When you move a system from personality-based solutions to rule of law, there is a painful period of readjustment of the old way of doing things to the new. People, institutions and analysts all need to readjust to the new reality. The recent commentary around the Financial Resolution and Deposit Insurance (FRDI) Bill that is up for debate in the winter session of the Indian Parliament has picked up on one section (section 52) of the Bill, ignoring everything else in the 125 pages, and has resulted in panic about the safety of bank deposits if this bill gets passed. I read the Bill over the weekend and this is my understanding of what the aim of the Bill is and what it means for you.
If you have had the occasion to have economist and Nobel laureate Richard Thaler sign a book for you, it’s likely that you have one that says, “Nudge for good” or “Misbehave for good”. Nudge and Misbehaving are books written by Thaler. Nudge, written earlier than Misbehaving, is about tweaking the choice architecture so that people make better decisions. For example, if we know that people will choose one item out of the first three on a menu card, a nudge would put healthy food in those spaces, while keeping all the other choices at number four and below. Nudges work to help us overcome our biases that prevent us making good decisions. Bad nudges have been used by corporations to trick us into doing what they want and may not be in our interest. For example, an auto tick on a travel insurance policy on an airline website is a bad nudge. Thaler wants nudges to be used for good. He wants them used for setting up the game so that average people take decisions that work for them. For example, a positive nudge is the Save More Tomorrow programme (bit.ly/2hYxfGy) that allows people to promise to save more next year.
At the 4th edition of the annual Mint Mutual Fund Conclave last week, the overarching theme was the question: should FY 2018 be called the year of the mutual fund? For an industry that just two years back was still calling itself ‘nascent’ 24 years after privatisation, it is a giant leap forward to have assets under management that have tripled in the last five years. Mutual fund assets are now one-fifth of bank deposits and almost two-thirds of the assets under management by the life insurance industry. G. Mahalingam, whole-time member of the Securities and Exchange Board of India (Sebi), in his keynote address, said that possibly the external factors that helped this growth, such as easy money policy overseas for the last few years and more recently, demonetisation, are coming to an end, and now the real mettle of the industry will be tested. He said that several regulatory measures that are coming in the days ahead will ensure that the industry is investor-friendly. One, the scheme merger announcement will be made soon by Sebi. Two, the work on the total expense ratio (TER) going down must begin. Third, investor-friendly disclosure measures such as using the total return index should be taken. “Good times are the best times to swallow bitter medicine,” he said.
Should you rent or buy a house? Many young families face this decision when they move out of the joint family to be on their own or when they shift to a new city for work. Notice that this is not an invest-or-not question, to which the answer will be very different. This is a should-I-rent-a-house-that-I-will-live-in or should-I-buy-now question. For others already on rent, the family conversation about ‘rent or buy’ comes up each time the math is done on how much rent flows out of the family budget each month. “If we had bought our own house, we’d be owning it soon rather than all this money getting wasted in rent” is something most renting families stress over. I’ve had this conversation at home many years ago; especially when money is tight and the growing family’s needs are many, the rent vs buy decision seems even more crucial. Why not put money down for something you will own rather than down the drain in rent?
If real estate markets were efficient, there should be almost no arbitrage between the decision to rent a house or buy it. The rent and the equated monthly instalment (EMI) would be not all that far away and you would be able to stretch just a bit to compensate for the mortgage cost to turn the rent into an EMI. But real estate markets in India are far from this utopia and follow no rational rules for valuations for residential real estate. At current market prices where the rental yields (annual rent divided by value of property, or the return you get from the asset if you were to rent it out in percentage terms) are just 1-2%, renting is clearly better than buying. Look at it this way— what you can rent for Rs25,000 a month will cost you at least Rs1.2 lakh in EMI in Delhi and Mumbai.
Around this time every year, for the last few years, Mint does a special edition tracking the uber rich in India. Conceptualised and edited by my colleague Vivina Vishwanathan, the edition looks at the lives of the super rich Indians through the lens of money. Economic liberalisation allowed new categories of people an entrance into the uber rich club. Doctors, lawyers, professionals, first-generation entrepreneurs, actors and sportsmen joined the high table of the super rich where the already rich through inheritance sat.
Year 2014 kicked off the edition idea with an issue that mapped the new Indian rich. You can read the edition here: bit.ly/2xsiOjF. Year 2015 mapped the Rich Professional. You can read the edition here: bit.ly/2wAF1be. In 2016, Mint Rich Stars mapped the money lives of India’s movie and sports stars. You can see the edition here: bit.ly/2hapZaf. We found behind the glitter and the high living was an uncertain future, sporadic income and a short tinsel earnings lifespan. This year, we mapped the lives of the young inheritors of some of the biggest business houses in India. You can read the edition here: bit.ly/2xfj6tY.
The reactions to the editions have always been a mirror to our difficulty in dealing with money. The basic question asked is: why do we map the lives of the rich? Why feature their lives in a poor country? I can only answer with a counter-question: why not? Mint aims to be an unbiased and clear-minded chronicler of the Indian dream. A lot of young Indians dream to be rich. Surely it is better to dream to be rich than dream to be poor. Chronicling the lives of the rich in one edition a year doesn’t make Mint an apologist for the rich.
The stories you hear are romantic only in hindsight. A young man starting with just Rs50 in his pocket sets out into the world. Thirty years later, he is the king of a large multinational empire. The stories of deprivation and lack of food in the early years make for good copy today, but only somebody who has been through it can even begin to imagine what it was like.
When you are struggling to get out of a bad place, you don’t know how it will end. Whether you will break through or get sucked in. In that struggle, however, comes the transformation. It is that fire in the belly to change, to transform, to win that pushes some people to do superhuman things. And once you make the breakthrough, it is a very human desire to promise that your children will never go through the bleak and seemingly bottomless darkness you have lived through.
You remember what the cold felt like without the money for an overcoat. Or the smell of hot food when all you had was a hole in the pocket. Not your children. Never.
I have a friend who lives well when she earns more and gets into a frugal mode when business is bad. An artist, her income fluctuates, so does her lifestyle. Up when there is more and down when there is less. Her mood, though, is quite delinked from her financial status—always up. Last year, she said she wanted to start systematic investment plans (SIPs). Why? Because everybody around her was starting SIPs, and it seemed a cool thing to do—getting financial security is good, no? Yes, sure, but it has taken her the first 40 something years to get to even talk about financial security. Better late and all that. The first thing I asked her to do was to put down a number that she needed each month to live. It’s very difficult to pin down an average monthly expense for a person who matches expenses to earnings every few months. But the budgeting exercise, which is the building block for most plans, takes on much bigger importance for people with fluctuating incomes. Without knowing what you spend each month, there is no financial plan.