If in the 1950s somebody wrote a future finance story about India, they may not have predicted the market that faces a retail consumer today. Till the 1990s, your savings and investing decisions were dependent on the government. No wonder Indian households chose gold and real estate as saving sumps. The financial sector was a reflection of the overall direction of the economy. Costs were high, service poor in state-owned and run finance. But post 1991, change came suddenly to finance and this column maps some of those changes as India celebrates 70 years of political and 26 years of economic freedom.
Low Risk High Return Buy 5000 SHARES Of xxxx CMP Rs 7.80 TGT Rs 15 SL Rs 7.70 . Stock Raise Non Stop Till Diwali.” Over the past few weeks some of us would have got messages pushing this one stock.
As markets keep moving up, the frenzied calls and SMS texts that push up a particular stock increase in frequency. I don’t get emails or WhatsApp messages pitching stocks—just calls and SMSes. Some of the callers are really aggressive. Push back at them and they start snarling. Obviously they’re sitting on very steep customer acquisition targets. But we know from past experience that any kind of frenzy usually ends badly. If you gave into the frenzy of real estate a few years back, you’re looking at a nominal erosion of 30-40% of the price you paid. An inflation- and mortgage-cost-adjusted loss will be closer to 50-60%. Frenzies are unsettling. You lose your equilibrium. You get pushed into doing things that you normally won’t do. If you find yourself thinking of suddenly moving money into one stock or one mid-cap mutual fund on a tip, you know you’ve succumbed to the frenzy. Otherwise I’m-safe-in-an-FD (fixed deposit) people are suddenly discovering their risk appetite and want to invest right away on a tip.
Anybody who has struggled with trying to select a mediclaim policy will know how painful it can be. There is plenty of choice and lots of hard sales push, but no way to know what works for you. There is an information gap in the market today—there is plenty of information out there but it is of little use to somebody wanting to buy a policy. Until you have an experience of hospitalization, you would not know what features are important. It took me one stint with a family member suffering from food poisoning to find out what a sub-limit means. For those still out of the loop—if your medical policy comes with a ‘sub limit’ clause, there will be a limit to what the company will pay for room rents.
As consumers, we’ve moved quite a distance from buying the cheapest policy in the market. Low premiums can also mean lots of things hidden in the fine print that the policy does not pay—like a high room rent or for treatment of a particular disease or a particular medicine. At the very basic level, a mediclaim policy is good if it comes at a reasonable price, promises good benefits and pays up the claims when they are made. Sounds simple enough, but begin reading a policy document and you will be stumped to decode what the jargon means. The Mint SecureNow Mediclaim Rating does the grunge work for you and trawls through some 400 data points to bring you a shortlist of policies that make the cut on the three parameters.
Markets are too high, I will wait for them to cool down before I invest. Nifty broke 10,000 and Sensex is at 32,000, is it too high? We’re in bubble territory for sure. Markets are in an overdrive—this ends badly. Markets are looking ahead and pricing in the structural reform the government is doing. Goods and services tax (GST) will cause markets to drop in the next 2 months—we’re just a few days away from a crash. Market is pricing in the long-term benefits of more taxpayers, less black money and better compliance due to GST.
Listen to the voices about the market and you’d imagine people are talking about two very different things. There are two voices that we hear today—one believes that we are already in a stock market bubble. The other believes that small corrections will happen, but we are in a long-term bull run.
A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
This would easily qualify as one of the worst moments of your life. That ping which says: your account debited with Rs30,000, and your current balance is now Rs2,467.20. Your blood chills and hands shake as you realise that you’ve been robbed—this is not a transaction you just made. Did I schedule a payment and forget about it? Did my spouse, who has my personal identification number (PIN), make a transaction? But I did not get a one-time password (OTP). You feel exactly the same way as you would, had somebody physically snatched your purse out of your hands. Robbery leaves the same feeling of disbelief and damage, whether it is virtual or not—the loss is very real.
While the loss you take home when cash is ripped out of your hand is yours, the responsibility is that of the bank when it happens in the virtual world. The banking regulator, Reserve Bank of India (RBI), has taken forward the draft it had released in August 2016 that thought through liability issues of electronic theft of money. The bank will now have to make good your entire loss if it happens through an unauthorized transaction or if the electronic theft happens due to a fault within the bank’s systems. You don’t even need to report this. For instance, when the data of nearly 3.2 million debit cards was compromised between May and July 2016, it was due to a virus in the systems of Hitachi Payment Services, the firm that manages the bank’s ATM network. In an event such as this, you do not have to report the loss of money, the bank will have to make good on it because its system failure caused the loss and many people are affected.
How much money we need to retire at age 60 can be answered in many ways. I wrote earlier (you can read it here: bit.ly/2ruHEtK) that you need eight times your annual income at age 60 to retire comfortably. Plenty of people wrote back to say that a more useful benchmark will be an expense multiplier rather than an income multiplier. An expense multiplier is, in fact, a better way to crack the same problem because at the same level of income, different families will have very different expense behaviour. I know families that don’t know where their money goes and others who have tiny expenses because of their chosen lifestyle. An expense multiplier assumes that you know how much you spend. Many families are clueless of their annual expense number—money comes in and money goes out. So get a hold on how much you spend in a year as a first step.