There are two kinds of parents I meet. One kind talks about their children’s spending habits, the peer pressure-linked expenses, the lifestyle costs. The other kind talks about how difficult it is to get their children to spend, how they actually have to set a minimum limit to their spending when they become young adults and how reluctant the children are to accept financial help after a certain age. What’s going on? How does one set of children grow up to be financially prudent and the other set will take hard knocks in their lives before they learn the importance of respecting money and what it can buy? The short answer is parenting. It’s what we do and not what we say as parents. Children watch keenly what we as parents do and say. They watch our behaviour and words. And at one point they begin to see the contradictions in what we say and what we do. That’s the time that most teenage rebellion sets in. And that’s the time money related issues too become another point of conflict.
Starting soon your mutual fund will cost less. The capital market regulator, the Securities and Exchange Board of India (Sebi), has put out rules that further tighten the mutual fund industry norms to take care of the loopholes found and misused by the industry. You can read the circular here. There are four changes that impact you.
One, for costs related to the scheme, mutual funds will now pay only out of the scheme account and not from any other source or account. What was happening was this: some of the bigger fund houses were using their profits to pay commissions to distributors to kick up sales. Remember that after a certain scale, it does not cost much more to run a fund house; so as the fund size grows, costs should actually come down.
It is scary to see your life’s investment shave half its value in a free fall in stock prices. Indian stock market investors saw such an episode starting January 2008. If you had ₹1 crore in an index fund linked to the Sensex as on 9 January 2008, by 9 March 2009, its value was down to just under ₹41 lakh. It is gut wrenching no matter how strong your stomach for risk is. The whole time over the year you were driven by sheer panic to sell as the signals about an imminent global financial crisis caused markets to teeter on the edge and periodically belch out another giant fall in stock prices. Some brave hearts held on to their investments during the bloodbath, married as they were to “long-term” investing. By 4 November 2010, they saw their money recover as the Sensex regained its 2008 peak. The market since has given an 8% average annual return. Who are the people who came out on top and what did they do right? A decade, and nearly another 20,000 points on the Sensex later, there are three lessons that we, as retail investors, can draw from the North Atlantic Financial Crisis that had a trigger point when the $639 billion multinational behemoth Lehman Brothers went bankrupt on 15 September 2008.
Closed-end funds have been in the news recently and not in a good way. One newspaper story has predicted the doom of these funds as the capital market regulator clamps down on mis-selling through this route. Closed-end funds have had a bad history in India and have been repeatedly used by the industry to mis-sell. My introduction to these funds happened more than a decade ago. In 2006, armed with an upgrade in the knowledge of using excel sheets and the workings of mutual funds, I did a series of stories in The Indian Express on the big mutual fund churn where mutual funds and agents were harvesting the high upfront commissions. You can read one of the stories here, the others seem to be lost online. You are being churned if your adviser or agent makes you sell a financial product only to buy something else, with an aim to earn commission on a new sale. The agent wins at your cost. It’s the oldest trick in retail finance. Churning is an industry practice that global regulators frown upon because it hurts investors.
Monika Ke Money Mantr
This is a teaser to the full show
The HDFC Asset Management Co. Ltd stock closed 65% up on the first day of listing over its IPO price of ₹1,100 per share. Investors who sold on day one, saw ₹10,000 investment turn to about ₹16,500 over a 10-day period. HDFC AMC’s business is to offer its investment management service to investors—both retail and institutional. It’s performance track record as an asset manager is mixed. For example, investors into the best equity scheme over a one year period—HDFC Small Cap Direct Plan—have seen a one-year return of almost 22%. The worst equity scheme from HDFC AMC, HDFC Infrastructure fund, lost 11% in the same year. Look further back, the worst equity fund is still HDFC’s Infra fund, with an average annual return of about 8% over 10 years. The best equity fund, HDFC Mid-cap Opportunities, has given a huge 20% average annual return over 10 years. As asset managers begin to list on the stock market, HDFC is the second AMC to list, the first being Reliance Nippon Life Asset Management Ltd that listed in November 2017, the question investors are asking is this: should you invest in the schemes of a fund or in the stock of the fund itself?