 1000 given to a MF scheme, the entire Rs. 1000 is available for investment.

(Do a simple exercise, look at all your investments, Mutual funds, Insurance, Debentures etc, and see which one has snipped the biggest hole as initial charges. Some may have collected Rs. 1000, but invested just Rs. 600).

This is a very investor friendly measure, and ensures the highest level of investment efficiency – unmatched by most products. For this single reason, Mutual Funds rank as one of the greatest financial products in India today.

But how does the advisor get compensated ?

In two ways. He continues to get a commission from the MF house (or AMC as they are called) and more importantly, he is expected to be reasonably remunerated by you, the investor. The commission stands reduced after abolishing loads and thus investor fees are expected to make good the deficit.

Why should you pay ?

There Is No Such Thing As a Free Lunch. Please remember this. Advisors - Independent, Banker or Broker - provide a service, much like a Doctor, Chartered Accountant or a Tutor. Your fee will determine the sustainability of your relationship with a good advisor. Advisors on their part also know that there is an obligation to provide the finest advice and most responsive service to a good fee paying investor.

My recommendation

Pay fees. Be fair. Be generous. Treat your advisor as you would your cardiac surgeon. With utmost respect. Nurture the relationship. You will benefit. But settle for nothing less than 100% Integrity and Transparency. 99% honesty will just not do. Make that clear. If you don’t do it on Aug 1, 2009, chances are that you will not do it on Aug 1, 2019 either. In my experience, the best advisors (as measured by helping their clients achieve their objectives) are those that have Integrity, Maturity and Customer Orientation. Not necessarily the ones with smarter jargon, slicker appearance and complex products. In short, those that have YOUR target in mind, not THEIRS. Be careful, very careful of those that justify financial instruments that embed a high front-end fee. Always, insist on disclosure of ALL charges. If you are convinced about product suitability despite high charges, go ahead. It’s your money. Not mine.

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The Big Bee

2009-07-06T17:16:00Z

So this was the Big B.

Having to do an assignment non-stop till 7.00 pm, I got my first view of the budget at 8.00 pm on B Day.

My first impression : The only Big B - Big Government. Anything named after Nehru, his daughter and her son was to get an increase of atleast 50% ! And in the present government, that just about covers everything from Roads to Tribal Archery competitions. I would be surprised if the fiscal deficit as % of GDP does not reach double figures by the time the next election is due.

The Finance Minister did well to abolish FBT, something his predecessor was in total denial about. Also, by removing the surcharge and upping the exemption limits, he has put in a little more into the middle class pocket.

That he did not fiddle with taxes on investments (STT, Dividend Distribution Tax and Capital Gains Tax) is also good news. Anyway, a new Direct Tax code is on its way, which should make interesting reading. GST should be operational from April 1, 2010, which is again good news.

NPS would remain EET, which is a letdown. It does not bring about parity with EPF and PPF as well as ELSS.

I am extremely uncomfortable with Big G having to handle so much of our Big M. Maybe that's why the Big S had a bad hair day and decided to swoon down to 14K.

But hey, Industry honchos have to sit and give it a ranking. Narayan Murthy gave it a 7, and everyone else in the panel said a relieved ‘Ditto'. Media pundits have to hype this as an event and Anchors have to sport a new wardrobe. I saw an eerie similarity in poses between Budget anchors and T20 captains. Everyone tried to look like Angelina Jolie in Tomb Raider. But I suspect Rakhi Sawant would have taken a fancy to a couple of them.

Bottom line : Rest easy, this Big Bee has no sting.

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What, No Load !!! What, No Load ???

2009-06-21T11:38:00Z

SEBI has just decreed that Mutual Funds in India will not charge a load. And many Financial Advisors have concluded that the epitaph in their tombstone has just been carved in granite by SEBI.

Having keenly observed and been an enthusiastic participant in the Investment Advisory business for more than a decade, there are two truths I firmly believe in.

1. The Mutual Fund is the greatest financial product in India today. It has the ability to create and preserve the wealth of millions of Indians. It is truly egalitarian, convenient and has a tremendous sense of integrity in its design. It is also fortunate in having SEBI as its regulator. And SEBI has done a terrific job.
2. The Mutual Fund Agent / Advisor has rendered maximum service and exerted the greatest of efforts in evangelizing mutual funds, despite the vagaries of the stock and money markets. The Mutual Fund Agent / Advisor - be it individual or institutional - has often received compensation that is a fraction of what their insurance counterparts have received.

So what is the fuss all about ? It's about the collision between the regulator and the distributor. For those not aware of what has happened, here is a three sentence gist : The regulator has abolished the entry load in Mutual Funds. This entry load (usually around 2.25%) was used to compensate the distributor. So now, investors get to enter for free, but will have to compensate their distributor with a separate cheque, at a rate of their discretion.

(Click Here for an earlier article on Variable Loads).

SEBI has clearly disrupted a perfectly well oiled business model. My sympathies with the distribution fraternity. This is a HUGE change. But SEBI must be having valid reasons for that. You bet. Foremost amongst them : Churning. Misselling. Skewed compensation to various distributors.

Do all distributors fall in this unsavoury category. Never. Just an unscrupulous few.

The Road Ahead

At this point in time, the path ahead seems unclear. Distributors have to shift to a fee based model and will have to make clients aware of their value. The clients on their part will have to realize that there is no such thing as a free lunch.

As I had said earlier, Mutual Funds are one of the finest financial products. I only hope that the best distributors continue their relentless pursuit of giving the finest advice and service. I also hope that some clients get over their mentality of discounting financial advice or trying to extract information for free. Every advisor should be adequately compensated for the energy and effort expended as well as education and counsel imparted. Not compensating an advisor satisfactorily would be the most unfair thing. But the moot point : Just what is fair? 1%, 3%, 5% or 0.1%

Knee-jerk Reactions

Some distributors I have met have predictably announced the death of the mutual fund industry. That is not going to happen. The destination remains the same. The routes have changed. All industries have to keep re-working the dynamics. Just ask Shah Rukh and Aamir. They have had to kiss and make-up so that Bollywood could do business with the Multiplexes.

What should the AMC do ?

The Asset Management Companies must recognize that this is a game changer. And not all distributors are equipped to handle the change. AMCs must initiate a dialogue with distributors and also inform their clients about SEBIs new rule. Clients must be made aware about the services they can expect from advisors and the necessity of engaging good advisors to achieve financial objectives.

AMCs also realize that they cannot afford disintermediation and that a robust channel is necessary to grow AUMs. Hopefully SEBI realizes this too.

As a strong votary of the Mutual Fund business, I hope SEBI, AMCs and Distributors work together to build a fantastic Asset Management industry in India. All the very best, everyone.

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Children and Investing

2009-06-11T01:34:00Z

A few days back I had conducted my first workshop for making children more ‘Money Aware'. Targeted at 10-12 year olds, it was the most fun I ever had in any workshop / seminar. And I know it could have been more creative and had more energy. Next time.

So what did the children learn about Money? All the basics - Earning, Spending, Investing, Planning, Risk, Time Values and Time Horizon. And Asset Classes.

What did I learn? Plenty : Indian Kids are more safe than savvy with money. Which is very good in a sense.

Just what does this mean : Consider this Simple Equation :

Earnings - Spending = Savings

Savings + A Plan = Investments

Most children are very aware about the Spending part and firmly believe it holds they key to more money in the hands. Maybe the Earnings Part will blossom in their minds later.

In an exercise designed to gauge their attitude to expenses and costs, most seem to have got the costs of everything from an egg to a Shatabdi ticket right. About 75% right.

In another exercise, children were asked to differentiate between short term, medium term and long term goals. They got it all right.

Asset Allocation, that most important investment activity, is a different ball game. Children should clearly know the importance of each asset class and the fit into a long term financial plan before attempting one. In short, Asset Allocation can only be thought of, once all the basics are in place.

(To hear a podcast on children and investing, click here)

Bargaining

One of the girls in a Q & A session, asked me if Haggling over price was a done thing. What a fantastic question from a young kid.

I threw open the discussion on bargaining to the rest of the group too. What happens in the animal kingdom happens with humans too. ‘Imprinting' is the biological term that describes why baby ducks instinctively follow the first moving object they see. If it is their mother (most likely) then they end up mimicking everything mom does. Smart thing, if you have to fly with mom over really long distances every winter.

Ditto for Money Matters. Most kids think that the rules that mom follows are sacrosanct. So all moms out there, start driving harder bargains in Linking Road, Commercial Street and Chandni Chowk. Your kid is watching.

Retirement Planning

As part of a discussion point with parents, I asked the kids to find out if their parents had begun retirement planning. Not a single parent did.

Like Roger Waters and Dave Gilmour screamed ‘Hey Teacher. Leave them kids alone'. It's the parents, stupid.

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Spending and Financial Planning

2009-05-31T11:23:00Z

Is Spending a valid theme in Financial Planning? Should Investment Managers and Financial Planners talk about it in India.

Earnings - Spending = Savings.

Savings with a plan = Investments

Investments x Fee (or commission) = Revenues for the financial services industry in India

Financial Planning Industry = Banks / AMCs / Insurance Companies / Independent Financial Advisors / Retail Financial Advisory Shops / Investment & Wealth Managers / Press / Government

In an industry with a godzillion stakeholders, I guess Spending figures somewhere in the whole equation.

So, why do Financial Planners refrain from advising clients on the way they spend?

Could it be :

a. Spending is viewed as a strictly personal matter. No Investment Advisor (IA) wants to be seen encroaching this space.

b. IA's don't have the interest or expertise to advice on this.

c. IA's are a happy lot, as long as they get their ‘pre-determined' ticket size.

d. Classic NIMBY inertia or busy collecting low hanging fruit in the relationship.

e. Some IA's think they would be viewed as competent only if they decipher mumbo-jumbo like Structured Products and Hedging Strategies.

f. Some actually do end up advising on spending without appearing to.

Huge Relationship Advantage

In my opinion, advising on spending is currently a huge relationship lacuna. IA's should view this as a great opportunity going forward.

However, this is possible only if the investor - IA relationship is one that has a strong foundation on Trust and Integrity. Spending is still a very personal matter. Only the trusted advisor will be allowed entry.

Viewed clinically, what is not spent, is destined to be invested. What is invested, generates a fee. But in Banks, the liability teams loss is the asset teams gain. So there is money to be made either way.

IA's that do counsel clients on spending are - in my humble opinion - that much closer to having a client for life, and not just for a Bull Market.

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Investing in Equities

2009-05-19T07:22:00Z

This is my third post specifically on investing in equities. And the theme is the same. Should you need to have equity in your portfolio, Invest Now.

I had started blogging on this platform with my first post titled ‘Let the Party begin...' on Nov 11, 2008 (Click Here to read that post).

Later, on Jan 22, 2009, I made an even more detailed case for investment in equities with a ghoulishly titled post ‘Bleak Outlook, Uncertain Future, Worried Fund Managers : Great time for equities', wherein I had presented various scenarios. Each investing circumstance presented was really meant to be a persuasive equity investment sub-plot. (Click Here to read that post).

How prophetic were these suggestions? On Nov 11, 2008, the sensex closed at 9839.69 and on Jan 22, 2009, the sensex closed at 8813.84. On May 18, 2009, it closed at 14284.21

Have I been proven right ? Certainly, but in my honest opinion, on the flimsy basis of a brief rally over a 4-6 month time horizon. This does not, I repeat, does not count for anything. This is just a 4-6 over cameo in the Test Match called life's financial objectives. I would feel vindicated, if I am right over a 6-8 year time horizon. I am confident that I would be proven right. And yes, I am happy with this passage of play.

But there is one thing I am certain about : The greatest buying opportunity of 2008-09 has passed us by, and 99% of investors were mute spectators. The distressing part is that many large institutional investors also took cash calls. India's largest Mutual Fund hoarded 27% of their equity assets as Cash, as on April 30, 2009. Sad, but true.

Investors who continued with their SIPs or rebalanced assets every quarter would be certain winners. However, NOW is always a good time to invest in equities and the Long Term is always a perfect time horizon.

PS : Equity Investing is high-risk high-reward. Those that have a 5-10 year view are advised to mute the volume of their favourite business channel. Still better, surf to Nat Geo or Discovery. Or the IPL.

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The Rahul Gandhi Moment

2009-05-11T12:09:00Z

Rahul Gandhi's unexpected words of praise for Nitish Kumar and Chandrababu Naidu has puzzled many political pundits. What if leading business leaders and financial honchos have similar cathartic seizures. In such moments-of-truth would we hear sound bytes like...

Mukesh Ambani : Yes, Anil is indeed doing a fine job. When did I ever say politics was a bad idea.

Anil Ambani : Mukeshbhai deserves all the hydrocarbons he can discover in every corner of India. Dad would be proud.

IRDA Chairman : IRDA will now focus only on investor interests. Insurance companies, distributors and intermediaries will take a back seat for now.

SEBI Chairman : SEBI will now focus only on AMCs, Distributors and Intermediaries. Investors will take a back seat for now.

RBI Governor : Inflation. Under Control ? Sort of. Depends. Well, WPI, anyway. CPI ? We are doing our best. That will come down as soon as the Model code of conduct is over.

Typical Insurance Co CEO : New launches will focus on pure Insurance products. We believe investments are best left to Asset Managers, Investment Bankers and Banks.

Typical Mutual Fund CEO : What rubbish, this AUM business. For us, retail money is paramount. We will gladly refuse short-term and unprofitable institutional funds.

Typical Real Estate Co CEO : Real Estate rates can come down. Remember 1996-2004 ? Please consider other asset classes as well. Oops, Control-Alt-Delete.

PS :

Vijay Mallya : Does a lemon cost $ 1.55 Million ?

Shah Rukh Khan : Well, this is it. Even Boria Majumdar doesn't support us now.

John Buchanan : It is time I monetized the Fake IPL Player blog.

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New Pension System : Mayday, Mayday, Mayday

2009-05-01T01:36:00Z

Mayday : The call, if made three times continuously, signals distress and trouble.

May Day : May 1, International Workers Day or Labour Day.

May Day, May 1 : Launch of the ambitious New Pension System (NPS) by PFRDA.

What's the connection? Looks like it is PFRDA that needs to send out a distress call on May 1, 2009. Apart from releasing full page ads, there seems to be little action in getting the ambitious NPS off the ground.

NPS : No Product Sir

Out of sheer curiosity, I visited six of the Points of Presence (PoP) in a busy commercial area, to get a sense of launch preparedness. I went to SBI, ICICI Bank, Union Bank of India, South Indian Bank, SBM and UTI Asset Management. In each of these branches, I showed the concerned Manager the NPS advertisement. Not a single soul knew anything about the product or the launch. When I drew their attention to their Bank being advertised as a PoP, they were confident that their HO / RO would soon revert with details.

Not an easy product to sell

The NPS is a great product. It is structured well and I am one of the biggest supporters of the NPS. However, it is one of the toughest financial products to sell. Why?

a. Really, really, long term : Contributions to the NPS can be withdrawn only at the age of 60. Even then only 60% can be withdrawn as a lumpsum and the balance constructed as an annuity.

b. No guaranteed returns : The Aam Aadmi wants a guarantee. Nothing sells like a Government entity guaranteeing returns. (Click here to read a post on the success of guaranteed return products). With the NPS generating market based returns, this is surely going to queer the pitch.

c. Confusing array of choices : Investors need to choose their PoP, their Pension Fund Manager (PFM) as well as the Investment Option and even the Asset Allocation. Improperly filled applications would be rejected.

d. Last Mile Connectivity : This is the real problem. Investment products, especially insurance ULIPS and Mutual Funds, are sold not bought. There is a considerable advisory effort before a sale is made. PoPs, however imposing they may be, need to don the advisors role if they are to make any headway.

e. No tax benefits as of now : The NPS is currently EET and not EEE. This is a dampener, which PFRDA, I am sure, will work hard to set right.

f. Inertia : Before an investor can make her first contribution to NPS, she has to get her Permanent Retirement Account Number (PRAN) and fill a lengthy form indicating all choices. Again, the PoP needs to make things smooth and easy to facilitate transactions.

g. Current Market Conditions : With risk appetite having deserted most investors, PFRDA would have to work just that little bit harder to gain traction.

The Post Office Bogey

In a recent interview, the PFRDA chairman, Mr. D.Swarup, was quoted as stating that the NPS would welcome the Indian Postal network to act as a PoP. I feel India Post is not suited for such a product. While their reach is unparalleled, their intensity is questionable. India Post themselves depend on a huge army of Agents to sell various PO small savings schemes. Unless PFRDA co-opts these agents into the sales process, the outcome would yield little joy.

So, let us hope that May 1, brings us good tidings. Apart from the Bandra-Worli sealink, we can also look forward to a truly new generation Pension System. However, PFRDA needs to act fast, otherwise May Day may well be a distress call.

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Did you buy Gold this Akshaya Tritiya?

2009-04-27T16:41:00Z

Today - April 27 - is Akshaya Tritiya and the bank I went to this morning was decked up real nice. The branch staff sported an ethnic look and only gold was on their mind. I believe sales were going on nicely and I was the only sour puss in their scheme of things.

Every Akshaya Tritiya, I get the feeling that all the gold mined on earth has just one destination - the Indian household. I for one, have never been a fan of gold either as an adornment or as an investment. It is just too expensive for the former and is an underperformer as the latter.

As an investment, it has more negatives than positives. Poor liquidity (which can now be tackled through ETFs), low long term returns as well as poor tax benefits. But probably, the biggest dampener is that for gold to be a stellar performer, the greater fool theory has to be played out.

With gold having no real economic use other than for being a store of value, its price is derived from the continuous demand vs. supply play. So long as there is a buyer for every higher price quoted, gold appreciates as an investment. Presently, with the investing world being risk averse, there seems to be a certain momentum towards gold. In my opinion, this is not going to last. Once risk appetite returns and equity markets do well and inflation remains benign, gold will return to being a long term underperformer. However, in the cash economy, gold will be a perennial favourite. Nothing we can do about that.

Your grandmother may have thought gold to be great. But then she may have witnessed World War II, Partition, Polio, Rural-Urban migration and food shortages. You haven't. In the 21^st Century, it is time to recognize that all that glitters is not gold.

Click here to listen to a podcast on why gold may not be the smartest investment.

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Mental Accounting

2009-04-17T00:22:00Z

Ever wondered why is it that when we go on a holiday, we tend to splurge on things we by and large would not have indulged in at home. For instance, spending an equivalent of Rs. 600 on a taxi ride in Singapore or Rs. 2000/- for entry into an amusement park overseas, when normally we would have thought twice about such expenses at home.

Or for that matter, willingly spend Rs. 15,000/- over and above budget while buying a house, but hesitate to spend the same amount in buying new clothes or new books.

Why is an amount of Rs. 1500/- that is received as dividend treated differently from the same amount received as a gift or as shopping vouchers received while redeeming reward points. And why is all of this different from Rs. 1500/- that is part of Salary. Its all about Mental Accounting.

Popularised by Richard Thaler, Mental Accounting is a concept that governs most of our choices and decisions in our life. As Thaler in his book Nudge highlights, "Every day, we make decisions on topics ranging from personal investments to schools for our children to the meals we eat to the causes we champion. Unfortunately, we often choose poorly".

Thaler has collaborated with other celebrated behavioural finance theorists like Daniel Kahneman and Robert Shiller.

How does it affect us in our daily life?

Mental Accounting influences the way we behave in several ways, especially when viewed against the flowing contexts.

a. Dividend Income vs Capital Gains : Why is it that certain investors prefer the dividend option, while others opt for growth (capital appreciation) option. The latter helps an investor benefit from compounding.

b. Paying by Cash vis-à-vis Credit Card : Rs. 2000 for a meal paid by cash tickles the mind much longer than a mere swipe.

c. Earned Income vs Gift Income : Mother always told us to save our ‘hard-earned money'. So what do we do with the Rs. 1000/- uncle just gifted us.

d. Context of the expense : Rs. 30 on a Kulfi after a thali costing Rs. 60 seems extravagant. However, an ice-cream for the kids costing Rs. 200 after an expansive lunch is par for the course.

e. Pain of Loss vs Joy of Gain : Most humans are more loss-averse than profit-motivated. Thus the pain of a loss is twice more hurtful than the joy of gain. Looked at from a different angle, the only time some investors assume risk, is actually to avoid a loss.

Thus being better Mentally Tuned enables an investor plan his investments and expenditure better.

Interested in hearing more about Mental Accounting? Click here for a Podcast.

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Sandwich Generation

2009-04-12T04:06:00Z

Taking care of your aged parents and having kids of your own to look after? Welcome to the Sandwich Generation.

While Indians have always been part of this generational Sandwich, it is grabbing headlines across the US, as an estimated 10 million children of the original Baby Boomers are becoming part of the Sandwich. There is much debate on whether these kids who now straddle three generations are just spurious ‘martyrs'. Shouldn't they just shut up and get along with caring for their elders and kids as well. For eons, families in Asian, African and Hispanic countries have been doing just that.

However, I sense that the Sandwich is undergoing an uncomfortable metamorphosis in our country. Changing family dynamics and value systems are playing havoc with many young Indians. The typical 30+ Indian Male / Female is now getting cues from various sources : spouse, friends, workplace peers, popular culture, parents, siblings, neighbours, on-line communities.

Just consider this. While driving back home last week I was tuned to the local FM. There were dedications galore. Not one guy / girl dedicated the song of choice to dad / mom / brother or anyone in the family. All dedications were to crushes and girlfriends. Can this generation be sandwiched comfortably ? Definitely Yes, but some re-engineering and rewiring is required. Otherwise, there would be a lot of short-circuits.

What has changed ?

In the earlier generation, there was usually only one financial stake-holder, the earning Male. Now with the Lady contributing to the high EMI and picking up tabs regularly, the urban couple better evolve consensus on matters relating to money.

Smaller family sizes have meant that usually the son is also the only son. And in some cases, the daughter is the only child. In some multi-child families, one sibling is usually in the US (for some, Planet Uranus - distant and cold). This means that the daughter looks after dad and mom too.

Consider Mumbai. Only the really affluent can afford a 3 BHK. The rest are corralled into ‘reasonably' priced sardine cans. Sandwich is a compulsion in most cases. An economic trade-off that has social sanction too.

Have I been sounding like a co-conspirator in jettisoning the elderly? Let me make it clear that in the Indian context, it is the elderly that have introduced values and seem much better to withstand adversity. And not to forget, that in India, despite all the corruption and decay around us, it is the Family as an unit that has survived against rotten governance and poisoned polity.

Surviving the Financial Strain

Sandwich households need to be financially strong. Investors need to have an asset allocation that reflects upward mobility as well as the ability to absorb shocks.

Thus Insurance (Life and Health) and high quality Equity and Fixed Income Instruments are a must. The Financial Plan must have a mix of long term (Wealth-creating) and short term (Safety and Liquidity) assets. Assume debt only to purchase a house. Seriously, do you need a new house, if you are going to inherit one. Many people buy additional apartments, only to suffer rental yields of 3-4% pa. What a waste of a huge amount of money. Click here to browse an all season investment check list.

Parents on their part must plan for a smooth and hassle free inter-generational wealth transfer. Make a will and look at tax advantageous methods to transfer wealth to children and grand children. Sentiments married to sound economics makes for a tasty sandwich.

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Imaginary Inflation @ 0.31%

2009-04-05T12:11:00Z

Inflation is taxation without legislation - Milton Friedman

Indian Inflation (WPI) resides at a magical 0.31%. This is the most make-believe number floating in the economy today.

Tragic, considering that serious decisions - interest rates for instance - emanate from these figures.

During the course of financial planning presentations, I often insert a slide on inflation. Call it the middle class mentality (whatever that means), but inflation figures, especially of staples, groceries and food items seem to generate maximum client empathy. I update my table every April, and the results are shocking. Just have a look to get convinced that inflation is nowhere near 0.31%

Item	Price April 2008	PriceApril 2009	% Increase
Sugar	19.00	27.00	42.11%
Rice	23.00	35.00	52.17%
Atta	31.00	33.00	6.45%
Potato	8.50	8.90	4.71%
Onion	8.00	10.90	36.25%
Bread	15.00	17.00	13.33%
Tea	108.00	145.00	34.26%
Thuar Dal	50.00	63.00	26.00%
Detergent Powder	55.00	82.00	49.09%
School Fees	16000	20000	25.00%
Cinema Ticket	130.00	120.00	-7.69%
Auto fare / km	7.00	7.00	0.00%
Petrol	52.86	46.28	-12.45%

All prices indicated in the table are accurate like to like comparison of prices. For eg, Sugar prices would be for the same brand and unit size purchased from the same supermarket a year ago.

Obviously the commodity meltdown affecting WPI has not descended to consumer prices. This could mean several things : there is a genuine demand / supply mismatch and / or that there is a fat margin being made by the trade / manufacturer. Or there is an imperfect price elasticity. Or a genuine increase in some factor of production and distribution. Prices raised during the Crude Oil hubris of last year have not come down.

Affluent consumers may not be affected too much. But for the lower middle class and the poor : an assault on the wallet. The really poor spend upto 50% of their income on food alone, and such an increase in prices would affect calorific intake for many of India's poor. My maid-servant buys just half litre of milk for her entire family on a daily basis.

How should the consumer react :

Become a smart spender. Compare, compare, compare. Nothing spooks a manufacturer / retailer more than the knowledge that the target consumer is extremely price / value sensitive.
Voice your opinion. Make it known to the seller that you are unhappy about the price. Feedback on price usually finds it way to the top.
Vote with your feet. Dump an item that does not seem priced right. Most FMCG companies operate on market share basis. They are in India for the volumes. When Indians dumped Surf for Nirma, HUL had to introduce Wheel.
Bargain. The recession provides a perfect platform to haggle in even the most snooty places.

While statistically accurate (as it is WPI), on a purely practical basis, the inflation figure of 0.31% is bunkum. Who knows, we may just slip into fantasy land. Before the first phase of polling, it may be deflation. Claptrap, really.

To listen to a podcast on Inflation, please click Here.

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Gilt Funds, Guilty Investors

2009-03-30T07:57:00Z

A section of investors in Gilt Funds are an agitated lot these days. For good reason too : As a category, Gilt Funds have fallen by 7.03% over the past 3 months, as compared to a return of 11.39% over the past year.

Just what has irked this section of investors? Excessive Volatility in the bond market translating to negative returns.

(Should you want to HEAR an update on Income funds, please click HERE).

Past Performance No Guarantee Of Future Returns

It is important to note that most investors came into Gilt Funds over the past 6 months. With bond yields falling, most Gilt Funds gave superlative returns in 2008. For e.g., the median 1 year return of Gilt Funds as on Dec 31, 2008 was 25.76% (with the best scheme returning 45.29%). Thus it is hardly surprising that investors jumped into the Gilt Fund bandwagon. Classic Past Performance faux-pas.

Late last year and early this year, the long term outlook was bright for Gilt Funds. With the economy expected to stay weak and inflation dipping sharply, interest rates were expected to move south. Move south, they did, initially smoothly, but with a lot of sputter later, to eventually reverse. And along the way, volatility surfaced, in the form of increased government borrowing and frequent sound bytes from the MoF and RBI. This was enough to spook the bond markets.

Siamese Twins

India's fiscal deficit is expected to increase sharply. The government would have to borrow more to stimulate the economy as well as compensate for lower revenue. All of this would add to pressure on bond yields, which moved from the 5% range (great for fund NAVs) to the 7% range (bad for fund NAVs).

Any upward move in yield is bad news for Gilt Fund investors. It would mean negative returns. With most fund managers maintaining a portfolio maturity in excess of 15 years, Portfolio Volatility is a Siamese twin of Portfolio Maturity. (Higher the maturity, higher the volatility).

So who is at fault?

The investor - and just the short term one at that - I am afraid. Gilt Funds are LONG-TERM instruments. Investors need to have a time horizon of atleast a year. And a stomach for volatility. However, there have been instances of investment advisors recommending Gilt funds as ‘Safe'. Safe from a Credit Risk PoV - Yes. From an Interest Rate Risk PoV - No. Fund Managers usually absolve themselves of any blame as they provide less volatile alternatives too.

Course Correction

Most Gilt Funds offer a short-term option, usually called Short-Term or Treasury Plan. This is recommended for a 6 month - 1 year horizon. Or still better, switch to a Short Term Income Fund if the time horizon is less than 12 months. If it is less than 6 months, then a Savings Advantage or Treasury Advantage plan is best.

Click here for a Podcast on Income Funds and Inflation.

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