A guy I know wanted to retire when he was 25. He just didn’t have the money. If I get Rs1 crore, he said, then I’ll retire. Now, 30 years later, he’s still working and still not done with gathering the corpus he needs to retire. Anyway, he’s wiser and agrees that financial security and going to work need not be either/or. People can continue to work even if they are financially secure. But how much do we really need to save out of our incomes to know that we will hit retirement with enough to maintain our lifestyle for another 30 years? Every time I speak to a friend about buying a life cover, he tells me—the risk we have is not of dying too soon, but of living too long.
Why do the world’s most value-for-money people choose a pre-tax 4% return on the money that they leave in their savings deposits? It is the twin advantage of safety and liquidity that makes people love their savings deposits. But an aggressive mutual fund industry is using new products and processes to offer alternatives to these deposits, and is taking the battle for the share of the household savings right to the door of banks. Remember that mutual funds have product categories that can look after most of your money management needs—from liquid money to building and milking retirement funds. Last week, the Securities and Exchange Board of India (Sebi) announced a series of rule changes that make it safer and easier for investors to shift from a bank savings deposit to a liquid fund and allow people to use their e-wallets to invest in funds.
What would you call a regulation that is titled Protection of Policyholders’ Interests, but is anti-consumer in its direction and intent? The draft regulation by the same name released by the insurance regulator on 1 February 2017 (you can read it here: bit.ly/2l9NpgI) has removed some basic consumer-first provisions that an earlier 2014 draft had suggested. As investors and consumers of financial products, we should worry about this.
But you said debt funds are safe. Financial advisers and mutual fund distributors must have heard this statement many times over the past week. The trigger was the fall in value of four debt schemes of Taurus Mutual Fund. The net asset values, or price, fell between 7% and 11% over just a day.
Mutual fund investors do not often see these kind of price crashes overnight even in their equity schemes—which are seen to be riskier than debt funds. Worse, the funds were ranked highly by most third-party rating agencies such as Value Research, Morningstar and Funds India (Mint50 does not have recommendations for liquid and ultra short-term debt funds and has done away with looking at star ratings while evaluating longer-tenure debt funds). Investors, distributors and advisers (correctly) find using a star rating an easy way to shortlist funds before they sift further.
The feeding frenzy on the possibility of long-term capital gains tax coming to equity for a while with editorials and TV shows hand-wringing about the retail investor getting hurt. But will we? Is a long-term capital gains tax on equity such a bad idea? Let’s get the basics out of the way first. The money we invest in different assets (bank fixed deposits or FDs, bonds, gold, real estate, equity and into some of these through mutual funds and bundled life insurance plans) throw off money in different forms. There is rent, interest and dividend that comes as income from an asset. This is income from owning and using an asset—financial (stocks, FDs and bonds) or real (gold and real estate). When you sell the asset you can either make a profit or a loss. Profits on sale of assets are called capital gains and in India are taxed under two heads—short-term and long-term.
This year will be remembered for the contradictions of the post-war world order manifesting in many ways. If 2008 was when the crack became visible, 2016 was when the fissure became too big to ignore. A series of global events point to the rising voice of those left hurting by rising inequality in the world economic order, where the benefits of globalization have gone to capital rather than labour. Labour as one of the factors of production—land and capital being the other two—has suffered. Real wages have been stagnant in the developed world and restrictive labour mobility rules have hurt labour in the emerging world. The rules set by the owners of capital make for a world without borders for capital, but not for labour.
Two weeks after the sudden death of a bulk of Indian currency notes, the most obvious panic seems to be over but the elephant of demonetisation is yet to work its way through the system. The entire process will take months before the python digests the elephant.
Arguments, edits, opeds, conversations, debates and social media are sharply divided on what the currency replacement will achieve. I remain in the ‘it’s good for the country’ side of the debate and want to address some of the arguments against demonetisation.