Markets sulk as rates remain stuck. Should you worry?

Expense Account, Mint

Despite the finmin’s public appeal two days back, the Reserve Bank of India (RBI) governor’s worries over inflation scored over growth concerns and he held onto the policy rates—the repo and reverse repo—though he did try to ease liquidity a bit and shaved another 25 basis points off the cash reserve ratio (CRR) to take it to 4.25%. One basis point is one-hundredth of a percentage point. Some more quick dejargoning here: the repo rate is the rate at which banks borrow from the RBI and is currently at 8%, the reverse repo rate is the rate at which banks lend to RBI and that is at 7%. The CRR, or the money that does no work, is the fraction of their deposits that banks need to keep with the RBI on which the bank earns no interest. Banks do earn interest on the funds kept under the other reserve requirement, the Statutory Liquidity Ratio (SLR) that is currently at 23% of deposits.

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Difference between 1.25% and 2.25% in cost can be in lakhs

Expense Account, Mint

Two years ago when the team at Mint Money created Mint50 (the latest listing here: http://goo.gl/23Qon) our aim was to pick out investment-worthy funds from a large pool of over 2,000 funds. The usual processes of getting a robust methodology in place (you can read it here: http://goo.gl/guZtN) and getting a good data vendor (we use Value Research data) were followed. But the final question we ask ourselves as each fund filters through is this: Would we put our money in it? And yes, we do. We buy out of Mint50 and yes, the portfolios have done well. Eating your own cooking is an important indicator of how committed you are to what you do. In an earlier job at another newspaper, I remember getting reporters to get the investment behaviour of some chiefs of the financial sector. I also remember being surprised. It was fixed deposits (this is about 10 years ago) and endowment plans for the 50-plus heads and the under-50 had real estate for investment and term insurance as life cover. Clearly the chiefs of the financial sector were selling stuff they were not buying themselves.

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The D-word haunts MF sellers: will the customer go ‘direct’?

Expense Account, Mint

The word “direct” is possibly the scariest word in the lexicon today for mutual fund (MF) sellers and advisers. At the receiving end of a series of regulatory changes for the last few years, the unregulated sellers’ community is going through growing pains. The next (and certainly not the last) regulatory directive will kick in on 1 January 2013, when MFs will have to offer two versions of each plan. The regular plan will carry on as before, but now a “direct” option to the existing scheme will be on offer. The only difference between the two plans will be in the cost to the investor. If the current expense ratio for equity funds is between 2.75% and 3% (the expense ratios are yet to settle down post the hike earlier this month), direct plans will be offered at 70-100 basis points less. The Securities and Exchange Board of India (Sebi) has asked fund houses to remove commissions paid to sellers of funds from the expense ratio for investors who come directly to the fund. The regulatory view is that the do-it-yourself (DIY) investor who does not use the services of an adviser or distributor to buy MFs, but selects, buys, sells and maintains her own portfolios, need not pay the distribution cost in the form of commissions that are embedded in the expense ratio. After the exit of loads from funds in 2009, the bulk of the market survives on upfront and trail commissions that the fund house pays out of the expense ratio, few advisers have a fee-only model in India.

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Life cover with a post-2007 SBI home loan? Expect a refund

Expense Account, Mint

An increasingly consumer-focused insurance regulator pushed the envelope just a bit further last week. On 5 October, the insurance regulator asked SBI Life to refund Rs.84 crore to policy holders, you can read the order here:http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo1798&flag=1.

The Insurance Regulatory and Development Authority (Irda) rules for group insurance (notified in 2005) mandate that beyond the prescribed limits of commissions, there must be no other payments to agents (as management or documentation expenses, profit commissions or bulk discounts—words used by many insurance companies to pass over commissions in excess of limits) who are individuals or corporates. Irda has found SBI Life guilty of breaking this rule over a period November 2007 to August 2010 for paying its master policy holders (entities who buy the group cover) commission beyond what is allowed under various heads.

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Buyer beware to seller be responsible

Expense Account, Mint

October has begun well. On the first day we had the roadmap for financial sector legislative reform unveiled in the form of an approach paper, and significant life insurance reforms. While the insurance reform is about removing wrinkles in the world as it exists, the first one aims to redefine the world. At least the financial world in India. If finance (finance is more than just money, finance is what money does) is the brain of the economy, then a financial system translates investment into gross domestic product growth. The paper says that there is strong academic literature to show that countries with a better financial system obtain better economic growth. If this is true, then India is attempting to run with both feet tied—some of our financial sector regulation would outdate good vintage wine and the regulatory arbitrage results in overt and covert turf wars that will make kabaddi look like a sophisticated game.

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