The year is 1992. I am in my first job and I don’t know it yet, but as a rookie business journalist, I’m watching India’s stock market balloon and then burst in a huge (for that time) ₹3,500 crore scam. As business journalists, we documented the setting up of India’s capital market regulator in 1992 and then its fight for teeth as the first chairman struggled to get powers to make the regulator effective. Setting up a new stock exchange to break the monopoly of the old one, moving to screen-based trading from the opaque open outcry system, getting brokers under some kind of regulation to demolish the closed club in which they operated and a whole universe of changes that really shook the way capital markets worked in India.
I remember having conversations with brokers and sub-brokers and arguing that corporatization was good and that transparency, rules of the game and investor interest would actually help the market grow. The insiders always resist change and the industry deeply believed that the business would end and everybody will lose. Investors will be orphaned in the new corporate system, went the argument. We resist in investor interest, they said.
An average person needs between 10 and 15 financial products to manage the complexity of contemporary life. A few decades ago, when the government was the main employer and would guarantee returns, it was easy to just leave it to the government to fix your life if you were lucky enough to be in the network. Those outside just got by with their own savings in gold, real estate and bank deposits. Opening up the markets boosts both incomes and choices. It pours millions of people into the middle class that consumes not just pizzas and gyms, but also financial products. But given the complexity of the market, even willing on-boarders to formal finance find it difficult to choose. One way to solve this is to have generics in the financial sector. Just as generics cost much lower as compared to branded pharma, we can think of generics that do the basic function without the bells and whistles. What a Jan-Dhan Yojana did for banking can be done by similar products in insurance and market-linked investment.
As an investor in a multi-cap fund, you could be feeling really confused about the uproar caused by the 11 September 2020 Sebi circular on making these funds more ‘true-to-label’. What happened is this: the circular changed the earlier rule of allowing a multi-cap fund to invest across market caps as they liked and has put in minimum limits across market caps. A multi-cap fund, from February 2021, must have a minimum of 25% in large-caps (defined as the first 100 stocks by market cap), 25% in mid-caps (101st to 250th stock by market cap) and 25% in small-caps (251st stock onwards). The rest of the 25% can be invested in any of the above three categories, technically allowing a 50% large-cap exposure in a multi-cap fund. You can read the circular here.
The upset is because multi-cap funds will now be forced to invest into the small-cap market, reducing the elbow room available with the funds to manage as they liked. There are three things that you as an investor need to consider before you get caught up in the hysterical outpouring seen last week about this circular. One, financial products are invisible. It is in their description they are created in the minds of investors. Therefore, product labels are very important in an industry that manufactures and sells products that are invisible and whose moment of truth is not immediate, but far in the future. The moment of truth of another invisible service like a mobile data plan is at once. A physical product like a plate of sushi is also immediate. But an equity-linked investment will by its very nature have its moment of truth in the future. Put these two things together and you need mutual fund labels to describe correctly what the investor is buying. Calling a credit risk fund, a credit opportunity fund is a sleight of hand to make risk sound like an opportunity. It has taken a lot of internal push to get the industry to agree to call a ‘risk’ a ‘risk’ and not an ‘opportunity’.
The decision of India’s Employees’ Provident Fund Organization (EPFO) board to split its payout for 2019-20 into two parts—8.15% from its bond investments right now and 0.35% from its equity investments later this year—was unprecedented alright. But it was no big surprise, given the poor performance of its stock portfolio. Provident fund (PF) subscribers should not fret too much. Even if they must content themselves with just the main tranche, a rate of 8.15% is superior to anything a bank deposit could have offered in these times of low interest rates. In fact, some economists have argued that PF account holders are rewarded far too handsomely, distorting credit markets by getting in the way of efforts by the central bank to cheapen loans. It is an argument that holds some weight, and so the state-run manager of our retirement kitty has been generous. Fund management is not about generosity, however, and its deferral of the equity slice of its annual payout is yet another sign that it is woefully out of step with the times.
Season 4 Episode 23: 6 ratios for your financial life
The Covid-19 pandemic has forced people to ask some tough questions about their money life. How much should one be spending and saving? How much should one spend on EMIs? How much life insurance should one have? In this episode of the special series of Money with Monika, personal finance expert Monika Halan talks about 6 Money Ratios which give a broad direction in which one should move. Watch the full video for more. Monika Halan is consulting editor, Mint, and author of the book, Let’s Talk Money. Note: These are rough ratios. Please speak to your financial planner for a bespoke plan.
Striking a balance between not doing enough and doing too much is tough for money, as it is with relationships. Do too little and a guilt nags at you each time you have a moment. Do too much and you sacrifice your today for limited future gains and life becomes about not living. I’ll leave the relationship bit for you to sort, but let’s at least put the money issue in perspective. While each situation is different and each family needs its own unique financial plan, it is good to at least have some basic rules of the road to know if you are at least going in the right direction. Remember these ratios are just very rough rules that point you in a direction rather than a detailed Google map. For that, find a planner, pay his fees and get your bespoke plan made.
#MoneyWithMonika: Asset allocation and checking your MFs’ performanceEven as the struggle against the Covid-19 pandemic continues, one of the biggest monetary lessons from the global ordeal has been to desist from taking knee-jerk reactions when it comes to investments and maintaining healthy asset allocation.
In this respect, understanding and using mutual funds can be very beneficial for your financial security. In this episode of Money With Monika, personal finance expert Monika Halan explains how and when to check the performance of your fund.
Bundled insurance plans neither give you a good life cover nor a good return and in India these are built like traps. In this episode of the special series of Money with Monika, personal finance expert Monika Halan explains why one should stop buying bundled life insurance plans in India and how it destroys one’s savings. Watch the full video for more.
You are doing great harm to your financial well-being if you continue to fall into the trap laid down by life insurance companies, their agents and now the shareholders of these companies, under the benevolent gaze of the insurance regulator. How many of us are still buying these traps? In financial year 2018-19 (that is the latest data available), individuals bought almost 30 million new life insurance policies, pumping almost ₹1 trillion of household savings into them.
Which policies are the most harmful? Traditional plans that include with-profit money-back, whole-life, endowment policies and guaranteed plans are the worst. These make up 85% of the entire market. Ulips are not traps and are much better products but don’t do well on disclosures and flexibility as compared to mutual funds. Term cover, the best kind of life insurance that you must have, are hardly sold. They are largely self-bought as smart people figure out what to buy. They buy online, cutting out the agent.