The #Covid19 pandemic and the consequent economic crisis are forcing everyone to make tough financial choices. Should you switch from a debt fund to a bank deposit? Should you get out of the equity market? Watch #MoneyWithMonika with
The choices that the ongoing covid-19 pandemic is forcing us to make are not the ones we had ever thought we would need to make. Some countries in the West debated the human life value of the old versus the young and then decided to take the aged off ventilators to make way for those with a longer life runway ahead of them. India, luckily so far, has not been at that crossroad.
But there are a number of economic choices that we have been forced to make as incomes, jobs and livelihoods have been under stress. Last week, Adhil Shetty, CEO of Bankbazaar.com, spoke to me on the three toughest money choices during the covid-19 crisis during a live interview. Each question had two parts and as we moved from question one to three, the choices got harder and harder. These are questions that all of us need to face and then try and answer even if our backs are not yet against the wall. As I keep saying, we are far from done with this crisis, and it is best that we belt up for a rough ride for a while.
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.
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.
Most of you who read this column are now investing in the right way, using a systematic investment plan (SIP). But did you know that your dull, boring SIP is the result of more than 10 years of regulatory change? Most of you have also discarded the low-return endowment plans and now purchase a pure term plan to look after your life insurance needs. But did you know that you got to the right solution not because of regulatory change but despite it. I’ve been mapping the Indian personal finance industry for over 15 years and the behaviour of two regulators in industries that both manage household money has been fascinating. We now have the data to show the impact of regulatory change in the mutual fund and the life insurance industries on firms, sellers and households. I will relate the story through four tables.
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?
At a wedding reception recently, a friend’s daughter, who just got her first job, wandered over to where us oldies were huddled. Aunty, I, like, wanted to chat about this SIP (systematic investment plan) thingie? Whenever you have the time, whatever? Another friend, not known for being sane, who lives consultancy cheque to consultancy cheque and regularly blows up her bank account on mad-hatter trips, worked with me over three afternoons to set up her SIP accounts through her online bank account. “I just totally have to get this SIP thing going—it is so cool!”
Sometimes a committee leaks a proposal it is considering to test reaction in stories and comments. Or sometimes it is a dissenter to what is being discussed who will leak a proposal or a decision to get public opinion against what is being proposed. Either of the two must have happened last week when we read that a Securities and Exchange Board of India (Sebi) committee examining a new compensation structure for mutual fund distributors is close to recommending a Rs 100 transaction fee on the sale of a mutual fund product. The quick push back from both distributors and consumer activists shows that both are unhappy. The distributors say that a flat fee of Rs 100 does not even cover the cost of transport and is neither here nor there. The consumer voices say that a flat fee is inherently unfair, translating to a 10% cost for a Rs 1,000 investor and a 0.1% cost for a Rs 1 lakh investor. They fear that this fee is an attempt to get entry loads in through the back door. It may begin as Rs 100 today, but what will prevent it from becoming Rs 1,000 tomorrow? Or coming back to a percentage in another year’s time?