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.
RRR exit, hmmm. Brexit, meh. Shrugging off plenty of bad news, the Sensex hit an 11-month high this week. What’s going on? The story for India is the thickening of the retail equity pipeline, not directly in stocks, but through institutions such as pension funds and mutual funds. Sustained flows of retail money is coming in. And it is coming in a staggered manner. Indian household money has traditionally been in real assets such as gold and real estate, in bank fixed deposits (FDs) and to some extent in life insurance policies. The organised sector contributed to their provident fund, which again went into bonds and other fixed return paper. Think about the change in our own investing behaviour—we swore by FDs and Life Insurance Corporation of India policies, but are now die-hard SIPpers (investors into systematic investment plans of mutual funds). What changed?
The middle-India push-back (http://bit.ly/1Udgm4P) on the government’s plan to tax the Employees’ Provident Fund and reduce rates on small savings products tells us that despite frothing at the mouth against the government during the day, finally, when the dust settles, we love the role of the government as an asset manager. What do we want? Ideally, government-guaranteed returns with no risk. So why don’t we buy government securities (G-Secs) directly? Because of the way the intermediation (link between savers and investors) market is constructed. Maybe it is time for this to change. We’re ready for G-Secs going direct to the public. But first, the background.
News reports last week said that high net worth (non-retail) money had flooded into the 7.35% tax-free NHAI (National Highways Authority of India) bonds while the retail portion, with a 25 basis point higher rate of interest, saw tepid demand. This can be interpreted in two ways. One, smart money expects interest rates to fall and is hence locking into a high tax-free return. Two, smart money expects stock returns to be muted and is therefore moving money into debt.
Imagine this. Your kid in class eight comes to you in the month of January and says that he’s unprepared for the final exams that are now just three months away. He’s sorry he faffed around all year, but well, it’s too late now, isn’t it? What’s your second reaction? The first is mostly to tell him how irresponsible he is and how, at his age, you were such a paragon of virtue and were studying by night and working by day (all lies, of course, but we adults do pretend to be perfect). Next lungful of breath is expelled in telling him to use the next three months to study night and day and do the best he can. Cut out the movies, the parties, the games, the online chatting and games, and get to it. You don’t find yourself telling him to drop a year and take no action since it is already too late.
1. Suppose you have some money. Is it safer to put into one business or investment, or multiple businesses or investments?
2. Suppose over the next 10 years, the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
3. Suppose you need to borrow $100. Which is the lower amount to pay back: $105 or $100 plus 3%?
4. Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money in both years?
5. Suppose you had $100 in a savings account and the bank adds 10% per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? $150, more than $150 or less than $150?
I recently learnt a very important lesson in goal-setting and habit-forming from a medical doctor. A persistent bad back has me visiting the orthopedics more than I like. They all say the same thing—regular exercise is your panacea. Not marathon running but just a simple, regular workout. I find that I begin well enough, but two months later regress into inaction. Travel, the big destroyer of routines, is the usual excuse for not finding the 30-40 minutes to do what is needed. Then this one guy sits me down and tells me: just do these three exercises. Do them twice a day. Don’t skip. Don’t do more if you have no time. Don’t do three sets of 10 each if you don’t have time. Do each just once. But do them. I hear him. And start. That’s it. The goal became smaller. Much more manageable, and one that did not require a full 30-40 minute time slot in the morning. I find that when one set is done, there is always space to do one more. And when three exercises are done there is always the space to do 10 more.
Has it happened to you? You know, you need to decide on something, but the fear of taking the wrong call makes you freeze. I have noticed that I push the decision to a dark corner of the brain, promising that I will deal with it ‘soon’. Years go by, but ‘soon’ doesn’t become now. Over the years, I’ve learnt to notice when the stealthy creature in the brain begins to slide the problem away. That’s the trigger to yank the problem back under the spotlight. I’ve learnt that to plunge head-first into the most unpleasant task frees up space for other stuff later. It also unchains the mind from the guilty tap-tap-tap of the big hairy decision that lurks in the background growling for attention. I’ve learnt that a sub-optimal decision is still better than no decision. At least you’ve moved from the rut of inaction into doing something. Mistakes can be corrected but to resurrect something from an ossified state is so much more difficult.
That even smart people make dumb money mistakes is now fairly well established. We are not the Econ 101 textbook perfect economic agents who maximize utility with perfect calm, using all the perfectly disclosed information to make the most logical decision. Notice how you spend the next time you go to a mall and the textbook version of yourself goes out of the window. Look at your investment portfolio and the picture looks less and less perfect. Hammering away at this notion of perfect markets with perfect economic agents has been behavioural finance, which has used experiments to bring real life into economics. One of the tenets of economics that has got turned upside down has to do with choice. Is more choice always good?
The mass affluent Indian home is run on the steam of its band of domestic help—garbage collector, cleaner, housekeeper, cook, driver, gardener, guard, car cleaner, and more—which provides direct services to the household. Then there are the vendors—presswallah, newspaperwallah, flowerwallah. As the wealth level rises, so do the number of people working to make the lives of the rich healthier—add on now the yoga teacher, and the physical fitness trainer. As a mean aside, I can’t help but remember my yoga teacher, who said that the rich homes he went to had fat and unhealthy masters and trim and healthy household help! Their collective salary bill will be a fraction of the monthly income of the mass affluent household.