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!
Monday, August 30, 2010
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.
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
Cleartrip.com 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 “Cleartrip.com”.
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 irctc.co.in which I use very regularly for train tickets and in over two years of continuous use, I have no complaints.
Greed does not pay. Sadly, I found this to be true whilst attempting to book an airline ticket through an online portal called “Cleartrip.com”.
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 irctc.co.in 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
FOR WHOM THE BELLS TOLL...
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.
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.
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.
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.
Friday, July 16, 2010
Corporate Defaults- Hiding the truth
See this article (http://www.business-standard.com/india/news/firms-shy-awayconverting-fccbs-into-equity/398541/) in the Business Standard. It talks about Indian companies that had raised convertibles at fancy prices and are now looking down the barrel. In the first place, at the point of placement itself, the pricing for most did look ridiculous, casting doubts on the analytical abilities and/or integrity of the investing entities.
Now, the hour of reckoning is at hand. It is in the interests of both to keep the charade going. If the investor were to press for repayment, most companies would have to face liquidation proceedings. And in a liquidiation proceeding, India is notoriously slow. The courts and the legal authorities will tend to favour the domestic companies due to the promoters clout. The legal system will stand thoroughly exposed. In India, it is impossible to recover money. If you have to recover any money, you need cooperation of the promoter. Of course, there are other lenders too, but all can be ‘handled’ by the promoters in case of need. We have only to look at the convenient mechanism called “Asset Reconstruction Companies” which have been used as a conduit by the promoters to cheat on debt, legally. The opacity of these ARC’s will get bust soon.
Here, the role of rating agencies comes in to question. Why are they still keeping quiet? It is obvious even to a mathematically challenged person that most of these companies can never hope to repay. Conversion is also not on, given the huge gap between the market price and the strike price. And, a rating should only focus on the assumption that debt has to be repaid. Otherwise, the rating is only a speculation based on a random event of conversion. If there is restructuring of the instrument, it is akin to a default. In such a case, the rating needs to be pushed to the last slot, indicating that the company is in default. That is what honest credit rating is all about.
In fact, each and every company on the list is worth watching. Maybe about ten percent of the companies will be able to generate money to repay. But, if you have to reschedule, you are junk. Alas, the banking system in India will not look at them as such. Some of them are marquee names, with tremendous clout in the banking system. They will be ‘prime’ borrowers. The bankers simply have to keep pumping in more money in to these companies, in the interest of protecting their own balance sheets. In the event of a default, these companies can put the whole banking system in to danger. Perhaps, there lies the answer. These banks will leave no stone unturned to ensure that these companies health status remains unimpaired, even if they have to pump in more money by helping them to pay of the FCCB’s and pump in local loans. The leverage of most of these companies is alarming and they all look like big default candidates.
The credit rating agencies are smug. They know that the system will bail them out, so ratings will not be changed. After all, there is no difference between a BBB and a AAA unless there is a default! Statistically, they will be on par.
Now, the hour of reckoning is at hand. It is in the interests of both to keep the charade going. If the investor were to press for repayment, most companies would have to face liquidation proceedings. And in a liquidiation proceeding, India is notoriously slow. The courts and the legal authorities will tend to favour the domestic companies due to the promoters clout. The legal system will stand thoroughly exposed. In India, it is impossible to recover money. If you have to recover any money, you need cooperation of the promoter. Of course, there are other lenders too, but all can be ‘handled’ by the promoters in case of need. We have only to look at the convenient mechanism called “Asset Reconstruction Companies” which have been used as a conduit by the promoters to cheat on debt, legally. The opacity of these ARC’s will get bust soon.
Here, the role of rating agencies comes in to question. Why are they still keeping quiet? It is obvious even to a mathematically challenged person that most of these companies can never hope to repay. Conversion is also not on, given the huge gap between the market price and the strike price. And, a rating should only focus on the assumption that debt has to be repaid. Otherwise, the rating is only a speculation based on a random event of conversion. If there is restructuring of the instrument, it is akin to a default. In such a case, the rating needs to be pushed to the last slot, indicating that the company is in default. That is what honest credit rating is all about.
In fact, each and every company on the list is worth watching. Maybe about ten percent of the companies will be able to generate money to repay. But, if you have to reschedule, you are junk. Alas, the banking system in India will not look at them as such. Some of them are marquee names, with tremendous clout in the banking system. They will be ‘prime’ borrowers. The bankers simply have to keep pumping in more money in to these companies, in the interest of protecting their own balance sheets. In the event of a default, these companies can put the whole banking system in to danger. Perhaps, there lies the answer. These banks will leave no stone unturned to ensure that these companies health status remains unimpaired, even if they have to pump in more money by helping them to pay of the FCCB’s and pump in local loans. The leverage of most of these companies is alarming and they all look like big default candidates.
The credit rating agencies are smug. They know that the system will bail them out, so ratings will not be changed. After all, there is no difference between a BBB and a AAA unless there is a default! Statistically, they will be on par.
Subscribe to:
Posts (Atom)
