When I began doing a personal finance show on TV about seven years ago, I was inundated by stock tip seeking questions. But I was clear that what we were setting out to do was financial literacy and not giving cheap stock tips. It took work to nudge the questions in a particular direction, but within a few weeks of the show, the questions changed. They changed from asking if they should buy or sell a particular stock to the “I have so much money, what product do I buy?” questions. A product sales driven model of retail finance, fuelled by commission bearing products, had framed the market in a certain way. So instead of using products to solve financial problems, manufacturers and sellers aim to soak up all the surplus money by selling a product that gave the highest commission to the seller. Smart Money on Bloomberg India TV is my fourth show and we (co-anchor Vivek Law and I) began with portfolio-driven questions—where viewers were writing in to ask if their portfolios were Ok. And now within 15 weeks, we see a pattern emerge that tells me that people are finally asking the right questions. Though half are still driven by questions around a portfolio check, the rest deal with issues around individual financial situations. We’ve moved from trying to find a product to hit with our savings to a place where we want a plan that we can follow for the rest of our lives.
Ramesh Kumar is disgusted. At 55, he’s had a long innings as the administrator of the Indian Paneer Board. (For those unacquainted with paneer, it is a milk product that used to be in short supply in the glorious socialist years of the 1960s and 70s and the government had set up a Paneer Board to facilitate procurement.) Kumar is just one of the many that suck away at the milk and honey as it flows through the system, he works hard to keep the system intact. Right now Kumar’s surfing channels in his office cabin, he’s just got the latest flat screen installed, right next to the 3.8 horsepower treadmill that he will surely use soon. He’s watching the second episode of the Cobrapost.com expose (http://bit.ly/15vUzy8). The first, he remembers, had bank officials of three private sector banks across 20 cities secretly taped offering to turn black money into white for a person fronting for a politician. Episode two expands the sting to include 23 banks and insurance companies—both public and private.
I must admit I’m a bit surprised by the kind of debate that the Financial Sector Legislative Reforms Commission (FSLRC) Report (http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf) has generated. The 439-page report has made recommendations to re-haul the Indian financial system to facilitate the journey of the $2 trillion Indian economy to becoming a $15 trillion one by 2026. The Justice Srikrishna Commission did not stop at recommendations, but went ahead and drafted law that that will make this happen. The draft Indian Financial Code (http://finmin.nic.in/fslrc/fslrc_report_vol2.pdf) has in it the blueprint of a principles-based, goals-oriented, democratic set of rules that, for the first time, have given consumers their place in the sun. Some of the debate trashes the entire report and calls for a total rethink. I believe this is based on either reading just the dissent notes or a very thin reading of the executive summary. But the conclusions these views come to are quite sweeping. While there may be merit in the argument against some parts of the report or draft law, it does seem a bit odd that instead of trying to correct what is wrong, some would rather throw it all out.
I like to talk about the efficacy of having equity in the portfolio because that is an asset class, I have been led to believe, which gives an inflation-plus return. But equity’s image as a super asset class beating the stuffing out of inflation has been under attack for a long time, specially so since 2008. Then last week a colleague sent across some disturbing news. The Economist has a story (http://econ.st/VqMcNA) which says that global bonds have outperformed equities since the start of the 1980s. The story is based on a book, “Triumph of the Optimists: 101 Years of Global Investment Returns,” written by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton. The colleague’s unasked question: “But you said…”
We’ve shown a more mature cheek this time around when Norway did its we’ll-protect-your-kids number and accused the parents of a seven-year-old for trying to discipline him using physical punishment. The national hysteria is missing and the social media comment is more muted. At the risk of opening an unrelated debate, I have to say that our parenting style swings between overindulgence during babyhood and then moves to the other extreme once the kid begins to display a mind of its own. However, one concern that stays steady with most parents is the desire to save for the kid’s future, usually higher studies. This worry finds itself assuaged in high-cost child policies from insurance companies or gold or some fixed deposits earmarked for the child. The pressing need to move this money into a bucket labelled with the child’s name is not wrong. One of the reasons for locking that money in the name of the child is so that we can’t get to it when we need it. Un-targeted savings have a habit of ending up parked in front of the house in an upgrade that gives a high for about 10 days.
What we know anecdotally is now there as data in the Reserve Bank of India annual report 20011-12, that Indian household savings are moving from financial assets to real assets. The household savings rate has remained almost constant at about 23% of gross domestic product (GDP) (at current market prices) but there has been a portfolio reallocation within this broad number. Net financial savings of households (remove home loans and other personal loans from gross financial savings to get the net figure) have dropped from just over 12% in 2009-10 to just below 8% in 2011-12. Valuables, like gold, have more than doubled their share from 1.3% in 2008-09 to 2.8% of GDP in the last financial year. The slowdown has been most severe in small savings, bank deposits and life funds. Go deeper into the numbers and you see that households pulled money out of mutual funds in 2011-12 and invested less in insurance funds. We invested Rs.33,000 crore in mutual funds (MFs) in 2009-10, but pulled out Rs.10,600 crore last year. We bought Rs.2,59,800 crore of life insurance in 2008-09 but bought Rs.36,400 crore less (Rs.2,23,400 crore) last year.
What do you expect your mutual fund to do? It is worth asking and answering this question as we carry out Mint Money’s biannual exercise of examining Mint50—the portfolio of investment-worthy funds that the Mint Money team curates. A quick word on why we do this. Indian households have a high savings rate but most of this lies in inflation-unfriendly deposits and traditional insurance plans. A gradual move up the risk scale would benefit the investors but that has not happened and fewer than 15% of Indians expose their money to equity, either directly or through funds. Similar looking products promising to do the same thing—long-term corpus building that come from three different regulators—seem to be confusing investors.
If 2012 is the year in which the world will end, 2011 was the year in which the world prepared to end. We heard that the euro zone break up may take Europe back to the fall of the Roman empire. That the sins of bowing to Wall Street will make the US implode. That the Chinese ghost cities will haunt the world. That the loonies will take over from pro-democracy Arab Spring leaders. And India will be stalling rather than rising. It’s different this time, we heard. At no other time have odds looked so stacked against the world. It’s different this time.
My teenager is sick of me. Nothing new in the history of teenage issues with parents, but she has a unique problem. It is not the usual teenage gripe about how-dumb-can-you-be or the will-you-just-get-off-my-case grunt or even how-did-you-get-so-far-with-so-little-brain eye roll. No. It’s a totally new one that will put books on managing teenagers off track. She’s fed up of me “talking money” wherever I go. Any amount of telling her that I do not initiate such conversations cuts no ice. Things got dangerous when the hair cutting lady began discussing her financial life. While daughter made retching, gagging noises, I tried to hear what the lady with the scissors said over the whine of the hair dryer. I learnt my lesson from Calvin (brother to Hobbes) who advises that it is always good to be nice to the person who holds something sharp near your neck. So I chose to answer hairdresser questions and dealt with the mutant teenager later.