Middle class Indian fathers used to be distant, authoritarian and usually dictatorial. They ran the extended household with an iron fist keeping a tight hold on expenses. The middle class pre-independence Indian father struggled to meet the needs of an extended family with meagre income and prospects. The fight for economic survival translated into the immovable patriarch image. Economic growth has changed not just fortunes of families but also the equations within the home. Smaller, nuclear families, better economic prospects, and more money has meant a larger role for the father within the home. From changing nappies, to school pick and drop duties, to doctor visits, the dads are a part of bringing up the baby. However, in most households, for a variety of reasons, the one thing that has remained largely constant is the control of the finances.
The math does not add up. The real estate refugees from the builder excesses of the past are now stuck between a rock and a hard place. These are the people lucky enough to actually have a finished flat with possession and not a legal case with absconding builders. These are the people who bought the Delhi suburban dream thinking they were getting in on the ground floor to the next Gurgaon. These are the people who live in Delhi, on rent or in own homes, and bought for investment in the greater NCR region, particularly in Greater Noida. These are the people who don’t know if they should sell and take a loss on their investment or keep funding it and hope prices recover.
A typical story goes like this: you bought a 3-BHK flat with a fancy foreign sounding name with a pool, community center, Italian tiles and more bells and whistles for Rs 60 lakh. Took a loan of Rs 40 lakh that costs about Rs 35,000 a month in EMI. Rent where you live in Delhi is Rs 30,000 a month. Rent from your Noida flat is Rs 8,000 a month. Amount of loan left is Rs 30 lakh. Current market price of flat if you can find a buyer—Rs 50 lakh.
It always happens. An introduction to mutual funds results in a feeding frenzy. I’d introduced a childhood friend to mutual funds two years ago. At age 45, she had left money and its management too late, but once she on-boarded mutual funds, she really went all the way. And beyond. Two years later, I’m horrified to see her portfolio. From the three-scheme portfolio she had started out with two years ago, she now sits on some 10 mutual fund schemes without a thought on what problem they solved. From an FD Hugger, she turned into a Feeding Frenzy Funder. I find that investors I meet fall into some stereotypes. Here are eight investor types—who are you?
The Ostrich: You have no plan, your money lies in your savings deposit and you are known to proudly say that you have no money to invest. You push away all help that comes your way because you are convinced that the world is full of cheats and you are just safer not doing anything rather than making an error. Beneath the don’t care mask, you are actually quite petrified about the state of your finance. And maybe for that reason believe that “something” will happen to make that pot of gold that you are convinced will come your way. Dream on.
Rahul Dravid filed a police complaint recently accusing an investment firm of cheating him. He invested Rs20 crore in a firm promising a 40% return. He recovered Rs16 crore but is yet to get back the remaining Rs4 crore. Instead of trusting a sharp shooter for higher returns, had Rahul Dravid invested his Rs20 crore in mutual funds, what would his portfolio look like today? The average large-cap 3-year return is 7.31% and the average 5-year return is 14.47%. His Rs20 crore invested 3 years ago would today be worth Rs25 crore and had he invested 5 years ago, he would be sitting on a corpus of Rs39 crore. That is if he got just average returns and not top quartile returns. But he is looking to just recover his principal from the sharp shooter who promised him super returns. Dravid would have been better off in funds than with a ponzi scheme that he trusted in search of more.
Mutual funds have done well and have been in the news for mostly good reasons in the past few years. The number of retail investors is growing, the systematic investment plan (SIP) book is now at Rs6,500 crore a month and long-term investors have seen stability in their money growth. When seen in the context of large banking scams or the loot of investor money due to misselling of life insurance products, or the periodic ponzi schemes that loot not just the rich and the famous, the fund industry looks good.
Are Indian stocks in bubble territory? An interview given by Uday Kotak to The Indian Express (you can read it here) asks this question. Kotak is making valid points when he says that there is a wall of money coming at the market which does not have enough stocks to absorb the cash. A strong institutional flow is bringing Indian household money to the stock market through mutual funds, unit-linked insurance plans (Ulips), National Pension System (NPS) and the Employees’ Provident Fund Organisation (EPFO). This money is going into a few hundred stocks because the Indian market lacks depth. The market cap of the top stock is Rs6 trillion and that of the 100th stock is just Rs32,000 crore. The market looks overvalued on metrics of the current price-to-earnings (PE) ratio, which is much higher than the 10-year average. Valuations can go back down in two ways—markets can crash, bringing prices down or the earnings can grow; both bring the PE down. The wait for earnings has kept the market buoyant in the past few years and the wait is still on. Which will come first, the market crash or the earnings bump? As retail investors, we have no option but to give our money an equity exposure; see Table 1. But we will never have the relevant insight to time the market. We also know that markets go up and down, get overvalued, crash and then recover. See Table 2. So, is there a way in which we can ride out the bubble, if indeed there is one?
Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.
ICICI Prudential Mutual Fund’s new fund offer (NFO) of Bharat 22 exchange traded fund (ETF) is in the market this week seeking investor money for the government’s disinvestment programme. Looking through the document, I was struck with the expense ratio of this fund. At 0.0095% per year, this is the cheapest ETF in the market today. Understand what this cost means first. The expense ratio describes the price you pay for the facility of handing your money over to a fund manager and it is charged on your funds under management. For example, a Rs10 lakh corpus, with an expense ratio of 1%, will cost you Rs10,000 a year. You don’t have to cut a cheque for this cost since it is taken by the fund house out of your corpus—that’s why it is called net asset value, it is ‘net’ of costs. Expense ratios have a big impact on investor returns over a lifetime of investing. At 0.0095%, Bharat 22 will cost you Rs95 a year. Reliance AMC’s CPSE ETF (the first government disinvestment fund) costs 0.07% or Rs700 a year. A 2% managed fund expense ratio costs you Rs20,000 a year.