Watch this thought provoking video :
http://www.youtube.com/watch?v=lMSatkxO_r0
If the link does not work, just search for "Corruption in India 2010 & Before
Tuesday, February 15, 2011
FUDGET 2011-12. Expectations anyone?
(February 28th is the creative accounting day. New terms are invented and fine print gets a new meaning. All of this is courtesy the annual budget that is presented on this day every year)
I have enough money to last me the rest of my life, unless I buy something."
— Jackie Mason
Once upon a time, the stock markets used to wait with bated breath for the budget, every year. The british tradition of five pm budget was carried forward for a very long time, till a finance minister remembered that we were no longer a part of the British Empire.
Till 1991 or so, budgets used to be a sad thing. Every year, we had to anticipate where the customs or excise would be raised. We rarely saw broad fall in any tariffs. So, there would be more of relief rallies in sectors where the anticipated hikes in tariffs did not materialise.
After 1991, it has come down to anticipating where the good things in life will happen. We now tend to look more for generic changes across the board rather than for one particular sector or company which has lobbied (in whatever way) for and got something that will help it or hurt its competition. Those still happen, but to a far lesser extent than the past. One often wonders after finding out that some obscure provision has been changed to benefit just one company. But, Indian politicians being what they are, this will not go. To take advantage of this, one has to have inside information, which in these cases would be mostly the promoter, his family and related circles.
Now, the budget is becoming more and more of a non-event as far as the stock markets are concerned. Now, there is anticipation built upon the following areas, in general:
i) Drop in income tax rates;
ii) Drop in peak import tariffs;
iii) Drop in VAT rates;
iv) Tax breaks on housing loans, education etc.,
v) Removal or modification in subsidies;
vi) Increased budget on education etc
Reforms outside the budget are more likely to impact corporate India. The budget can only bring forth so much. Given the fact that the government is a hotchpotch of different parties, full- fledged reform is ruled out. The Congress party has always pretended to be Socialist, so we will have terms like ‘aam aadmi’ dominating the budget. As is said, “The fortune is at the bottom of the pyramid”, in more ways than one, includes collection of votes.
The budget is a presentation of the nation’s profit and loss and balance sheet on an annual basis. The one big difference is that we NEVER get an audited actual. Perhaps the nation’s wise men have realised that an audit means nothing. The budget virtually tells you the ‘state of the nation’ at a point of time in history. Political compulsions, nearness of elections (both state and central) and a new found desire to please the global financial community seem to be the main drive behind the budgets of recent years. The budget has also undergone some clever nomenclature changes, to present a better picture of financial health than it actually is. For instance, the fiscal deficit now has a new component called ‘primary’ deficit.
At the end of the day, what really matters is the sources and uses of money. The sustainable sources are tax revenues alone. What we see is that we use a majority of non-recurring revenue to present a picture that is removed from truth. What happens is that when revenue falls short of expenditure (which has been India’s story since independence, the government resorts to ‘borrowing’. This means that the government pushes in to circulation, money which is not backed by anything. So, it results in inflation. To this central government budget, we have to add the fiscal waywardness of the Indian states (alas, we are creating more and more of them, with disastrous financial implications). The net result is that we have a fiscal deficit of over ten percent of our total expenditure, which is mind numbing. Indirectly, the annual budget has a recipe for ten percent inflation. What saves us somewhat is the money that the foreigners bring in by way of direct or portfolio investments. Add to that the remittances that the Non Resident Indian sends, our finances appear to be healthier than what they really are.
For instance, in 2010-11, the government will take credit of the revenue from the auction of the 3G Licenses. Strictly speaking, it is like selling the family jewels to meet monthly expenses.
Indian fiscal situation has been out of control for a long time. It is not expected to get any better so long as we have a weak Central government, which is surviving at the mercy of wayward regional parties. These regional parties compound the national problem by adding their own doses of free television sets, one rupee a kilo rice and so many other wasteful schemes, to stay in power. Add to that the perceived ‘farmer’ lobby which results in heavy subsidies on fuel, fertilizers, electricity etc., there is no way that India can ever balance its budget.
So, if you see, at the end of the day, the budget is becoming more and more of a non-event so far as the investor is concerned. Of course, we will have the usual suspects (fertiliser, railway machinery suppliers, irrigation, education etc) where there will be a build up of hope. The Railway budget is another anomaly which exists in India. There is no rationale behind a separate budget for the Railways. It is time that it is a part of the national budget. The only thing one can see from a separate railway budget is the poor return on money that the nation gets and unnecessarily creates a power lobby of its own.
So, as far as investment goes, it is best to ignore the budget and carry on with bottom up investment themes. The budget may provide momentary hopes and agonies for the momentum traders. Naturally, there will be expectations that get built in. I have normally seen that the higher the expectation, the lower is the post budget returns from the market and vice versa. This is simply because the stock markets are comprised of expectations.
The budgets are not likely to offer any structural solutions. Let us see if there is one big bang on taxation. It is time that we live with tax rates that are fixed for life. And the other foolish expectation is whether a centralised sales tax (GST) gets in to play quickly. Most important, let us hope and pray that the Finance Minister does not introduce a new ‘Voluntary Disclosure Scheme’ to bail out the crooks who deserve to be hung). For more reforms, wait for a government with spine and majority.
I have enough money to last me the rest of my life, unless I buy something."
— Jackie Mason
Once upon a time, the stock markets used to wait with bated breath for the budget, every year. The british tradition of five pm budget was carried forward for a very long time, till a finance minister remembered that we were no longer a part of the British Empire.
Till 1991 or so, budgets used to be a sad thing. Every year, we had to anticipate where the customs or excise would be raised. We rarely saw broad fall in any tariffs. So, there would be more of relief rallies in sectors where the anticipated hikes in tariffs did not materialise.
After 1991, it has come down to anticipating where the good things in life will happen. We now tend to look more for generic changes across the board rather than for one particular sector or company which has lobbied (in whatever way) for and got something that will help it or hurt its competition. Those still happen, but to a far lesser extent than the past. One often wonders after finding out that some obscure provision has been changed to benefit just one company. But, Indian politicians being what they are, this will not go. To take advantage of this, one has to have inside information, which in these cases would be mostly the promoter, his family and related circles.
Now, the budget is becoming more and more of a non-event as far as the stock markets are concerned. Now, there is anticipation built upon the following areas, in general:
i) Drop in income tax rates;
ii) Drop in peak import tariffs;
iii) Drop in VAT rates;
iv) Tax breaks on housing loans, education etc.,
v) Removal or modification in subsidies;
vi) Increased budget on education etc
Reforms outside the budget are more likely to impact corporate India. The budget can only bring forth so much. Given the fact that the government is a hotchpotch of different parties, full- fledged reform is ruled out. The Congress party has always pretended to be Socialist, so we will have terms like ‘aam aadmi’ dominating the budget. As is said, “The fortune is at the bottom of the pyramid”, in more ways than one, includes collection of votes.
The budget is a presentation of the nation’s profit and loss and balance sheet on an annual basis. The one big difference is that we NEVER get an audited actual. Perhaps the nation’s wise men have realised that an audit means nothing. The budget virtually tells you the ‘state of the nation’ at a point of time in history. Political compulsions, nearness of elections (both state and central) and a new found desire to please the global financial community seem to be the main drive behind the budgets of recent years. The budget has also undergone some clever nomenclature changes, to present a better picture of financial health than it actually is. For instance, the fiscal deficit now has a new component called ‘primary’ deficit.
At the end of the day, what really matters is the sources and uses of money. The sustainable sources are tax revenues alone. What we see is that we use a majority of non-recurring revenue to present a picture that is removed from truth. What happens is that when revenue falls short of expenditure (which has been India’s story since independence, the government resorts to ‘borrowing’. This means that the government pushes in to circulation, money which is not backed by anything. So, it results in inflation. To this central government budget, we have to add the fiscal waywardness of the Indian states (alas, we are creating more and more of them, with disastrous financial implications). The net result is that we have a fiscal deficit of over ten percent of our total expenditure, which is mind numbing. Indirectly, the annual budget has a recipe for ten percent inflation. What saves us somewhat is the money that the foreigners bring in by way of direct or portfolio investments. Add to that the remittances that the Non Resident Indian sends, our finances appear to be healthier than what they really are.
For instance, in 2010-11, the government will take credit of the revenue from the auction of the 3G Licenses. Strictly speaking, it is like selling the family jewels to meet monthly expenses.
Indian fiscal situation has been out of control for a long time. It is not expected to get any better so long as we have a weak Central government, which is surviving at the mercy of wayward regional parties. These regional parties compound the national problem by adding their own doses of free television sets, one rupee a kilo rice and so many other wasteful schemes, to stay in power. Add to that the perceived ‘farmer’ lobby which results in heavy subsidies on fuel, fertilizers, electricity etc., there is no way that India can ever balance its budget.
So, if you see, at the end of the day, the budget is becoming more and more of a non-event so far as the investor is concerned. Of course, we will have the usual suspects (fertiliser, railway machinery suppliers, irrigation, education etc) where there will be a build up of hope. The Railway budget is another anomaly which exists in India. There is no rationale behind a separate budget for the Railways. It is time that it is a part of the national budget. The only thing one can see from a separate railway budget is the poor return on money that the nation gets and unnecessarily creates a power lobby of its own.
So, as far as investment goes, it is best to ignore the budget and carry on with bottom up investment themes. The budget may provide momentary hopes and agonies for the momentum traders. Naturally, there will be expectations that get built in. I have normally seen that the higher the expectation, the lower is the post budget returns from the market and vice versa. This is simply because the stock markets are comprised of expectations.
The budgets are not likely to offer any structural solutions. Let us see if there is one big bang on taxation. It is time that we live with tax rates that are fixed for life. And the other foolish expectation is whether a centralised sales tax (GST) gets in to play quickly. Most important, let us hope and pray that the Finance Minister does not introduce a new ‘Voluntary Disclosure Scheme’ to bail out the crooks who deserve to be hung). For more reforms, wait for a government with spine and majority.
Monday, February 14, 2011
Spoof of identity - Moneylife Personal Finance site and magazine
Spoof of identity - Moneylife Personal Finance site and magazine
Spoof of identity
February 14, 2011 11:52 AM |
R Balakrishnan
How many details do statutory authorities need to establish an identity? Going by the current scenario, the list is unending... And soon we will all be confronted with another ‘Useless Identity Document’
A few years back, I started a systematic investment plan (SIP) for my children. My permanent account number (PAN) card, some address proof, etc, was all that was required. Now, my son is nearing 18 years of age. The money that is lying in his mutual fund account gets orphaned on this date. It can be many days before he can utilise it and I as the guardian have no control over it now! A few months ago, the registrar of the mutual fund wrote to me seeking the details of the bank account I planned to open for my son; his signature duly attested by a banker; his PAN card and his address proof.
There is a need to submit ‘proof of old bank details’ which is marked with an asterisk. The asterisk explains that it should be a cancelled original cheque leaf (with the name and account number)/bank passbook or bank account statement (certified by the bank manager)/letter from the bank for the new bank account/passbook. The PAN card is a tough hurdle. I did apply for a PAN card for my son a couple of years back, but the agency for the card issuance refused to supply one. Their logic was strange: a PAN card is not normally issued to a minor. This was nonsense, considering that my Marwari and Gujarati friends create income-tax files for newborns and pump income in their names from age one so that they can build ‘capital’ in a tax-efficient way. Finally, after a slanging match, they issued a PAN card for my son, with no photograph and with my signature!
Now, there will be a long wait. I have to get a PAN card issued for my son. And I cannot start the process until my son is 18 years old. Then, I will have to have another battle with my banker. He will want ‘address proof’ for my son. I have been a nomad for most of my life and this is a tough ask. Luckily, not having full-time employment has its advantages. I spent many man-days and got a ration card with the address where I am residing currently. Using that as the base, I managed to get passports for my children. The bank issue is sorted out, hopefully. This whole process can take quite some time. In the meanwhile, the money is frozen. I also do not understand about the ‘proof of old bank details’. At that point in time, none was asked for. Everything was linked to my account. The account was sold to me by HDFC Bank through their ‘Relationship Manager’, who is no longer with the organisation. So, no service from them, while the Bank will continue to amass the trail commission on these instruments. This sure beats working for the Government of India.
The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have carried the know your customer (KYC) norms to ridiculous extremes. If one has a bank account, why bother with anything else? SEBI supervises the stock exchanges, home to the most manipulative trade practices. SEBI also ‘compounds’ offences with some token fines. None of the vanishing companies has been caught—or punished—so far. According to reports, indicted players like Ketan Parekh are supposed to be operating merrily. The regulator is behaving like the dog that chases the moving car. Once it catches up with the car, the dog does not know what to do.
These KYC norms are impractical and are meant to harass the mutual fund industry and investors. The insurance industry does not seem to care for these norms. All that the Life Insurance Corporation of India wanted from my son was a bank-attested specimen signature and a nomination form. Soon, we will all be confronted with another ‘Useless Identity Document’. The Unique Identification (UID) project would have been great if it were a single requirement. But it is yet another requirement. As I said, I have been a nomad. When I switch residence, I will have to communicate these amended details to a dozen or more places! Maybe there is scope for a broker to offer his/her services for effecting ‘change of addresses’. With mobility of jobs being so high, there surely is a huge market for such a service.
Spoof of identity
February 14, 2011 11:52 AM |
R Balakrishnan
How many details do statutory authorities need to establish an identity? Going by the current scenario, the list is unending... And soon we will all be confronted with another ‘Useless Identity Document’
A few years back, I started a systematic investment plan (SIP) for my children. My permanent account number (PAN) card, some address proof, etc, was all that was required. Now, my son is nearing 18 years of age. The money that is lying in his mutual fund account gets orphaned on this date. It can be many days before he can utilise it and I as the guardian have no control over it now! A few months ago, the registrar of the mutual fund wrote to me seeking the details of the bank account I planned to open for my son; his signature duly attested by a banker; his PAN card and his address proof.
There is a need to submit ‘proof of old bank details’ which is marked with an asterisk. The asterisk explains that it should be a cancelled original cheque leaf (with the name and account number)/bank passbook or bank account statement (certified by the bank manager)/letter from the bank for the new bank account/passbook. The PAN card is a tough hurdle. I did apply for a PAN card for my son a couple of years back, but the agency for the card issuance refused to supply one. Their logic was strange: a PAN card is not normally issued to a minor. This was nonsense, considering that my Marwari and Gujarati friends create income-tax files for newborns and pump income in their names from age one so that they can build ‘capital’ in a tax-efficient way. Finally, after a slanging match, they issued a PAN card for my son, with no photograph and with my signature!
Now, there will be a long wait. I have to get a PAN card issued for my son. And I cannot start the process until my son is 18 years old. Then, I will have to have another battle with my banker. He will want ‘address proof’ for my son. I have been a nomad for most of my life and this is a tough ask. Luckily, not having full-time employment has its advantages. I spent many man-days and got a ration card with the address where I am residing currently. Using that as the base, I managed to get passports for my children. The bank issue is sorted out, hopefully. This whole process can take quite some time. In the meanwhile, the money is frozen. I also do not understand about the ‘proof of old bank details’. At that point in time, none was asked for. Everything was linked to my account. The account was sold to me by HDFC Bank through their ‘Relationship Manager’, who is no longer with the organisation. So, no service from them, while the Bank will continue to amass the trail commission on these instruments. This sure beats working for the Government of India.
The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have carried the know your customer (KYC) norms to ridiculous extremes. If one has a bank account, why bother with anything else? SEBI supervises the stock exchanges, home to the most manipulative trade practices. SEBI also ‘compounds’ offences with some token fines. None of the vanishing companies has been caught—or punished—so far. According to reports, indicted players like Ketan Parekh are supposed to be operating merrily. The regulator is behaving like the dog that chases the moving car. Once it catches up with the car, the dog does not know what to do.
These KYC norms are impractical and are meant to harass the mutual fund industry and investors. The insurance industry does not seem to care for these norms. All that the Life Insurance Corporation of India wanted from my son was a bank-attested specimen signature and a nomination form. Soon, we will all be confronted with another ‘Useless Identity Document’. The Unique Identification (UID) project would have been great if it were a single requirement. But it is yet another requirement. As I said, I have been a nomad. When I switch residence, I will have to communicate these amended details to a dozen or more places! Maybe there is scope for a broker to offer his/her services for effecting ‘change of addresses’. With mobility of jobs being so high, there surely is a huge market for such a service.
Friday, February 11, 2011
A nice political blog
http://blogs.hindustantimes.com/singly-political
A nice blog, with good political insights. Go through the archives, for many things will fall in to place.
A nice blog, with good political insights. Go through the archives, for many things will fall in to place.
Friday, January 21, 2011
Retail tales
Read this story about the erstwhile UTI Ventures (now called Ascent Capital)'writing off' and investment in KOUTONS RETAIL.
http://www.livemint.com/2011/01/20215647/Ascent-Capital-exits-from-Kout.html?atype=tp
In informal circles, Koutons was considered to be one of the better retail plays, much like Vishal Retail was talked of as a focused and aware player. Both have fallen. This is the third large failure. The first to fall was SUBHIKSHA which had some high profile investors.Of course, the TVS Group had given up this sector after a very early try in 1990 or so.
Organised retail chains find it difficult to battle the local stores, which have upgraded themselves, have low costs, low rents and labour costs that are half or less.
Of course, there are scalable models like Star Bazar (do not know about their profitability). Real estate is one business. Retailing is another. Understanding both is key.
Clearly, the dice is loaded against the retail sector from an investment perspective. The rents kill. On top of that, Vishal and Koutons also had to face the problem of having their own brand in ready to wear garments. This is a foolish business to get in to, since the inventory risks are very high, given that both the retail cos did not have any brand worth a recall.
I am also amazed at the venture capitalists who put in money.
Or, maybe, the promoters are laughing their way to the banks (swiss or not, it does not matter).
A clear message that retail focused on the Bottom of the Pyramid (India's pyramid bottom is ninety percent of the population) is a dicey call.
http://www.livemint.com/2011/01/20215647/Ascent-Capital-exits-from-Kout.html?atype=tp
In informal circles, Koutons was considered to be one of the better retail plays, much like Vishal Retail was talked of as a focused and aware player. Both have fallen. This is the third large failure. The first to fall was SUBHIKSHA which had some high profile investors.Of course, the TVS Group had given up this sector after a very early try in 1990 or so.
Organised retail chains find it difficult to battle the local stores, which have upgraded themselves, have low costs, low rents and labour costs that are half or less.
Of course, there are scalable models like Star Bazar (do not know about their profitability). Real estate is one business. Retailing is another. Understanding both is key.
Clearly, the dice is loaded against the retail sector from an investment perspective. The rents kill. On top of that, Vishal and Koutons also had to face the problem of having their own brand in ready to wear garments. This is a foolish business to get in to, since the inventory risks are very high, given that both the retail cos did not have any brand worth a recall.
I am also amazed at the venture capitalists who put in money.
Or, maybe, the promoters are laughing their way to the banks (swiss or not, it does not matter).
A clear message that retail focused on the Bottom of the Pyramid (India's pyramid bottom is ninety percent of the population) is a dicey call.
Tuesday, January 18, 2011
THE YEAR THAT IS WILL BE THE YEAR THAT WAS....
(This appeared in the recent issue of MoneyLife)
The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)
By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.
The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)
By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.
SELLERS KEEPERS, BUYERS WEEPERS
(This appeared in the recent issue of MoneyLife)
My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!
My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!
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