Thursday, December 30, 2010

Portfolio Damagement Schemes and distributors

(This appeared in

A big fund house recently announced the redemption of a three year real estate PMS scheme. The investors were happy as they got back a total of one hundred and three percent of the money they invested. Yes, a pathetic return, but the investors were happy to see their principal back. Of course, it is more psychological than logical. In real terms, probably each investor lost around thirty percent of his principal, if inflation or purchasing power is factored in! Not a very prudential investment.
Several interesting takeaways from this:
i) Though the scheme collected money in 2007 (property prices even today are around fifty percent higher than that period), the investment must have been so bad that the net return to the investor is so pathetic. Or it is likely that the fund manager/s has done sweetheart deals with investee companies and made good money on the side;
ii) There would have been some investment costs (brokerage, due diligence etc);
iii) The distributor made a total of around five percent upfront, when he sold the scheme to the investor; and
iv) The AMC or the investment manager charged a three percent entry load and an annual management fee of two percent. Totally, the AMC made around nine percent of which five percent was given to the distributor. In effect, the AMC made four, the distributor five and the investor three! All the investment was of the investor. So, for the distributor and the investment manager, the return is infinite and for the investor, it is less than one percent per annum!
Alas, even today PMS schemes continue to lure investors.
The latest among the PMS schemes are the ‘debt’ PMS schemes, with return promises of around twenty percent per annum for three to five years. The collected money is lent to investment companies belonging to industrialists who in turn pledge their holdings in listed companies. The money is used by the investment companies to either buy more shares or to manipulate the share prices. Not all the investment companies are actually disclosed to be promoter entities as per the official records. And since there are no investment limits etc on PMS schemes, often, the entire pool of money is lent to one entity! This is nothing but backdoor money lending!
For selling these funds, the distributor can get two to five percent commission, upfront.
I happened to see a PMS account statement of a gentleman who had invested money in to a scheme focused on ‘consumption’ theme. In one year since investment, the person was down eleven percent, in spite of keeping cash balance of close to 45%! In the same period, the sensex has given a positive return of twenty percent! I found the arithmetic difficult to digest. My guess is that what I saw was just the snapshot of the statement date. Perhaps there has been active churning and trading which would have eaten away most of the money. Investors never seem to learn!
It is rare that PMS schemes give returns higher than the mutual funds. In spite of that, people with too much money, seem to get easily conned by the sales folk who push the PMS schemes at them because the selling commission is much higher than a mutual fund. It is time SEBI raised the minimum ticket size for PMS to at least a few crores of rupees. Then, it is a case of the rich putting their money knowingly. Today, people with less than even a crore of investment portfolio, are being lured in to PMS. Of course, they too do not deserve any sympathy, but greed is a normal human tendency and if the regulator can curb it somewhat, the investor who keeps away from such rotten schemes, would be protected.

2011- change is nothing. stock markets rule ok

2011 - Crystal Ball
(This was written for the Dalal Street Journal)

P/E Open Close
25.53 Jan-08 20,325.27
12.16 Dec-08 9,647.31 -52.54%

12.21 Jan-09 9,720.55
21.82 Dec-09 17,464.81 79.67%

21.99 Jan-10 17,473.45
22.85 dec 6 2010 19,981.31 14.35%
(Above numbers are based on the BSE Sensex)

The above table is self explanatory. Indian markets have given fantastic returns, unless you were caught with your money in the markets through 2008. If you have done that, hopefully you have bounced back. It is likely that if you were caught in fancy ‘growth’ stocks and still deep in the red.
From my experience of equities, I can clearly see that ‘value’ stocks have delivered superior returns as opposed to ‘growth’ chases. You have only to look at multinational stocks like HUL, Colgate, Castrol, Cummins etc to realise this. Many Indian ‘growth’ stocks have given nothing but heartaches. Perhaps you were lucky to catch an Infosys early, but it is more likely that you may have the ilk of Ispat in your portfolio.
The charm that the MNC companies offer us is that they seem to be in dull businesses. But in a country where domestic demand is going up in leaps and bounds, their businesses benefit enormously. Most of the companies I named enjoy incredible return on shareholder funds. They enjoy their share of India’s economic growth as well as stay focused on what they do.
Our economy has kind of moved on to a seven to nine percent growth despite the government’s utter paralyses in terms of doing anything proactive (other than individuals taking a toll for putting a rubber stamp). And for the righteous ones, who think that corruption and scams will matter, do not worry. Dishonesty is a way of life in India and merely because it is out in the print does not amount to a new discovery. Ignore it.
Industrial growth can be as high as fifteen percent, if supply catches up. In many areas, including service sectors, there is a clear shortage of skilled manpower. Rising wages are eating in to profitability as well as adding to inflationary pressures. I think that profit growth is going to be a party pooper. Inflation should continue at nine to ten percent in official terms, whilst on the ground inflation will be closer to twenty. This alone should keep some profit on the table for companies.
One worry is whether the last quarter will see some dip in rural spending as farm output is getting impacted by capricious weather in most parts of India. This is something that can upset the consumption story.
In this backdrop, I would like to look at keeping my money in to sectors like banking (private banks), pharmaceuticals, engineering and FMCG. Oil and petroleum can be looked at, but the sector has limited investment possibilities. Regulated sectors (fertilizers /sugar etc ) continue to remain politically threatened sectors and usual speculation around pre budget time could provide some quick bucks. With all the controversies surrounding telecom, it would be good to pick up market leaders at declines. The trouble is that one does not know which of these companies would be the next ‘discovery’ in a scam.
The government’s selling off of capital assets (shares in PSU) and treating the proceeds as revenue, will help to dress up the shoddy fiscal position. Analysts will shift focus from Trade deficit (increasing at nearly six billion dollars a month) to Current Account deficit (buffeted by capital market inflows) and say that ‘All Is Well’. The main plank for the bullishness is continuing foreign inflows in to this market. At some point, if they wake up and think that India is not all that hot or that some other global economies offer better opportunity, the flows will thin.
2011 is going to be a year of uncertain returns in this market. Whilst I do not see a market collapse (primarily due to corporate earnings rather than macro economics), earnings growth beyond fifteen percent or so is clearly not on. So, valuations are rich and stock picking is going to be key.
Gold and silver seem to be on a tear and so long as Europe and America continue to wallow in printed money, the gold run would continue. Perhaps gold and silver would give higher returns. If you ask me about whether they are at fair value, the answer is a resounding “NO”. Clearly, our stocks represent better value than the precious metals. The metal prices merely reflect the fear on global currencies.
One possibility is of regulatory whiplash which can bog down investments. These could be accompanied by exposure of accounting frauds also. 2011 is going to be a bumpy ride in the face of rich valuations, decent economy and strong funds flows.

R. Balakrishnan
December 7th, 2010.

Wednesday, December 15, 2010

Trust betrayed-

Today, the television channel, Headlines Today (belonging to the India Today group) had an expose on the Tata Group. In brief, land that belonged to Voltas, with a market value of Rs.250 crores was sold / transferred at Rs.25 cr to nominees of the Karunanidhi family (the family that rules the state of Tamil Nadu and is an important ally of the Congress ). According to the channel, this was the consideration paid to ensure that the Telecom portfolio was NOT given to Dayanidhi Maran.
In the same news capsule, there is mention of a shell co which links the Anil Ambani group, Swan Telecom, ETISALAT, ETASTAR and the DMK ruling family!
To all of those who have been saying that I am very negative and pessimistic, what more do you expect?
If Voltas has done it, Ratan Tata stands totally stripped of his high moral stance. That was supposed to be the last bastion of trust.
Now, let us turn to the important question. If the land deal is true, Voltas shareholders have been screwed. Voltas shares are held by institutional investors also. This is a fit case to sue the Board and recover the difference. The Board has gifted away the property of the shareholders.
This is also a lesson to those who invest based on ‘asset’ values in Indian companies. The benefits rarely come to the shareholders.
Even if the Tatas restore the property to Voltas (a high probability due to the political stench that is happening), the Board of Voltas has to go. They have no bloody business being there or on any other Board of any Company. In fact there is a fit argument for suing them for breach of trust. This shows that the Boards are dummies and the promoters can do what they want. Look at the names on the Board:

Name Designation
Ishaat Hussain
Chairman / Chair Person
Nasser Munjee
N N Tata
N D Khurody
Nani Javeri

Sanjay Johri
Managing Director
S N Menon
Ravi Kant
Jimmy S Bilimoria

How independent are any of the names above? Is any one of them fit to be trusted, if the land deal has been struck?
This is a fit case for SEBI, Co Law Board and shareholders to act upon.

Hero Honda

Hero Honda Motors is a respected company.
Honda Motors, the Japanese technology and name provider, is exiting the joint venture.
The press reports indicate that the Japanese partner will sell its stake to the Indian promoter (or his nominee, I suspect). The interesting thing is that the papers report that the Jap is selling the stake that is currently valued at nearly two billion dollars, at around one billion dollars.
So, is this a windfall to the promoters? And in the process, the 'other' sucker shareholders get the middle finger?
Fairness would have it that the shares could be offered to the other shareholders as a rights at some price. Alternatively, Honda should dump its shares in the market at the best possible price. Surely, Honda Motors is a listed co and they too would have some shareholder accountability?
Or is it that the exit is as per some pre agreed formula of yesteryears which was put on paper when the JV was formed? In this case, no one will cry.
Hero Honda is a valuable company with an amazing track record.
The Munjals have some explaining to do on how the deal is being put through.
If the media reports that they are picking it up at well below market price is true, it is only fair that the rewards be shared. The media reports also say that this bought out stake will be placed with PE investors.
Why go through this convoluted route? A simple rights issue would be the perfect thing to do.
Will the Indian media (which gets huge advertising revenues from Hero group) keep mum?


(This article appears in the latest issue of Moneylife- 'What me worry about corruption")


Another scam, another scandal. The sun again rises on nothing new, in India.
The one good thing the bribe exposure did was to show how shallow our stock markets are. It also shows the risks in the markets. Under normal circumstances, if one were to believe all the corporate governance speeches and talks that the foreign investors make, they should have totally ditched Indian markets. The fact that they choose to remain, shows that money and respect for ethics are two different things. Being unethical is no bar to making money. Tolerance is everything.
The breaking of the scandal perhaps gave the markets a good excuse to correct. Stocks of companies that had risen for no apparent reason fell with a thud. One hardly saw a good quality stock price take a big tumble. Yes, our markets need continuous doses of ‘grease’ to keep going. Most promoters and money managers fall in to the honey trap and create an environment which creates a make believe world of ‘all is well’. I am reasonably sure that this scandal will blow over. In fact the first two to three days have seen an enormous number of market participants appearing in the media and making light of the scandal. Corruption is accepted as a way of life. Getting caught does create some hiccups. Look back at 1991. So many got away scot-free, some got divine retribution and a few got punished. History will repeat itself.
Yes, we can question that the actual impact of the scandal on a LIC Housing or a Bank of India does not appear to be damaging. Most analysts came back saying that either the amounts are small or that the loan book is still healthy, so ‘what me worry’? This will be the sales pitch to ensure that these stock prices will recover sooner rather than later.
To me, the bigger issue is the management culture in the PSU’s. It is common knowledge that graft and grease take various forms and shapes in the public sector undertakings. I am not, for a moment, saying that only the public sector is greasy. Private sector is often more greasy. Unfortunately, the public sector also has the ownership in hands of a government which should not be in commerce. It uses the public sector as a part of its ‘currying favours’ kit. The private sector promoters, on the other hand, treat the companies as their personal properties and use the money first for self, then for family and residual is for all ‘other’ shareholders. In the private sector, personal ambition often creates a lot of incidental value for the other shareholders. On the other hand, the PSU bosses are not unduly worried about share prices. For them, wealth is what can be taken away from the company. In the private sector, the promoter is happy when the share prices rise. This is the big difference.
What keeps people invested in public sector companies? Is it a hope that someday, the government will exit the board room like they did in IPCL or BALCO or Modern Bakeries? Or is it a blind evaluation of published figures? Perhaps it is a combination of both. One fund manager friend mentioned that he prefers public sectors simply because the government will always stand by it. Look at the banks, he said. Some of the new gen private banks have vanished. But the dull public sector banks are still around, after having got several doses of oxygen.
Somewhere, there is also the fact that if we take the recent scandal, the private sector intermediary company share price is far less likely to recover than LIC Housing’s share price. Investors will not care unless it turns out that the company is filled with dud assets. The scandal will be taken as a small dent in the share price and in fact I know of some investors who have bought in to these shares when it fell sharply. So, the world of investors really gives a damn about corporate governance or honesty.
The real estate sector has also taken a hit. Here again, the take is that perhaps for a small time, the companies will find it tough to get loans. This will pass. They will find new intermediaries. This sector has never been known for its transparency, but still attracted the cream of foreign investors. It hardly matters whether they are straight or fit in to the shadow of a corkscrew. So long as they have land, can sell houses and offices, investors will flock to it.
So, don’t worry. Grease and graft changes nothing. It may change a few equations here and there, but the investment universe feeds on it.

Monday, December 13, 2010

Lenders weepers, borrowers keepers....

Shortage of money should never come in the way of fulfilment of your basest desires. The RBI encourages you to do so. In the past, if you borrow from banks, there was a fear that some goons may come and harass you for repayment. They made it very difficult for you to miss EMI’s etc., Do not worry. All is now well, with the RBI having come to the rescue of people who love to live their life with OPM (Other People’s Money).
Well, the first part starts with getting money. Make sure that you approach as many banks as possible simultaneously. So long as you do not have a bad record as a past baggage, then no problems. Hit every bank for the maximum possible. Does not matter if the EMI’s total to more than you are ever likely to make in a month.
There is no way the banks know what you are going to borrow. If you have a job, it is fine. You can have a salary certificate. If not, go to the nearest printing press and get some done. Reference checks should be another breeze. Have a couple of prepaid mobile sim cards. Now with multiple sim cards in one phone, you can give one number as the referee’s so that when there is an attempt at verification, you can take care of it yourself. Verification is generally done by third parties, who are paid per completed verification, so play them along. It is rare that they will take a second or third attempt to complete the form. The third party will have targets from the lending bank, so they are very happy to complete the paperwork as soon as possible. They pay their employees ‘per case’ so the system works in your favour.
Having got the loan, now forget it. In order to make it easy, here are some tips:
i) Leave your house just around seven am and return just after seven pm. This way, your stay at home is peaceful. A recovery agent cannot come in to your house between seven pm and am;
ii) When there is a call for you, and it seems like it is the recovery agent, give them a bogus name. They cannot talk to anyone other than the borrower about the loan;
iii) If you are in a pooja, they cannot interrupt. This will come in handy;
iv) Even if the recovery agent calls you, you can put him off. He cannot call you more than once a day;
v) Per chance, if the agent finds you at home during ‘permitted hours’ organise an impromptu function or pooja. The agent cannot now bother you or enter your house. So, if he knocks, and you are foolishly caught unawares, tell him that there is a pooja going on and he can come next day after calling you;
vi) In case you have a vehicle pledged to them, do not worry. They have to give you a notice of repossession, give you time and then only they do it. Offer severe resistance physically whilst they come for repossession. They cannot retort since their code prohibits them from doing so. Alternately, keep some banned substance in the vehicle, which you can then pin on the agents;
vii) Even if they repossess your vehicle, they have to auction it to the highest bidder. You can always lodge a complaint with the consumer courts that they have not done their job diligently and that you could have got a higher price is a good plank to fight the lender. Who knows, you may get an out of court settlement offer;
viii) Inspite of all this, if the recovery agent manages to collar you, do not get intimidated. Tell him that you do not agree with the numbers given by him. Once this is settled, then till him that you will talk directly to the bank. If he still does not listen, tell him that you will lodge a complaint for harassment with RBI and the lending bank. It will be his word against yours and typically, courts will tend to support the ‘innocent’ and hapless borrower;
ix) Banks have been told to go to Lok Adalats for amounts up to Rs.10 lakh. Try and cross this limit. This will make sure that the matter goes to a court of law;
x) Once it goes to court, go to the bank and plead for a settlement. It is very likely that you may be able to settle for anything between thirty to fifty percent of your loan. You can keep this handy by placing a FD for around twenty percent of the loan you take, with a separate bank. This gives you the freedom to blow up eighty percent of the loan!
The Indian banking system is wonderful and is tailor made for defaults. So far, this privilege was available only to large borrowers (textile mills, steel mills etc) who could merrily default and thumb their nose at the banks. Now, there is a level playing field. Even if you are small, you can still default. If large borrowers and farmers can, so can you. Ditch Shakespeare (Neither a lender nor a borrower be...etc). Borrow and enjoy.
As regards the lenders.. God help them. The best way is to keep the legs crossed and not open the loan books to individuals for ‘personal’ loans, stock market loans, housing loans etc., In the US, even the distressed housing loans have become an issue, with the banks being virtually stalled from repossession!
(The central bankers and the media treat the borrowing scum with misplaced sympathy. This is the sole reason that crooks and criminals are able to siphon public money. If I had a choice, I would make sure that defaulters lose at least one limb and have a tattoo on their forehead. Defaulters are thieves who steal and should be shunned and boycotted by all decent human beings.)

Friday, November 26, 2010

Birla and their skills in managing money

Read this article.

It is scary to think that groups like this would get a banking license.

Wednesday, November 24, 2010

With my palms open..

The news of a scandal involving LIC Housing Finance and some PSU banks is noteworthy. Why? No one is surprised, but what is surprising is that some arrests have been made. An obscure financial services co which suddenly shot in to the limelight with a huge fund raising, has apparently been the go between or the ‘arranger’.
Corruption in public sector is a given thing. Given the salary scales, there is no other reason why someone should work in those organisations (yeah, there are exceptions, you say, but they only go to prove the rule). Corruption in money lending is universal. When one sits at a desk with powers to hand out loans, the temptation is huge. Even private sector is not immune. In the private sector, corruption takes many forms. It could be personal gratification (money, women etc). I know of a private lender, who is innovative. He gives loans to builders in return for giving flats to friends, family, associates and employees at ridiculously low rates. And the lender makes sure that he always sides with a few people and deny loans to competition. So, here, can you point a finger? Especially if the organisation does not have to write off any loans? No one can establish the loss of revenue. That is beyond the realm of audits.
In all cities, there are ‘fixers’ who arrange loans from PSU banks at a price. They could be accounting firms, financial service brokers or just an individual with a suitcase. In fact I cannot imagine a single area of the financial services industry where corruption does not exist. Some fund managers take all kinds of gratification to invest in dubious securities. Or they take it to invest in good companies at high prices. I know of many fund managers whose lifestyle and assets are far beyond what they earn as salaries and bonuses.
The financial services industry (lending, borrowing, broking) is as filthy as it gets. In the seventies, grease was used to get loans from financial institutions. Private sector executives would take money to hand out mandates on investment banking. Some ‘clean’ broking houses would use ingenious routes to generate cash and pay the executives.
Corruption is a way of life in India. Nothing will change it. It has become a part of the blood stream. And believe me- it is higher than ever before. We have a PM who is universally recognised as a clean man. I think his reign has witnessed the highest level of corruption in independent India.
Live with it. Accept it. It is all around you. Right from the moment you pay a bloody tip to an attendant in a five star toilet who holds out his palm to you after giving you a paper towel to your paying capitation fee for a college admission for your kid, you do not escape the web of corruption. You start by paying ‘speed’ money to get a birth certificate and end with your kin paying it for getting your death certificate.

Thursday, November 18, 2010

Promoters are Not like you and me. They have special rights...

- George Orwell, Animal Farm
So long as a promoter does not invite others to be shareholders in his company,
He can legally and morally do what he wants with the company. There is no one to whom he is answerable. The moment his company has other shareholders, he can no longer have the right to do his bidding. He has to have the consent of other shareholders for most actions that impact the shareholders as a universe. This is the spirit and letter of the law. In real life, though, this receives scant attention from the promoters. They use the company as their personal fiefdom. When it comes to raising fresh capital, the law states that there is a right of refusal to all the shareholders. In other words, if I am a shareholder, I cannot be denied a right to subscribe (as proportionately as possible) to any shares / warrants or such instrument.
However, the law has been perverted by the businessman. They introduced an obnoxious amendment to the law which permits issuance of shares on a ‘selective’ basis. This could be in the form of a private placement with an institutional investor(s), or to a collaborator, or to the promoters. In each case, to deny the general shareholder, a ‘special’ resolution needs to be passed. This means that seventy five percent of shareholders present at a shareholder meeting have to agree to this. In India, this is easier done than said. Not many attend meetings. And institutional shareholders always side the promoters. Mutual funds do not generally vote. So, it is a simple thing for a promoter to do what he chooses.
To me the most obnoxious practice by a promoter is the subject of ‘preferential’ warrants to himself. He has only to pay 25% of the conversion price and has 18 months to make the balance payment, at a time of his convenience. This provision is the one used by promoters to abuse the markets and the shareholders. First they ramp up the stock prices, and then sell their holdings. Then they screw up the performance, drop the share price and then issue warrants to themselves. This is like a ‘merry go round’. This is the one clause that SEBI has to get rid of. I also wonder where is it that promoters get the money to subscribe to these shares and warrants. In some cases, I would not be surprised if it is through money skimmed off the company through some devious means.
Why should a promoter not pick up shares from the secondary market instead of issuing warrants to himself? SEBI permits the promoter to do so. With such a window available, I do not see any rationale for issuance of warrants to promoters.
One argument that some promoters put forth is that when new shares are issued to themselves, the company gets the money. If the company really needs the money, surely a ‘rights’ issue is possible? And when ordinary people are buying shares from the market by paying spot cash, why should a promoter have the luxury of getting extended credit for buying shares? The legal system has been in league with the promoters and will perhaps continue to be such forever.
I also wonder when promoters decide to acquire a company or a football team or a cricket team or buy a personal aircraft with the shareholders’ money. These kinds of acts are the clearest indications that they give a damn for the other shareholders. And in no time we see kith and kin in action, burning shareholder money for some unrelated activities like ‘art’ shows, ‘social’ initiatives etc., If a promoter wants to fly in a private aircraft, let him do so with his own money. In this age of instant communication where is the need for intensive travel? As a shareholder, I am perfectly content to see the CEO travelling economy or business class. A co paid aircraft is used by family members, friends and political contacts.
Corporate governance is a fashionable term that does not exist in the real world. Same is the case with Corporate Social Responsibility (CSR). It is fashionable to devote two pages in the Annual Report to CSR and half a sentence to explain the losses borne by the company. Perhaps if the CSR were eschewed, the losses would have been smaller. And in matters of CSR, you always see the beaming faces of the friends and family members of the promoter on page three. I invest in a company for dividends and capital appreciation. No fund manager or investor gives a share a higher price because of CSR. So, let the promoter give me the money and let me decide whether I want to be charitable and if so I will choose the path I wonder how is it that CSR related expenses are permitted by the tax authorities as legally deductible ‘business expenses’?
The whole world is happy to build this facade of CSR, corporate governance etc to assuage their guilt. And the media is a willing partner.

Wednesday, November 3, 2010

Paying your money manager

This article was written for Moneylife magazine (


Fund managers are a revered kind. There are too few of them (excluding the millions of self styled investment experts) and the good ones do not like to be seen or heard. When the term ‘fund manager’ is used, what image does one form? An expert, who knows everything about every stock, every company and also knows which stock will go up or down including when. He is Warren Buffett and George Soros rolled in to one. Long term investment is the philosophy without missing a single short term play.
There are over thirty five fund houses, a dozen odd insurance companies and a few hundred licensed portfolio managers. In addition, we have thousands of ‘investment advisors’. In addition, we have a few more thousands of ‘technical’ analysts, who look at prices as they move tick by tick and forecast the likely outcomes over the next instant to a few months.
So, what is it that we expect when we give money to a fund manager? When we put money in a mutual fund, we are either choosing a ‘star’ fund manager or putting our faith in the fund house, without bothering about who the fund manager is. Whilst the statutory warning does say ‘past is no indicator of the future’, we do lay a high emphasis on track record. The second issue is one of paying fees to the fund manager. The industry structure is such that the payment does not seem to reflect performance. We pay fixed fees (in case of mutual fund industry) whether the fund house performance is in the top ten or the bottom ten. Often we are hustled in to a decision without getting sufficient time for analyses or thought. In case of portfolio management schemes, the situation is even worse. The manager takes a fee plus a share in your gains based on a ‘hurdle’ rate, which can be even a single digit number. In many cases, even if the PMS Manager delivers returns far below the market, you may have to pay him a ‘bonus’ for beating the hurdle rate! And in some cases, the PMS Manager may first lose a large part of your money (taking only his fixed fee for this splendid performance) and then when he recoups the losses, he may actually end up earning a bonus! It is a funny industry.
Let us now look at what is it that we should be expecting from a fund manager? To me, the first task that I expect from a fund manager is that he should be able to give me a higher than market return, to earn any fee at all from me. If I can buy an ETF and get market returns, the fund manager has to first clear this hurdle to earn anything at all. Otherwise, he has no business to be called a ‘fund’ manager. And, in a falling market, his expertise should enable me to preserve capital as far as possible. If he says that he lost only twenty percent of the money when the market fell twenty one, does he deserve a fee? Probably yes, but I would be reluctant to pay. If the expert cannot tell me when to get out, he is not an expert.
I see many fund managers who say that it is their ‘mandate’ to stay invested. I have an issue with this. A fund manager can miss some or most of a run up, if he is able to articulate that he is not comfortable investing at those levels. Surely, no one comes in expecting the moon. Of course, if there are such people, I have no truck with them. Greedy people do not deserve any sympathy or explanations.
So, what is it that I expect from a fund manager? There are many possibilities:
i) To give me a ‘better’ than market return. I am willing to go along with the ups and downs of the market. I am focused on the long term. So, to take any fee from me, the manager has to deliver better than market return’
ii) To give me a return ‘better’ than the most obvious fixed income return. For instance, I want a better return than a bank fixed deposit or a company deposit. Here, my interest is in preserving capital, but the returns are important to me. The investment is treated as an ‘earning’ member of my financial family. I know that there is a ‘theoretical’ risk of my losing some money, but think that it will not happen to me. Typical investments could include Fixed Maturity Plans (if I am very conservative) and Monthly Income Plans (Am a little ambitious);
iii) To give me a ‘decent’ return. I am not too bothered about beating the market, but am willing to give it to any manager who can deliver, say, twenty or thirty percent per annum. Here, my faith is more on charts and figures, with a ‘stop loss’ discipline (stop loss sounds good to me, but I know that in Indian markets, the stop loss limits are only a figure of speech). Here I am willing to pay a negotiated fee plus an incentive if the manager meets my goals;
iv) To absolutely ‘preserve’ my capital. Zero risk tolerance, because I need the money soon. Instead of it being idle, I want it to earn something. A fixed deposit is a good choice, but liquidity and tax is not very friendly. So, I choose a ‘liquid’ fund. No FMP for me, because exit in between would normally have a penalty; and
v) I am a compulsive gambler. I want the benefit of leverage. So, I give my money to a ‘derivatives’ fund manager, who can multiply my money manifold. Hopefully, give me double every time I check my portfolio. Here, I know that I run the risk of losing my entire stake. If it is going to bother me, I should not be here.
So, there are fund managers for every need. Should all of them be paid uniformly, irrespective of performance as well as meeting goals? In any case, if a fund manager does not generate excess returns over any passive investment, he should not be called a ‘fund’ manager. In fact, any fund manager who gives a return worse than the market, deserves to enter the Hall of Shame and be called a ‘Fund Damager’.
The regulator has already taken the first steps on the ridiculous fee levels being charged under Portfolio Management Schemes. Hopefully, it will also prescribe some qualifications required for someone to manage funds. We are probably the only market in the world where a distributor needs to pass an exam and absolutely no qualifications required for someone to become a fund manager. Fund houses that care about their image and investors generally put in good fund managers in place. I cannot say that same thing for many mutual funds as well as for Portfolio Managers. And another thing that bothers me is the number of schemes that a single individual manages. If I have to manage several schemes with different objectives, I cannot do justice to all. Someone is bound to suffer. This can be clearly seen that if you see the performance track every quarter, the top ten keep churning. Consistency suffers. And once a fund house loses its predictability, marketing becomes a seasonal affair. Marketing pushes the fund only when the rankings look good.

Thursday, October 28, 2010

Understanding econoMISTs- Gobbledygook

About inflation, commodities and effective substitutes, and proteins
October 28, 2010 05:27 PM |
R Balakrishnan

An article in The Wall Street Journal a couple of days ago, left me all mixed about some everyday issues

I guess one of the most essential things for someone who is always in the glare of the media, is to be articulate. Often you have to say something which sends the reader into a tizzy. For fear of sounding stupid, the reader does not ask anything.
Today, I stumbled upon an article titled, "RBI: India Experiencing Structural Food Price Shock", in The Wall Street Journal. (You can access the report at
004575575421547641584.html .) The article reports on a speech by Reserve Bank of India governor Subir Gokarn. Each of the quotes is worth reproducing. I am not an economist, so to me the sentences were high octane economics. Here goes:

"Persistent price increases in commodities for which there are no effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time," Mr Gokarn said in a speech.

I tried to break down the sentence at different places and still ended up as confused as ever. Does this mean that when the price of something goes up, inflation happens? Or does it mean that inflation happens only when prices of commodities, of those that have no effective substitutes, go up? (Wonder what the term 'effective' substitute' means?) One brilliant sentence and the readers can enter into a debate about the meaning, context and the impact. I think what it means is that when price rises, inflation happens. Wait. Maybe it means that when prices rise, the 'rate' of inflation will go up. One thing, though, was clear. Inflation is here to stay. The only thing to wonder is why and what makes it happen. Part of the answer is in the explanation given. Inflation is because of 'persistent' price increases.

This sentence followed immediately:

"This means that actual inflation or interest rates would be higher than they would be in the absence of such increases."

The sentence is far more profound. One thought that there is more than one kind of inflation. One is 'actual' inflation referred to in this statement. The second part though should defeat a layman like me. That if the prices do not increase, the inflation or interest rates could be lower. I hope I got it right. Or, does it mean that because of prices rising, inflation is higher than what it could be without such increases? Well, I am all at sea.

The next quote is something out of this world:

"Increasing demand for protein appears to be an inevitable consequence of rising affluence. The affordability and availability of protein is an important indicator of an equitable and sustainable development with implications for both nutritional balance and macroeconomic stability," Mr Gokarn said. A powerful supply response to all sources of protein is needed, he added.

The first half is clear to me. As we Indians get richer, we want more proteins. This includes our dals and perhaps chicken. (You see, in Chennai, most shops selling chicken have the word 'protein' in their name). The next part of the sentence was a Eureka moment for me. The more of dals and chickens I have, the more prosperous my nation is! And the gentleman has drawn another interesting relationship. That affordability is not enough by itself. One should be able to lay hands on it also. And how much of dal and chicken we can have and access tells the story of how healthy we are (nutritional balance?) and how healthy our economy is (macroeconomic stability)! What deep linkages.

So, the solution lies in making available more dal and chicken to all. Sure it is not enough by itself, but proteins are an important indicator. Since I do not eat chicken regularly, I must eat more dals. That is a sign of my growth. And of course I stay healthy and the nation also remains stable.

I never knew that economics, inflation, chicken, dal and proteins were so closely linked and that they are key determinants of social and national development. And as the gentleman says, we need a powerful 'supply' response. We need a national campaign to grow more dals and hatch more eggs.

Friday, October 22, 2010

IPO's and errors in documents

The above article is from "Mint" newspaper about the recent IPO of Coal India.
Moneylife also has an article on this. (

There are big arguments about errors being made in the Red Herring Prosepectus / Offer Documents that are being prepared. The surprising thing is that someone actually spotted the error ( kudos to the Regulator for having spotted these).
The argument is about whether the error is serious enough to warrant SEBI offering an exit option to the investors.

I think, SEBI is right. In fact, there were two earlier IPO's where such things happened. SEBI is being consistent.
To me, the following are the points to look at:

i) The Investment bankers (merchant bankers who advice the issuer and take care of all documentation) are getting away scot free. They are the ones who are directly responsible for errors;
ii)One practical point in favour of SEBI keeping quiet, is that no one actually reads the DRHP or the offer document.IPO's are sold on hype, grey market premium and the aggression (both official and otherwise) of the lead manager. Institutional investors usually do not bother much about going through the details.So, if there is an error in the DRHP, it hardly matters. The fund manager who invests, just looks at the 'flip' gains that he can make;
ii) SEBI never punishes the investment banker. This is exacerbated by the recent import of 'compounding' from the US of A. This implies that there is a tariff card for wrong doing. The investment banker has merely to estimate the likely compounding tariff vis a vis the potential gain. Compounding expenses today have become a part of the Business Plan of intermediaries. They can screw up, mislead investors and /or hide the truth, without worry. No one is going to threaten their existence;
iii) Investment bankers are hiring poor quality people. This is because they want to show off. They tend to hire from the "B" schools, whose products have no patience for the details. All of them are potential CEO material and are excellent at hustling or putting together a concept paper. In the olden days, the document verification, data input in offer documents etc used to be seen with a critical eye, by old timers who could smell mistakes;
iv) The so called 'exit' option supposed to be offered by the issuer of the IPO is hardly seen. Why cannot SEBI insist that this exit option be announced prominently, in each and every publication/media where the IPO offer was splashed? Also, it should be a distinct ad and not hidden somewhere in a jungle of print.

Fairness is required in this industry. Alas, no one wants it and no one is bothered by it. Even the issuers are not concerned, I think.

Tuesday, October 19, 2010

Mutual Funds - All weather harbour


I met quite a few investors over the last couple of weeks. Clearly, there is discomfort in equities at these levels. Whilst they are not too worried about the growth of the economy, there is a feeling that the markets have run ahead of the fundamentals. There is a reluctance to put additional money in to the broad market and most of the HNI’s I know have been switching out to other avenues. Some are going in to MIP’s (having some comfort in the fact that the schemes generally cap exposure to equities and will keep booking profits in order to do so in a rising market), being happy with the returns. Whilst MIP’s will not deliver chart busting returns, they do generally give better returns than a bank deposit, with tax advantages that mutual funds enjoy. Here, one has to be careful, since just around half a dozen of them have given ten percent or more returns in the last twelve months. You also have some of them delivering sub five percent returns.
Some are shifting to income funds. The general view is that interest rates are close to peaking and will start to correct. The problem with Income funds in India is that these funds need the benefit of timing. Without that element in your favour, the returns are generally pathetic. One year returns on long term debt funds have ranged from SUB ONE PERCENT (!) to around nine percent. Not a very encouraging sign. Here, one has to time the entry and after getting a near double digit return. If you stretch it to three years, about half a dozen have returned near ten percent annualised, with the vast majority being under five percent. Not very encouraging and indicates that even the fixed income fund managers are unable to match bank deposit returns.
From my long term experience I have found that diversified equity funds tend to deliver the best returns if you take a perspective of three years and more. Not every fund in the category, but definitely the top ten. Here I do not find much difference between a mid cap and a large cap. Yes, over a short term period there are divergences, but over a longer term it tends to even out. Even sector funds (with the notable exception of banking sector, which seems to be on a roll now) are no different. So, it is not much use choosing between different types of funds. With almost all funds in any one category having similar or same stocks, diversification does not happen.
To me, the biggest disappointment has been the ELSS category. In the initial days, the thought was that ELSS funds will outperform, because the fund manager will not face redemption pressures and could plan a longer term investment strategy. Alas, churn seems to be a better reward, unless one opines that the fund managers do not think long term. Or is it simply that the ELSS schemes tend to be a small percentage of the overall AUM with fund houses and that they neglect it? Whatever be the reason, the ELSS funds have delivered almost five percent lower annualised returns over three years, as opposed to the diversified funds! The lower returns have virtually nullified the effects of any tax saved on that count. As a long term strategy, it seems best to avoid the ELSS category.
I do not like the Gilt funds category. This is because these schemes are either used by PF’s or institutional investors. More important, with the underlying assets trading in market lots of 5 crores, there is an inbuilt inefficiency. In the old days, the banks used to park money in gilt funds for speculating on the movement of interest rates on the ten year bonds. In 2004, spectacular returns were had, when the interest rates on 10 year paper fell from eight percent to sub five percent. However, if you take a longer term frame (three or five years) the returns are a decent ten to fifteen percent per annum for the three and five year periods respectively. However, the corpus is not large enough to warrant a general endorsement of this category. As a class, it has done better than Income funds. From the safety point of view, I would certainly rank the gilt funds higher. So far, our Income funds have not taken any blows (except in the early years, when one of the AMC’s took it upon itself to bail out the investors by buying a defaulted paper from the fund), the risk remains.
Some of the HNI friends seem to of the view that of the different sector funds, the Infrastructure sector funds are lagging behind and are putting money there. The expectation is that this sector will do well, with real estate stabilising etc etc.,
The lesson I have learnt is that it pays to remain invested for a long term. Churn does not benefit the investor. Perfect timing of every move is not possible. One bad move is all it takes to wipe out a lot of hard work that has been put in. I do believe that the mutual funds have done a decent job in India and for those who do not have the knowhow to do their own homework they offer the best avenue. I would keep away from PMS because of their tax inefficiency.

Monday, October 18, 2010

The IPO swindle

Please read this report that came in DNA newspaper on 11th October:
Enam Securities and IDFC Deutsche Equities (India) were the book running lead managers to the issue.
ICICI Prudential, Birla MF, AIG Global, Canara Robeco, Kotak Mahindra MF, Morgan Stanley MF, Goldman Sachs, Axis MF, HSBC MF, Sundaram BNP Paribas MF and ICICI Lombard GIC as anchor investors.

Looks like merchant bankers will go to any lengths to cheat public. Also shows the shoddy nature of work done by the company and the investment bankers.Also a great reflection on the quality of people churned out by the colleges (IIM's ??)who cannot analyse or even present a balance sheet number!
These kind of investment bankers should be banned for life.
Apparently the co offered an option for investors to pull out. I do not recall seeing any ads. Wonder whether you did.
The right thing would have been for full refund, barring the investment bankers for at least five to ten years and tell the co to file papers with a new banker.
But, commerce prevails over justice to the small investor.
The funny thing is also the due diligence done by the anchor investors! When they put in other people’s money, this is the care they show. Wonder whether there is much more to this issue than meets the eye.
Of course, the media kept quiet either because they were not aware or because they did not want to upset the investment bankers.

Sunday, October 10, 2010

Foreclosures gone wild MarketWatch First Take - MarketWatch

Foreclosures gone wild MarketWatch First Take - MarketWatch

This is always the case. India or US, I guess it makes no difference. Harvard did this study. It is people from institutions like theirs, that have designed the process, written complicated laws and generally prescribed documentation of forty pages, where four would suffice.
But, to me, the more important thing is the indulgence being shown to individual defaulters. Virtually the world is looking at 'small borrowers' vs lenders as a "David vs Goliath" story. Media sympathy seems (wrongly) with the small guy.
Maybe it is one way of levelling things. The big corporations swindle billions of taxpayers money from the banks in single deals. Guess the small guy is entitled to piece of the action!


(Recently published in Moneylife magazine)

Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now." - Charlie Munger

Our markets continue to be on a tear. The flood of FII money, with more than thirty billion dollars having come in the last twenty months, has been the main driver. Domestic flows have been small and on its own could not have provided the legs for this rally.
Foreigners across the globe want to be invested in Indian markets, because our bumbling efforts to get any kind of decent share in global trade have suddenly become a virtue! For foreign investors the routes are limited to using either the registered FII route or the ETF route. The ADR stock of Indian companies is lower than that of Chinese companies, so the money flow is severe. Also, China does not allow FII moneys like we do.
As the indices keep shooting up, the first fear is of 2008 happening all over again. I was talking to a friend and he said that these are the ‘bull’ factors for the markets:
i) Our economy will grow at 8% plus, irrespective of global conditions. (this may be true in the short term alone. In the long term, if the global economy does not recover, Indian growth will slow down as retaliatory/protectionary measures set in);
ii) The forward earnings multiples today are lower than what they were in 2008. One estimate says that the BSE Sensex, at 19500 is trading just at 15 times 2011-12 earnings. I think the earnings growth keeps getting revised upwards by brokers as the markets keep going higher. The advance tax numbers to September 2010 show only a 13% rise in advance tax numbers for the top 100 companies. This means that the earnings growth is under 15% or else the numbers are getting fudged;
iii) The long terms story is that as Indian economy keeps growing, over the next ten years, in each industry sector, we will have two to four giant players (for inst RIL, BHEL, SBI, HLL) who will be global size and if you look at their profile ten years from today, you are getting them cheap today. Foreigners have realised this and are piling on to the front line stocks. This is a logical argument, but it is like buying 2015 earnings now. What if in 2015 the earnings have not caught up? Upside from here seems to be absent;
iv) The US dollar is set to weaken and hence the foreign investors would also like to invest in Indian equities which not only have a good story, but strengthening of the Indian rupee will also contribute to a higher return on investment. Looks logical, but with India running a trade deficit in excess of US$ 10 billion per month and inflation upwards of 8%, the rupee has no legs. It is only the capricious capital flows that are propping up the rupee. Also, the regulators have a defeatist approach to Indian exports and will not let the rupee strengthen;
v) The general argument is that whilst valuations are a bit aggressive, this time the downside seems small because the fundamentals are strong. This argument does not hold water. Fundamentals are markets do not go hand in hand for any length of time. Markets remain overvalued for long time and remain undervalued only for short periods. This is simply because there is too much money in the world which due to the global meltdown, gets no return and has turned to markets like India in their greed for higher return. Our markets can tank below the 2008 levels if the FII flows were to reverse. When I tell this, I am a loner in the room. No one wishes to believe or accept that if the FII’s pull out, say twenty billion or so dollars over a fortnight, we will reach that kind of a level. Of course, what will prompt them to do that seems to hold the key. Let me say, I am less in disagreement with this than most other bull arguments;
vi) Real estate sector is yet to recover. If you look at the index, it is just around five stocks (SBI, HDFC, L&T, ITC, HDFC Bank) that have contributed to the rise. Hence, the markets have a long way to go, as other stocks also participate in this bull run. I find this argument full of holes. After a long time, I see that the sensex does not have a single stock with one digit P/E multiple. Even cyclical stocks like Hindalco trade at near twenty multiples. In fact, it is difficult to find any value buy in this market. You have to bet on high growth. Many will falter, some will achieve. It is a tightrope of expectations, where one stumble can happen anytime. Talking about real estate, the stocks are trading at anywhere between thirty to fifty times earnings. Finance sector is now trading at over four times book value!

Without being alarmist, I would definitely advise people to take a pause and then proceed. Interest rates are still high and may go higher, even though the policy makers seem to indicate that they have run out of ammunition to halt inflation. They have now taken recourse to changing the method for calculating inflation. Wonder when they will realise that it is not money supply which is the cause for this inflation but the simple fact that there is a supply shortfall. I was at a friend’s office that has an agency arrangement for motor vehicle spares. Most spares have a waiting period! Demand has gone up due to reckless credit expansion and the service industry job creation that has thrown easy money at so many people with virtually no skills. Every company I talk to is scared about the quality of labour they get and the high attrition rates. These are definite pointers to inflation being a real scourge.
The other factor to look out for is the slowing down in the pace of deposit growth at banks. This will lead to an increase in deposit rates, as banks use it as a tool to attract a larger market share of deposits. Our banks still worry about deposits size rather than profitability.
State and central governments are throwing freebies after freebies at the populace as many states enter in to an election phase from next year. The combined fiscal deficit of state and centre continues in double digits. A onetime bonanza from the 3G auction is being wrongly accounted to show a lower deficit. It is like selling family wealth to meet the food bill.
A record IPO flow is going the hit the markets in the balance of this year. I have not seen so much aggressive pricing even in 2007-08. Add to this the fancy pricing for exotically labelled sectors like microfinance. This is a right brew that usually points to a peaking in the bull story. Promoters have stopped issuing shares to themselves at these prices, rather choosing to dilute. They have all tanked up their personal treasuries with warrants issued to themselves during the fall in 2008. Now they are primed to dump it on the investors.
I also see a big range of upward revision in earnings forecasts, which seem dubious and smells more like a ‘sell’ side attempt to justify higher prices. When the markets were near 10K, I saw at least three in ten were ‘sell’ recommendations from brokers and research analysts. At 20K, the ‘sell’ reports are missing altogether from the brokers. This is perhaps a good indicator of where the markets are headed.
Take care. The markets are slippery.

R. Balakrishnan
September, 18th, 2010

Monday, October 4, 2010

IIT Coaching Classes and the present education system

In one of my earlier writings ( I had moaned about the problems facing the IIT's in the matter of finding teaching staff, due to their being poached by the private classes. I had suggested doing away with the entrance exams in the present form, in order to contain this malaise.
Alas, this has to be done sooner than I thought.
See this article:

The problem continues. Solution lies not just in opening new IIT's but also finding teachers for them. And reforming the tenth to twelfth standard education to make sure that there is just one standard to measure it. State Boards must go. One national standard is a must. Only then can the IIT's be liberated from the clutches of the coaching classes. Today, many state boards have made a mockery of education by having lax standards.

Wednesday, September 29, 2010

Ayodhya- Fodder for the media & some thoughts

Tomorrow is the expected date of a judgement on the Ayodhya dispute. Sure, there are strong possibilities that it may get deferred yet again (the Congress wants this as a live issue)or if there is a decision, the losing side will go to the Supreme Court. My blood boils at the media for focusing with so much intensity on an issue that is best forgotten. They are the ones fanning the flames of communalism.

I am a Hindu by birth. I am comfortable with the freedom that Hinduism has given me. I do not need any self appointed guardian for my faith. The Vishwa Hindu Parishad (and its proxy, the BJP) think that they are the self appointed guardians of all Hindus. They could not be more mistaken. The Hindu is not so weak that he needs rabble rousers to be his guardians. To a Hindu it does not matter whether he goes to a temple or not. He is as comfortable in worshipping a Ganesha as he is in worshipping Sai Baba of Shirdi. He is equally comfortable in not doing any worship. Just because he is not following a ritual does not mean that he is an atheist. To him atheism is a fall out of what the preachers of the faith have turned the religion in to.
As a Hindu, I do not need a VHP or a BJP to tell me what is faith. What they tell me about faith is not faith at all. Faith is not following some idol or God or demi God. Faith is not found inside a temple, church or mosque. To me, all these symbols are mere edifices of some one’s belief or a vested interest. Apart from an archaeological interest, I find no spirits in these places. And in each of these places, whether it is a Tirupati or a Kalighat or Jagannath Puri, the gatekeepers of those Gods make sure that even an agnostic will surely get converted to an atheist. In Tamil Nadu, I have seen a humungous number of people who have ‘converted’ from Hinduism to Christianity or Islam. Today, when I meet someone with the name of Srinivasan, I cannot take it for granted that he is a Hindu. These conversions are purely driven by economic considerations and the failure of institutions like VHP to do anything positive for the Hindus.
Organisations like VHP / BJP have not anything for the Hindu they claim to represent. I have also seen Christian (there are about fifty different church branches- with most having adopted Hindu rituals in order to keep the new convert involved) leaders siphon away wealth in crores, but at least most of these convertors have given some money or a school admission to the convert. It is a different story that after conversion, they extract their pound of flesh. Conversions in India is a big business and I will not dwell on it here.
The other interesting role is that of the Congress party. Right from the days of P J Nehru, appeasement of muslims has been fashionable. In the name of ‘secularism’ the Congress has always turned a blind eye to the Hindu. The Congress does not want the Ayodhya issue to be resolved since it is a permanent tool to bash the BJP. The day the dispute is resolved, Congress has no grounds to talk about any shortcomings in the BJP which they themselves do not possess. They are stupid not to have accepted a 'compromise' to have a temple and a mosque side by side.
The BJP is plain stupid. Self styled leaders like Advani think that their rabid styles get votes. Sadly, guys like this have done zilch to do anything for the betterment of the Hindu. They also fall in to the trap of opening their stupid mouths in the media with nothing positive to demonstrate. They are sliding down a banister with splinters pointing up.
Finally, the media in India is probably the worst in the world. Today, when people care a damn about Ayodhya (frankly, I did not know anything about the dispute in so much depth but for the media noise in the last two weeks or so) they keep throwing images of demolition of the Babri masjid. And by having daily debates anchored by their rabble rousing and obnoxious anchors. They publish and announce messages of ‘peace’ but make sure that there will be trouble tomorrow, by raising tempers and fanning the flame of communalism in the name of secularism.

Thursday, September 23, 2010

MICROFINANCE- The New new thing.

(This article appears in Moneylife Magazine)


Microfinance is the new buzzword. In the name of ‘financial inclusion’ no one has bothered to either regulate them or decipher them. The first IPO was a roaring success with all making money. Hopefully all the forthcoming IPO’s from this sector will also help all stakeholders to make money.
Microfinance is not an easily scalable business. Being small is a virtue in this industry. This is because the lending has to deal with groups of borrowers whose characteristics change from region to region. In its simplest form, it involves lending small amounts (usually around ten thousand rupees) to each borrower in a group of four to five people, and make each one of them responsible collectively and individually. ThLis works fine when the needs are small and genuine. Moral suasion helps. The typical lending is for ten to eleven months, with weekly repayments. All is in cash. Some lenders have used this model to push compulsory insurance products at the borrowers and reap the benefits of the high commission that the insurance company pays. The lending rates typically vary from thirty to fifty percent per annum and the insurance commission is the icing on the cake.
In the early days, most microfinance companies started off with a lot of social fervour and with grants from multilateral agencies that support the cause of upliftment of the poor. Most companies started off as ‘not for profit’ companies. Gradually, the realisation that a listing is good, made these companies buy shell companies that had NBFC licenses and then merge the business in to them. In the process, the founders and the staff rewarded themselves with more than market salaries and huge stock options (mostly with zero outlay). The founding NGO’s took their money and so will the private equity investors who grabbed this opportunity.
I would urge those who are interested in this subject, to go through the papers written by Prof M S Sriram of IIM Ahmedabad, who holds a key position in the area of Microfinance. He has documented some very interesting case studies about the beginnings of the microfinance companies, which gives us a good insight in to a few of the promoters and professionals of the high profile industry. I found the paper titled “A Paper on Commercialisation of Microfinance in India” particularly fascinating. This paper documents how the professionals who started off with a ‘not for profit’ motive ultimately get back to making money, forgetting the start up vision.
I do not see this business as a scalable model. It is tough to scale up a business when it involves dealing with people (remember, the borrowers are of the highest risk category, with no wherewithal and unable to get credit from the banking system) across different regions, religions, castes and communities.
It is unlikely that microfinance companies will help to significantly replace the traditional moneylender. Maybe they would bring down the interest rates a wee bit, but not substantially. Given the ticket size and the collection costs, I do not see any lending below, say, thirty percent per annum being economically viable. Yes, if they sacrifice on employee costs, they can, but then why would anyone do this?
The other big factor is the ease with which the companies raise money. Having a large amount of lendable resources is the biggest threat. I think geographical scaling is not possible. The next risk they will take is of increasing the ticket size. I hear of the limit being raised from ten to twenty-five thousand. This is extremely high risk. Already, if you go through the offer document of the recently listed SKS Micro, the fact that frauds do happen is indicated. When ticket sizes are small, the number of frauds will be lower. Since it is an element of the business model to hire people at different locations, without much training or financial scrutiny, employee frauds are bound to keep going up. Credit standards also would get diluted (if not already happening).
The other big issue is one of regulatory imposts. Today, the microfinance companies operate in a vacuum, with total freedom. They do not have to disclose the rates of lending etc to the borrower. Once they start doing all this, there is bound to be social and moral pressure to lower the rate. For some time they will pretend to do so, by creating some fancy structures and selling other products like insurance etc to protect yields. However, I do not see this as a sustainable thing. Also, as the problems of collections start mounting, employee turnover is bound to increase exponentially. The capital market welcome to SKS micro will push up employee costs as each one who wants to hit the capital market will try and poach anyone with prior experience.
In the eighties, we used to have a lot of NBFC’s that went in to consumer finance. Today they are shuttered down and dead. Will microfinance companies give them company in the graveyard?

Monday, September 6, 2010

Buy, Sell or Hold???

(This piece appears in Moneylife magazine)

The Joys of Uncertainty
It is interesting to see the big debate on our markets in the context of ‘expected’ doom that is being forecast for the American markets. And just to put it in perspective, the doom prediction is also a forecast from someone who sees a monster pattern in the charts, so it adds credibility to people who believe in charts and Ouija boards. Since the investment world is not a rational one, I guess these kind of forecasters are perhaps more relevant once you run out of fundamental reasons to support a cause.
Our markets are perhaps under the spell of an ancient Chinese blessing (May you live in interesting times). Otherwise, how does one explain the following factors?
i) The markets are a near two year high;
ii) The P/E multiple is almost at 22 times;
iii) There are no value stocks available ( Am not talking about finding obscure companies with micro market capitalisation);
iv) Earnings growth continues to be strong with the June quarter results being quite strong with profit growth of over twenty percent;
v) Dividend yields (though Indian promoters hate to give money to non promoter shareholders) just above one percent;
vi) Price to Book Value is upward of four times (this is not relevant to India, since most companies stated asset costs are divergent with real costs due to funny accounting, over invoicing and inconsistent depreciation policies);
vii) Interest rates showing an upward bias, with ten year yields nearing eight percent and corporate borrowing rates going up;
viii) Gold prices are at record highs;
ix) Inflation on the ground abating, but price levels still at very high levels across commodities, food products, fuel and every other thing;
x) Central government finances are better than last year, but if you exclude the realisation of sale of family silver (the 3G network) not very comforting;
xi) Middle class buying continues unabated thanks to easy money and supply bottlenecks;
xii) Moneyflow in to Indian markets continues to be good and if there is a global crises, the amounts invested are an insignificant part of global wealth and will not run away;
xiii) Analysts, Economists, Planning Commission members, government mouthpieces and non traditional forecasters are all of the view that India will grow rapidly, irrespective of what happens to the world;
xiv) India, China, Russia etc are countries where the future of the world is etc;
xv) Buy recommendations from analysts, brokers outnumber sell recommendations by more than 20 to 1;
xvi) Corporate action (mergers etc) is strong;
xvii) IPO’s are back in fashion, with fads like microfinance queuing up;
xviii) Real estate markets are recovering all over India;
I can add to this list with a few more good things.
So, the only conclusion I can draw is that we are ‘buying’ in to optimism. Optimism- that growth is forever and should be easily above twenty percent. We do not care about the rest of the world.
We will slowly see bad news coming. What shape will it take? Protectionism (like raising visa fees, imposing quotas) from slow growing economies is surely one of them. The other could be in the form of inflation in double digits continuing for a few more years. Do not trust government numbers on this. Keep track of daily living prices, rents etc.,
But, the argument goes that even if bad news were to descend on our economy, the liquidity will not be impacted. This is simply because we are different. Ours is the land of hope. So, money managers world over will not disturb their assets in India, for fear of missing out if something were to happen. Also, the government may announce more positive things like permitting FDI somewhere, removing controls somewhere etc., So, we will have ‘good news’ flow coming in, that would stop the foreigners from taking away their money from our markets and may prompt them to hike their stakes in India. The FII’s have a total AUM of nearly ten lakh crores of rupees, with around fifteen percent coming in through Participatory Notes. They are the ones to decide the future direction of this market.
From the domestic side, the much hated ULIP is the biggest (perhaps the only) incremental investor in Indian markets. Retail investors are yet to make their direct presence felt, a sure sign that we are yet to reach the top.
So what does one do? Wait, sell or buy? This is a good time to sell and if I take the next ten years as the horizon, we should get same or lower prices at some points in time. One possibility is that the markets may remain in the range of 15,000 to 19,000 for the next few years, waiting for earnings to catch up. Of course, a surge in liquidity can lead to a blow out on the upside and if the markets touch anything like 21000 in the next twelve months; it may be a great selling opportunity.
If you are a long term investor (i.e. one who does not ‘need’ to sell) then keep your good quality stocks and dump the dubious ones or those that have become grossly overpriced in relation to their earnings.
The key dilemma is what to do with fresh money? My call is to keep it in some fixed income instrument and wait for better times. Ultimately, either price has to wait for earnings to catch up or correct in order to align with the earnings. Of course, if I take the last ten years as an example, the markets remain overvalued for a long period and good buying opportunities came just about twice.

Monday, August 30, 2010

The Gods that Fail

SEBI, the ‘regulator’ of the Indian capital markets, is truly a bull in a China shop. Chronicles of regulators worldwide would rival Cervantes’ Don Quixote. The regulator thinks that it is engaged in ‘investor’ protection. Action that is focused on investor protection ends up having a totally bizarre result. To protect the ‘investors’ from the mutual fund sales man, it took several steps, which have had the unintended (?) impact of hammering a nail in to the coffin of the yet to mature mutual fund industry. When the noise became unbearable, SEBI tried to take on the Insurance industry which was merrily run by proxies of the insurance salesmen. Regulators tend to see windmills as giant enemies.
SEBI has never been able to pre-empt any white collar crime in India. Its investigation and prosecution has been the stuff that comedies are made of. The Harshad Mehta scam, after everything was handed to it on a platter, is testimony to its prosecution abilities. The Gods got tired of waiting for action from the regulator and pulled Harshad below. Innumerable acts (rulings) of SEBI were overturned by its tribunal.
Suddenly, SEBI discovered ‘compounding’. A full import from the US of A. Compounding has now become a planned expenditure for brokers, bankers and other players who now have a way to evaluate the costs and benefits of breaking a law. And compounding has enabled AMC’s, brokers, investment bankers, companies and other regulated entities to break the law with impunity and not carry any scars! When punishment for an act is merely a fine, it is no longer a sin. There is merely a price at which it is right. Going through the website of SEBI and reading the compounding done so far, is scary. The hallowed names all have contributed to the bottom line of SEBI. Of course, the IRDA (the agency that ‘regulates’ the insurance industry) has also picked this practice up. Recently, it slapped a ‘penalty’ of a miserable half a million rupees on an insurance company that submitted one product for approval, but sold something else altogether!
Now SEBI is chasing the likes of Bennett Coleman (Times of India, Economic Times, ET Now etc). These media companies have been selling ad and PR space in exchange for equity in many companies. Naturally, to protect their investments, the media ensures that the investee companies are plugged and negative news blanked out. Yes, it is a scam, but who can say it is legally wrong? The media company is not bound by any law. They are unlisted entities. They do not legally mislead anyone. On what basis can SEBI regulate this? SEBI clearly is caught with its pants down. Crime does pay.
World over, it is the business interests that write the rules. Regulators are there merely because it seems logical. No country in the world can actually claim that regulators stopped or saved an investor. Sometimes, public pressure and legal compulsions do force the regulator to do some good. Given a choice, the regulator is merely a spectator. I remember going to meet the Deputy Governor of RBI, once upon a time. My boss and I were worried about what the leasing and hire purchase companies were up to. It was obvious to everyone that there is a tragedy in the making. Public deposits were being accepted in gross violations of all norms. Fancy accounting had inflated the networth of all the NBFC’s. Credit quality was slipping. NBFC’s were paying six to ten percent commission to get one year deposits at the then ceiling rate of 14% p.a.! We discussed all this. Then the honourable gentleman said that the RBI can act only if someone ‘brings it to our attention’. We were stunned! He wanted us to put in a written complaint so that the government could act! I lost my temper and told the gentleman, that right outside the main RBI building, there were cloth banners announcing incentives of six percent on the one year deposit by a NBFC. The gentleman was getting uncomfortable and we were pissed off with him. True to his form, the Dy Governor did precisely nothing.
How many people have lost money with time shares and plantation companies? Has the regulator been able to do anything at all?
Regulation of financial markets is a charade. You have only yourself to blame if you get trapped in the web of deceit that is continuously being spun by the players. Caveat Emptor!

Wednesday, August 25, 2010

Of Mutual Funds, PMS schemes and the seller

There is a lot of shout that mutual funds are not able to increase their assets. The answer is simple. They are not paying the salesman enough money. Investor preferences have absolutely NOTHING to do with money not coming in to equities. Investors have no clue about where to put their money and need some push. Pushed hard enough, they will put money in to fixed deposits of companies with no credit rating or low credit rating, dubious real estate PMS schemes or plantation schemes. They need just one nudge from the distributor and they will do it. The retail and the HNI investor are the ideal clients for any smooth talking sales guys.
Just last week, one foreign bank raised over Rs.1,000 crores (Yes, a thousand crores) for a PMS scheme. At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and equally other inane reasoning.
I went a little behind the curtains to see what the distributor got. He got a four percent up front commission for selling this PMS. The PMS itself had a very simple structure. An upfront annualised management fee of two percent, and exit load of two and a half percent if redeemed within twelve months and a profit share if the returns crossed two digits! There was no link to the market performance. If the market returns were thirty percent and the PMS delivered twenty, the PMS Manager still got an incentive. It is typical of most PMS structures. And of course the return is measured before tax and not after tax. Recently, I saw a PMS, where the value of a five lakh investment had gone up by Rs.1.45 lakh, but all of it was short term gains. Removing 30% tax, the gain shrunk to under one lakh rupees. The PMS Manager also deducted his incentive on the gross gain (around Rs.0.29 lakh). The investor was left with around Rs.0.85 lakh! The more interesting part was that the money was invested three years ago. The value, after tax and incentives etc is today below Rs.5 lakh, which was the original investment. If one takes the churn in to account, the broking firm has made a handsome return. The investors got totally screwed.
Why I am giving the example is that the said investor again put money in to the PMS of the foreign bank that I mentioned above.
So, if we look at it, the investor is a fool and no amount of reading or counselling makes a difference to the guy. All that matters to him is a slick distributor making a sexy power point presentation and perhaps treating him to a drink or attacking some other weakness of his. The distributor knows this and attacks. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this he makes four percent up front. So, he sells this. For the investor, it is ‘long term’ investing advised by an ‘expert’.
So, as I see it, it is the distributor who is key to expansion of any market. By taking him on, SEBI has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses. To top it, we are seeing a toothless and mindless agency like AMFI trying to dob the distributor with a ninefold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI, which is only a trade body of mutual funds. Their inability to do anything meaningful has been demonstrated by the fact that even the test they used to hold for distributors, was a sham and the same has now been transferred to an agency of SEBI. In this context, why should AMFI have any nexus with the distributors? In fact, I would urge the distributors to simply ignore AMFI and have their own trade body. AMFI is irrelevant for the distributor. Of course, SEBI is trying to push AMFI in to the corner by making it a ‘Self Regulatory Organisation” or a SRO. I do not know if that is any answer to expanding the market or any use for the distributors.
If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.

Friday, July 30, 2010

Cleartrip- Caveat Emptor.. Caution NOTHING CLEAR ABOUT IT

Greed does not pay. Sadly, I found this to be true whilst attempting to book an airline ticket through an online portal called “”.
I had used this service in the past, but once had an experience of the money having been debited and then the ticket not coming through and since then I had discontinued their services.
Alas, I was lured by an offer of one free ticket for each ticket booked and had a go.
Late evening, around 715 pm or so, I filled out all the details for a Chennai to Pune flight by Kingfisher airlines. It showed a fare of around 3857/-. No sooner had I pressed ‘submit’ (or the equivalent of wanting to conclude the transaction) that I got an SMS saying that my bank account has been debited ( I had used netbanking facility of my banker) with the said amount. I started to smile on having successfully navigated yet another net based transaction (you see, the BSNL internet connectivity is such that it keeps going off, so to complete an online transaction, it is an achievement for me). Alas, my smile froze. A message flashed online that the transaction ‘failed’. I had no clue of what happened. I checked my bank account. Yes, the amount had been debited.
So, I presumed that there is some glitch and called a customer support number of Cleartrip. I was a bit disturbed since I did not have any reference number. The lady who attended to my call resolved that by checking with my email id. Luckily, I was a ‘registered’ user and hence I had logged in with that id. So, it was easy to trace and she gave me a Cleartrip ID number. She said that the ticket was not issued due to some ‘link’ not working!! I tried to probe further, but got no farther.
She told me that my money would be ‘reversed’ immediately and that I could call in half an hour to check about the fate of my ticket etc.,
Alas, after an hour I could not get through in spite of several tries and so I kept it for the next morning.
Next morning, I checked my Cleartrip account to see if any ticket had been issued. None. I checked my bank account to see if the amount was credited. No. Cleartrip was still holding on to the money for a ‘failed’ transaction!
I called them up and once again was given a spin as to why the bloody thing did not work out.
Now, I got on to the website of Kingfisher directly and booked the ticket. Surprise! The fare was lower though they did not give any buy one get one free.
Is Cleartrip justified in doing what it did to me? It is very clear that they did not give me service that they promised. And the fact that in spite of taking my money, they could not deliver is proof that they did not have any valid arrangement with the airline.
Cleartrip is clearly not my cup of tea. Henceforth, it is the airline website or a physical travel agent. Online travel brokers/agents are high risk and we have no control over the transaction. Take care, folks. Cleartrip is out. I have no clue about other such brokers and I have no intention of finding out either.

These kind of bucket shops should learn from the railways website called which I use very regularly for train tickets and in over two years of continuous use, I have no complaints.

Wednesday, July 28, 2010

Mutual Fund Industry- RIP


The regulator seems to be on a single minded mission to pull the shutters on the mutual fund industry, in its zeal to make things easier for the investor. Now, with no margins left to pay the seller, mutual funds will remain an anglicised urban product. Insurance (thanks to the timely action by IRDA) will be the product that will continue to be sold across the length and breadth of the country. Insurance industry will regain its place under the sun. In its battle with the mutual fund industry for a share of the wallet of the public, it found a great ally in the government of India.
The mutual fund industry, alas, missed its first decade by total dependence on the distributor fraternity and instead focusing on the AUM rat race. Of course, AMFI was effectively used to push through regulations that helped protect the big boys.
Most of the mutual fund sponsors also own insurance companies. This prevented the mutual fund industry from actively taking on the insurance industry. The sponsor was threatened when SEBI tried to put brakes on the ULIP sales. Fortunately, IRDA had enough clout with the government to ensure legislative protection and sanctity to push ULIP’s to people at large.
Some cosmetic changes will be made in the ULIP’s, but it is unlikely that the insurance industry will scale down the commissions significantly. The investor will continue to get opportunities to invest in ULIP’s as before. Most Advisors, who were selling both mutual funds and insurance, will focus only on insurance products. Those were not selling insurance before, will invent reasons to structure life savings around insurance.
The clout of the insurance industry can be seen in the fact that LIC has been permitted to issue bonds that would qualify as “Infrastructure Bonds”! Maybe it will also get extended to other private insurers. Why not? If you look at the fact that in 2009-10, ULIP collections amounted to over one lakh crore rupees, the insurance industry is extremely important to keep the financial markets going. The investors in insurance paying a little more commissions do not matter in the importance of things. Millions of insurance agents would not be able to feed their families if the government had not passed the legislation that kept SEBI away from the insurance companies. So, let us not complain about insurance being an inefficient way to invest. As opposed to it, the mutual fund industry collected less than ten thousand crore rupees in 2009-10.
It is the insurance industry that helps bail out stock markets and the governments use it to bail out PSU issues of stocks and debts. The mutual fund industry does not help out the government in times of need. Naturally, it is the insurance industry that needs to be given full protection as it is an important building block in the nation’s finances.
Now, AMFI is apparently getting rebirth as a Self Regulatory Organisation (SRO). Many years ago, this proposal was roundly put to bed by its members. Now, the players have no option but to seize this opportunity and use it to protect the industry. One hopes that it does not succumb to ridiculous proposals like insisting on minimum capital etc. I hope that the smaller mutual funds get to have their say in the new avatar of AMFI. Maybe we will see a change in the board composition, which has been dominated by a few large players on the basis that since they represent a larger AUM base, they represent more investors! I have never seen AMFI being anything other than a trade lobby, so the platform was more used to create entry barriers and nuisance to smaller players.
In this whole context, what about the investor? Well, who gives them a damn! They can buy what their friendly broker tells them. SEBI will try and make mutual funds more and more attractive for them, but will put it out of their reach as mutual funds will no longer be able to spend big money in reaching out to them. If I take the cost of servicing a SIP investor of one thousand rupees a month, the costs far outweigh the money that can be made out of them. The small investor is a drain on the mutual fund industry. Even in the days of entry loads, upfront commissions etc, the focus was on large ticket investors. Now, surely the fund houses have strong financial reasons to ensure that the small investor is kept away from their books.
Of course, for the small investor, the other door of insurance is open. It is being made more transparent and ‘better’. Instead of debiting the first year commission in one go, they will spread it over the ‘life’ of the instrument. And you had to save through ULIP’s only for three years as the minimum. Now it is five years.
Investor protection, RIP.

Monday, July 26, 2010

In Gold we trust...

(This was written for a personal finance magazine)

Gold has always fascinated Indians. India was an amalgam of many princely states, till the British united us finally in 1947. Perhaps, the absence of one currency and the instability as each ruler was overthrown by another is the reason why gold became the Indians’ store of value.
Classic investment reasons for investing in gold include:
i) To beat inflation’
ii) To protect against a weak dollar;
iii) Safe haven in times of economic and political turmoil;
iv) For portfolio diversification; etc
Investing in gold has been a painful journey. I will just give you some dates and prices:
1968 Jan $ 35.20
1969 Jan $ 42.30
1974 Jan $129.19
1979 Jan $227.27
1989 Jan $404.01
1999 Jan $287.07
2009 Jan $858.69
2010 Jan $1117.97
(Above are average prices in US dollars per ounce for the month).
The journey looks smooth, does it not? What I have not told you here is that there was a kind of rush in end 1979 and beginning 1980. In Jan 1980, the price of gold had shot to near $850 an ounce and then there was a painful decline to $280 or so by 1985. Then the price climbed to over $500 in early 1988! By end 1999 it had gone down again to near $260 or so! It is only after 1999, that there has been a steady uptick in gold prices. Of course, the steadily falling Indian rupee in the first six decades of Independent India bumped the returns for the early Indian investor.
So, all those who advocate gold investments will only give you data from 1999 or later. Before that, you could have lost a fortune betting on gold.
So, do not buy the argument that gold is a failsafe or fool proof investment. Timing is all. If you look at it dispassionately, gold as a metal has very limited use. It is only a ‘perceived’ value. The cost of mining gold varies from country to country, but is generally around US $ 300 or so per ounce. So, in today’s markets, the producers of gold are reaping a bumper bonanza. What keeps the price high? It is perhaps a beautifully managed (manipulated?) price by the World Gold Council. Demand and supply are both artificial. Demand in India (the largest private hoarder of gold) is around 700 tonnes or nearly one fifth of world demand.
Now, you do not have to buy physical gold. Buying physical gold is the worst way to invest in gold. If at all one has to buy gold, the best way is to go in through the Gold ETF (Exchange Traded Funds). These trade at real time prices and there is no opaqueness about them. You are saved the bother of worries on quality, storage etc., Never buy jewellery for investments. You lose a fortune in making charges and a high probability of getting cheated on purity.
Even though India is the largest consumer of gold, gold prices are still designated in US dollars. Hence, how our rupee will behave has a great bearing on gold prices. My belief is that over time, if our economy continues to grow at twice or thrice the pace at which the US is growing, there is no reason why the Indian rupee should not keep getting progressively stronger? In fact, this is the biggest risk that gold investment carries. In ten years, the Indian rupee should logically be closer to thirty rupees to the dollar than forty. In such a case, if the gold price stagnates at current levels, as an investment, we end up losing money.
To me, the basic call one has to take is whether you are bullish or bearish on India. If you are bullish on India, relative to the US of A, over the next ten years, then gold cannot be such a great investment. Equities will be a far superior bet. The counter argument to this is that if there is a crisis in US of A, the dollar will collapse and gold prices will shoot through the roof as the world looks to gold as a reserve currency. With the crisis in Europe, it is unlikely that the Euro will ever replace the US dollar, so there is a fair chance that some people will park some of their money in gold. The other factor is that the World Gold Council will at some point not be able to regulate supply and the high prices will lure miners to produce more gold and bring the prices down.
On balance, if there are uncertainties about the global situation, gold may turn out to be a decent investment. This also depends to a great deal on how the World Gold Council controls the supply. If some central bank decides to come and sell a few hundred tonnes of gold, that will create a drop in prices.
In short, whilst gold has given spectacular returns since 1999, there is no guarantee that it will continue to do so. However, in times of fear and uncertainty, gold has its proponents. The other thing is whether you look at investing in gold as just another investment. Most Indians never sell gold if they buy. In such a case, it hardly matters what price you pay and what returns you get. One decent way to go about would be to go ahead with a SIP in gold ETF. The only loss out of that would be the annual management fee and the expenses that the AMC will charge you. A small price to pay as compared to owning physical gold.

Tuesday, July 20, 2010

Insurance and the Art of Lying

Will you walk into my parlour?"
Said the spider to the fly;
"'Tis the prettiest little parlour
That ever you did spy.
The way into my parlour
Is up a winding stair;
And I have many curious things
To show you when you're there."
"Oh, no, no," said the little fly;
"To ask me is in vain;
For who goes up your winding stair
Can ne'er come down again

I keep getting text messages on my phone (I have registered in the “Do Not Call” Registry Long ago) offering me really tempting investment products. Two days ago, I got one, which reads as under:
Sender: +917667396014
“BAJAJ ALLIANZ: DEPOSIT 8800/Yr or 5000/ Half Yr for 3 Yr July 20, Get FREE SPOT 1gm GOLD COIN, Approximately 52800 at 5 Yr, FREE PENSION PLAN, SAVE TAX. CAL: 9840150809”
The arithmetic is very interesting. The return is close to 36% p.a.! Bajaj Allianz must be a fantastic money manager.
Of course, I am a born sceptic. So, I will pass this offer. Alas, no one in the mutual fund industry promises me this return. I do not get any text messages from any mutual fund agent promising me this kind of returns. Other than Bajaj Allianz, I also get similar messages with almost identical numbers citing LIC. The moment I can spare this amount, I am going to invest in a Bajaj Allianz product. In addition, I will get a gold coin! I wonder if I have to pay any tax on it or would I be asked to pay up on account of TDS?
I also wondered at the other fantastic thing. I could either pay 8800 every year or 5000 every half year, with the same end result! So, the investment option has to be fantastic.
With this kind of return assured by Bajaj Allianz, surely other insurance companies cannot be far behind. Then why are they protesting about offering a guarantee of a piddly four and a half percent annual return on pension products? Then a thought struck me. Maybe they want to have a guaranteed rate that is much higher, given that the offer to me was at a handsome thirty six odd percent.
I also think that in my younger days these insurance products were not around at all. Here I have HDFC Standard Life promising me that I can be an independent person in my old age, if they take care of my money. I wonder how they can do so, given that they have been around for less than ten years. But then, I think, it is only an advertisement and if there was anything funny, IRDA would not have permitted it. In my days, LIC would only give guaranteed returns of around eight to nine percent post tax. Now, all of them have moved to much higher numbers, though these kind of text messages (Insurance is the subject matter of solicitation) give me hope that they can give me great returns.
Each day, the phone brings forth text messages that promise me the riches. Stocks that will multiply in price, insurance products that give me usurious returns and many freebies like gold coins etc., I have resisted so far because of age, lack of surplus money to gamble and my innate scepticism. Wonder how many people respond to the messages and enjoy these returns.
It would be nice if any of our readers can tell me if I should give my money to the agent who sent me the text message. And wonder if either Bajaj Allianz or IRDA can confirm the numbers, so that I can also join the elite club that can make so much returns? In case the numbers are not okay, will IRDA step in and do something? I do not expect the insurance company to do anything, because their job is to sell.