My article on Life Insurance- Published in the READER'S DIGEST

(I grew up as an avid reader of Reader's Digest- The source of knowledge and some stimulating stories. I am delighted that the July issue of RD carries an article of mine from Moneylife, with some re-writing and comments from the Editors. )

The Elusive Pure Insurance

By R. BALAKRISHNAN From Moneylife

68 | july 2014 | reader’s digest

It has emerged, from the recent reports and exposés on banks, that insurance is one of the conduits

for money laundering, along with real estate, precious metals, gems and jewellery. The insurance industry, as it is structured the world over, is actually an investment manager more than a risk manager.

My memory goes back to my early days when uncles and cousins sold me “endowment” policies on which they made handsome commissions, year on year. And after I stopped subscribing to their con games, they simply stopped servicing me, secure in the assurance that as long as I paid my premiums, the commission would go to them. Those dear ones have stolen some of my wealth.

The industry has come a long way thereafter. It indulged in another con game in the 2000s, when it sold tens of thousands of crores of unit-linked insurance plans (ULIPs) that created a big dent in the average person’s savings by inflicting massive losses on them. All this has led to a slowdown in the insurance business. The industry has now raised alarm bells that it is not growing, as if this is a national tragedy.

Well, to me, it is the first sign of financial wisdom dawning upon investors who have been shown the ghost at the graveyard and milked of their bank balances that have gone to enrich the agents. Life insurance is needed for the lowest-income strata of society—a segment that cannot afford to pay the premiums. The State could provide a minimum cover of a few lakhs of rupees—at the cost of the national exchequer. I will not crib about this subsidy. If one takes a pure insurance product, most of us would need to spend under a thousand rupees a month, for a reasonable cover. Once you grow rich, you can simply stop paying, like medical insurance premiums. Insurance companies will try and avoid selling pure term policies. One can take any kind of “investment” policy for even a newborn. Now, try asking your agent to issue a “pure” term policy for your child. The agent will say that the insured has to be at least 18. If the kid was good enough for an investment insurance policy, why is a term insurance policy denied?

I will offer a real-life experience. I went to HDFC Life, through my banking relationship manager, and asked for a “pure” term policy for my children who are over 18. His face dropped, since commissions are very low compared to an endowment or a ULIP, but he humoured me. He collected details from me and said that he would get back the next day.The following day, he wanted to know about my children’s “income.” I mentioned that they are students and, as a parent, I would be paying the premiums till they start earning and continue with the policy, if they want to.

Agents told me that, to take a term policy, the “insured” has to have “income”! No matter how much I argued, they would not relent. They even refused to give it to me in writing, admitting that this was one of the requirements.

I continued arguing with them: What if someone takes a policy and then loses his job? They simply refused to budge. However, since then, the HDFC Life guy has made a couple of abortive attempts to sell ULIPs and SIPs for my children. For ULIP and SIPs, it does not matter where the money comes from. Next, I went to an LIC agent, who said that he will get back to me about a pure term policy. A year later, I’m still waiting for that call.

I tried to buy an insurance product that is pure risk—no money back if the insured person survives—which is the only insurance that a person needs apart from medical insurance. For medical insurance, there is no insistence that the person who has to be insured has to be a salaried person.

Almost one-fourth of the total assets of the insurance industry are accounted for by ULIPs. If you add back the commissions and administrative expenses, the figure would be even higher. The life insurance industry collects over one lakh crore rupees annually in “first premium” receipts. Of this, the premiums for term policies are not disclosed but I suspect they may not be even five percent. With so much mis-selling (labelling something as insurance and selling investment products qualifies as mis-selling in my dictionary), I have often wondered whether we would be better off without this industry.

REPRINTED FROM MONEYLIFE, THE PERSONAL FINANCE MAGAZINE. © MONEYLIFE / R. BALAKRISHNAN

NOW, BYPASS THE AGENT! BUY TERM INSURANCE

As a rule, keep your insurance needs separate from your investment needs. Life insurance must be taken purely to cover the risk of death: The potential financial loss arising out a family member’s passing away can be compensated to a great extent if he or she had taken life insurance.

Most Indians take life insurance policies that give returns—indeed they are swayed by those earnings. What they are seldom sold is “Term” insurance, which is pure insurance with seemingly no benefits during the insured person’s lifetime. But what you may not realize is the big benefit that term insurance really offers during your lifetime: very low cost to you in the regular premiums you pay the insurance company to stay insured. Term insurance will cost you only a fraction of what you pay for ULIPs or other insurance schemes. So what you save here may be invested in fixed deposits, or better still, in a good equity mutual fund or directly in the shares of good companies. This way, you build wealth, without sharing your hard-earned money with the insurance agent, and cover risk at the same time.Insurance agents get very little commission when you take term insurance,whereas they get a huge amount taken from your premium/investment when you buy ULIPs, for instance. So they are often not interested in selling you term insurance and will sweet-talk you into the “returns” you get with other products (schemes) and “mis-sell” only those products that fetch them good commissions.

We now live in the age of the internet, when you no longer need to deal directly with agents, brokers, bankers and the like—if you bought something online. You can now buy term insurance directly from an insurance company’s website. So the agent’s disinterest no longer matters.

Reader’s Digest checked with insurance companies and found out that: You normally need to be between ages 18 and 55 to be given term insurance. The cover may extend till 65 or 75, by which time you’re unlikely to have dependents. If you took term insurance online for a large cover (usually above Rs75 lakh) and you are 45 or older, you will be asked to undergo a medical examination. Actually, it is best to undergo a medical exam and declare all existing illnesses—and family med history—before taking any life (or medical) insurance, since the insurance industry is notorious for repudiating claims on the flimsiest of grounds, and these are usually medical grounds. the editors

Mid Caps, Mud Caps, Multibaggers and other small stocks in the market

HIGH RISK HIGH REWARD GAMES

People often ask me about what is wrong in investing in small company stocks? By small, I mean ‘small’ in terms of market capitalisation. Market capitalisation is the price of each share multiplied by the number of shares issued. For example, as of close of 22^nd July 2014, the Bombay Stock Exchange had 3,232 scrips that were ‘traded’ (or where a price was available). The total market capitalisation of these companies was Rs.91,02,473 crores if we used the closing prices of that date. Interestingly, the 100 largest companies accounted for Rs.67,81,963 crores. In other words, three percent of the number of companies accounted for nearly three fourths of the size of the market!

Why does liquidity in a stock matter? Liquidity has a direct impact on the tradable prices of a share. You may assume that once you see a price on the exchange, you can buy or sell reasonable quantity of the stock at that price. Nothing could be farther from the truth, if the stock is not liquid. Less than a hundred stocks will meet that qualification.

What would be a reasonable quantity? For a FII it could be a million dollars ( or Rs.6 crores), for a domestic mutual fund it could be around Rs.50 lakh and for an individual it could be, say, a lakh of rupees.  So, can one buy or sell ‘reasonable’ quantity of a stock at the indicated price? If the answer is positive, then you could say that the stock is ‘liquid’.  Most often, if you exclude the top fifty stocks, the price you pay/receive will not be what is quoted on the screen. You will end up paying a higher price if you are a buyer and get a lower price if you are a seller. That is the ‘impact’ cost of your trade. The poorer the liquidity, the higher the impact cost of your trade.

So, if you are trading for a few rupees, this hurts you badly. So you will see that the day traders generally flock to the large liquid scrips. Poor liquidity is also the reason why it is easier to manipulate prices in smaller company stocks. A large buying by a group of seemingly unconnected people is sufficient to drive prices higher and higher, when the stock is illiquid. Often, the smart operator first accumulates a stock, then issues a recommendation to buy and provides supplies at gradually increasing prices. Once someone creates a buzz in a stock, the price of such a stock moves with huge jumps making each buy more and more expensive.  

The negative side is that when the sentiment turns against the stock, the bottom seems to fall out of the stock. The stock keeps hitting the lower circuits with not much volume and we could get stuck with a stock where stop losses and sells do not work. All theories go out of the window, when such a fall happens.

Thus, if you decide to buy or sell a stock that is not liquid, you have to plan for properly. You cannot invest or trade in this for a small return like ten percent. The impact cost of buying and selling could easily take away ten percent! Probably you will have to buy early and sell early also. You cannot wait to sell at the highest possible price because if the selling starts, you will be unable to execute a trade except at a huge disadvantage.

The tough part is that if you are seeking big winners, they are hidden within this group. The large well known names may offer you average to above average returns, but if you want a kicker, it would be from this universe of illiquid stocks. Thus, I would not ignore this space. However, I will also not put all my money in this space. And keep looking for longer term buy and hold stocks.

In a bear market, this illiquid segment becomes very illiquid and as sentiments keep improving, volumes in this segment keep getting better. As a contrarian, it makes sense to buy illiquid stocks when the bottom is falling off the market and sell when everyone wants to buy. As far as I am concerned, it is a good time to get rid of some of these stocks.

(This article appears in today's Asian Age/Deccan Chronicle)

Can a common man become a nation's ruler? An interesting book-

Professor Dipankar Gupta spent over 30 years, teaching sociology and anthropology at JNU till 2009. He continues to be engaged with academics and has authored /edited nearly 15 books. In Revolution From Above, Gupta talks about revolution in a democracy. His view is that changes can be brought about only by ‘citizen elites’. India has been reduced to a democracy that is exploited only by politicians and their cronies. The country has perhaps created an  unprecedented divide between the haves and the have-nots in just six decades since Independence. India is a result of the shape given to it by a few ‘influencers’. Unfortunately, the positive impact stops with Gandhi and Nehru. After that, no one has taken charge of the destiny of India.  

The author talks about the three ingredients of democracy: liberty, equality and fraternity. India has somewhat succeeded in the first two, but fraternity is totally absent. This is a key point made in this book. Essentially, Indians have never grouped together as one. There is a divide caused by religion, caste, language, etc., which has been exploited by politicians to further their own cause. No other democracy lacks ‘fraternity” so much, he writes.

The author, through this book, compels the reader to think ‘what will change this?’ This change has to come from an ‘elite’ leader. It was ‘elite’ leaders like Gandhi or Nehru who  helped eradicate ‘untouchability’ or promote gender equality. These elite leaders had no vested interest in what they helped achieve. Gupta exposes how politicians have used these ethnic divides to further drive a wedge between Indians and use divisiveness as a political weapon. Equality is brought about by making barriers vanish and not by creating fresh ones through reservations. 

However, the author believes that since Gandhi and Nehru India has not thrown up any ‘elite’ leaders. Gupta has arrived at this conclusion after doing a highly logical analysis of subsequent leaders, including Prime Minister Manmohan Singh. 

Gupta does not pull any punches. He is scathing in his criticism of the present PM and the uselessness of the Planning Commission. Probably the best analysis of the Planning Commission has been done by Gupta and, for this alone, the book is a must read.

As regards healthcare and education, Gupta points out how Nehru let the country down on both counts, in spite of setting up stellar institutions such as AIIMS and the IITs. For those who want to have a different perspective on Gandhi, Gupta provides ample instances. 

There are discussions on urbanisation, the contribution of the migrants to an urban city. There is so much packed into this small tome that it deserves multiple reads to revisit the author’s thoughts.  

(This story was published in BW | Businessworld Issue Dated 07-04-2014) - 
( I had written this review nearly six months ago, but got published so late in life- Anyway, interesting that this book's hypothesis has been demolished by NARENDRA MODI, who has no claims to an elitist background)