Grow up into a Better Human to be a Better Investor

Off late my son has been asking me just one question “Did you write something new for your blog?” And answering this question incrementally with a ‘NO’ was getting unbearable. This pressure felt worse than any sales target I would have ever undertaken. I asked him in jest that what topic should I write on and he says ‘Demonetisation’. It took a while for the thought to sink in. And serendipity happened;  Modiji! Hamaara Desh sach mein aage badh raha hai!!!  What can be better than a Punjabi son having a discourse with his Mom not about Aloo ka paranthas or Rajmaa Chawal but Demonetisation.

So I decided to write a note to my son, on the ‘Donts’. Things which we tell him but which perplex him. Things which we hope will make him a Better Human. Before you decide to log off thinking, O No! There she goes with her sermons; damn I get enough of them from my Mom, Dad, Spouse, Boss and my Dog….. WAIT!!

Serendipity also happened when I realized that how similar it is, the principles on which you can govern your Life & Investing style. Yes, fundamentally analogous it is to be a Better Human and a Better Investor. Did you notice that I am using the words “Better Human” instead of “Being Human?” I can’t infringe on one Mr. Khan’s copyrights also I have no driver to bail me out in case I get into some road accident.

NOTE TO A SON FROM HIS MOM    :     DO THESE ‘DONTS’

Son, do not get bogged down by what your friends do or don’t. Do not let yourself be defined by others. Try to build your own thoughts, independent of what your friends think. Do not seek affirmations and confirmations from all and sundry. A handful of well-wishers are enough. Trying to please everyone will be suicidal for your personal growth.

Likewise; In Investing, do not buy or sell based on what your friends, neighbor or that fancy stock guru is buying. You do not know their realities. You do not know their risk appetite, information ratio, maneuverability, asset allocation, incentives involved in doing so. Actually you know nothing about those whom you wish to imitate. Robert Cialdini has described this behaviour as ‘social proof’. It is the tendency to see an action as more appropriate when others are doing it. Remember, it may not always be the best for you.   

Son, do not be in a hurry to grow up. You are always asking me when will you get independent, when will you make money, when will you be involved in the discussions which we adult partake while asking you and your brother to go to the other room?  Some things take time. Growing up is a process. Enjoy it every day. Your science book explains how a seed turns into a sapling, then into a shrub and later into a tree. Some seeds do wither away, not all will turn into a tree and bear flowers and fruits.  We nurture you, support you, love you and at times admonish you; know that this is all a part of growing up.  You do not realize but at every stage you have your own set of responsibilities, independence and authority. If you keep comparing yourself with us grownups, it will only add to your misery.

Likewise; In Investing do not be in a hurry to see your investments grow. Investing is a process, a journey towards your financial well-being. It is not a journey towards building an X amount of retirement corpus but a journey to achieve financial independence. The sooner you achieve the better it is. Not all your investments will pay off. Some may wither away; some will grow exponentially to bear fruits of your patience and discipline. But it is all well if it ends well. Worrying over every investment and why it went right or wrong will only add to your misery.

Son, do not wile away this precious time. All play and no work also got Jack nowhere. Remember, the ant and the grasshopper story? Where the ant works tirelessly through the summer while all the grasshopper does is play, sing and dance only to learn the value of hard work when winters arrive. I would like you to twist the story a little. Be the ant many a times but do become the grass hopper too sometimes. The fine balance is a difficult one to achieve, but then who ever said that Life was easy? Also, take care of your belongings. Don’t be careless.

Likewise; In Investing average investors can only earn a finite amount on their investments. There is no substitute to grow your wealth but by saving more. Do yourself a favour, watch two shitty movies less in a month, skip an expensive meal at a fancy place at times and put that money to good use. Take care of your money, because if you don’t, no one else will. A famous artist Rihanna filed a suit against his manager for swindling away her cash and he had this to say about her “Was it really necessary to tell her that if you spend money for things you will end up with things, and not the money?” Pretty much sums up all you need to know. Things don’t makes us happy, experiences do. The trick is not to get off the Hedonic Treadmill at once, but keep reducing the speed and finally someday you may not feel the need to be on it at all.

 

Son, do not get too attached and emotional about your friends, mates, belongings. It only hurts. This is sheer experience talking. People around you who you think are your ‘friends’ will change. Situations will metamorphosize.  Let go. Destroy your most cherished ideas by confronting them. Be honest with yourself in the least if not with anyone else.

Likewise; In Investing do not fall in love with any of your investments. Investing environment will change. Views will change. Stocks, sectors, asset classes which made fabulous returns in the past may not do so in the future. Confront your realities. I know a friend who has made tremendous net worth on Real Estate in the past 15 years, is still in denial. He still thinks it is the best place to make money. May be he is right, but if only he was willing to be a little more open to other investment ideas, he would not be currently stuck with illiquid properties. We know enough stories about how we expect some dud stocks to turnaround but some stocks will never go back to their glorified prices even when the index achieves newer heights every day.  

Son, do not show dis respect or disgust towards anyone. This includes not just us your parents or grand-parents. It includes your teachers, your extended family, the maids, drivers or random people in the park. I know this is idealistic but at least try.  This beautiful aphorism by a Jesuit priest Baltasar Gracian “The wise are the least tolerant, for learning has diminished their patience” is true. But at this raw age you are far from being wise, so learn tolerance.

Likewise; In Investing respect the opinion of others around you. Learning can come in from any corner, from that new intern in your office, your pantry boy or from your fiercest competitor. Above all, respect MARKETS. The day you are too sure of the directions which the markets will take is also the day you can celebrate as your Fools Day. And try to reduce the velocity of this celebration. The best investors are also the most humble ones. So short Hubris and long Humility. 

Son, do not confuse Success with More Medals or Money.  But, Success equals to Happiness. It is perfectly ok to come second in the race, as long as you know you tried your best and are able to work harder the next time instead of saying that you can’t do it. It is ok to have stage fear while you are up there reciting a William Shakespeare poem as long as you stand upright and are ready to recite one more, the next time too.

Likewise; In Investing do not confuse success with a higher CAGR on your portfolio or with your ability to identify more and more multi baggers in the stock market. To grow in life, one needs to push themselves to get out of their comfort zone but in investing, it is imperative to operate within it. A good night sleep is the best return on your investments. Never compromise on it while maintaining your discipline in the markets.

And lastly, this is something you need to DO. Develop a hobby. It could be a sport interest, an art or a craft. It can act as a great stress buster especially when you grow up and are absorbed by worldly pressures or pleasures. Going back to your hobby is like going back to the one you love. You may ignore it, exploit it, use it, abuse it but it STAYS with you and calms your riled nerves when you need it the most. Your hobby truly loves you back in return. So have one. 

Some think Investing is a Science, some think it is an Art but I have always thought that Investing is a CRAFT. Investing is a craft as it can be improved with practice. The finer nuances of investing may be known to many but followed only by some. Investing will test you, your emotions, your strategies; your best laid plans and ideas. It is only how you hone this craft and improve it every day will set you apart

Kachhe Din were not so Achhe Din

To all those perplexed with the title, kachhe means underpants in Hindi. And with Kachhe Din I actually mean ones childhood days.  Yes! I am indeed saying that adulthood is better in many ways than childhood. Caveat: My definition of adulthood is when you are making your own money, you are well settled with spouse and kids and you have a positive tick to most milestones to be achieved at your age. I am not counting old age here, as that is past adulthood. That age is dull hood.

We all know the famous Jagjit Singh ghazal where he sang:

 “Yeh daulat bhi lelo, yeh shauhrat bhi lelo, bhale chheen lo mujhse meri jawaani, magar mujhko lautado bachpan ka sawaan, wo kagaaz ki kashti, wo baarish ka paani”

Fine! he may take the kashti, I shall still take the paani. I mean fermented water( read alcohol). See the first perk of growing up!!!

But on a serious note, I say this out of my own experience of growing up and by observation around us. Let us break some myths of why it was not so much fun being a kid.

Myth no 1: No Responsibility

Everyone loves to say that. Oh Come-on! The child from a very young age grows on the pile of expectations of their elders. Do this, do that, don’t do this, don’t do that. The values, culture, traditions, rules and a myriad of more such mono syllabic instructions all of which are a child’s “responsibility” to follow. So many struggles; such a tiny and fickle mind. My son today on being instructed to do something retorts back by saying “India got independence from the British in 1947, but I am still a slave, India is free, but I am not independent” Yes, I foresee him becoming a dialogue writer when he grows up.

I am better off now growing up and having the limited (yes I think they are limited) responsibilities of making moolah and tending to the family.  Hell !!! All you need to be able to do is afford some maids, find out some engagement activities for the kids, plan holidays, dinners, keep your spouse interested in the marriage and so on so forth. And most of the things mentioned can be taken care off by just one thing ‘money’. So the sole responsibility only appears is to make more money. Now Go Figure.

Myth no 2: School Days were so good

What was so good about studying so many subjects and so many topics? Carrying such heavy bags? I am yet to understand why and how finding out the empty space in a cube of 22 cm diameter, apparently filled with spherical marbles of 0.5 cm occupying 1/8 space in it, could have helped me in my life? Or why studying, dissecting different body parts of a cockroach be it the thorax, abdomen, alimentary canal or some intestine would help me. I am still after all these years, afraid of them. Clearly, cutting them on the dissection table hasn’t helped. Or why was it earth shatteringly important to remember history dates? How did it help me in my life knowing when Tipu Sultan died, married or had a baby?? I would be better off studying how to manage life, how to build and develop healthy relationships, how to manage finances, how to be emotionally strong, none of which are covered in any of the book curriculums.

I am better off now as an adult reading books I want to, browse as much internet as possible without having parents coaxing and chiding us to stop. Also for most men, being a couch potato in front of the TV after a hectic day at work looks as well-deserved as tiny Pappu earning a lollypop every time he has allowed Mommy dear some peaceful shopping at the mall.

Myth no.3: We had so many friends

No dear!! What you had as a child was an illusion. An illusion, that everyone who we spoke to and played with was our friend. Real friends were always far and few. You must thank adulthood which does the reality check. I remember being hurt many a times by the behaviour of my so called best friend. The whole world thought we were best of friends. Uff the pressure……to maintain the illusion. We carried on the pretence for very many years. It took half of my school life and my entire college life to break free of that misconception. Today, we are as good as two strangers and I know who my real friends are. And yes, I am lucky to have more than one real friend. And trust me even if you have one real friend, God has been kind.

Myth no 4: You enjoy Life as a Child

Think about it, as a toddler, you were struggling to walk. On watching your older peers, you then wished to run. When you were in the primary school, you admired the grown up secondary kids and wanted to be like them. When in secondary, you craved for the glamour of college life. When in college, you were already dreaming of a corporate life; the time when you start minting money. But!!! Mind you!!! Now that you are working, making your own money, you DON’T WANT TO GROW OLD.

This ‘in your face’ fact is that none of us want to grow old.  Ahhh! that grey hair, well…. I am not talking about the salt pepper look which men like to keep with the idea of impressing the fairer sex. But seriously, how many want to grow old to welcome weaker knees, body aches, lose dentures and hundreds of other ailments which the dullhood brings along. Hence my limited conclusion is that, NOW is the time when you will actually enjoy life as you are not looking forward to go the next stage!!!

Yes you enjoyed troubling teacher in schools but do you know you still trouble your colleagues alas without realising. One thing I cannot deny though is the fun playing out in parks and grounds, something which this generation is anyways fast forgetting no thanks to the smart phones and gaming gadgets. I rather be an adult clued on to that gadget than being a small kid doing the same. That is more shameful.

Myth No 5: It was a carefree time

How was it carefree??? Of course we are not talking here about earning bread and butter, managing the household or work etc., but childhood had so much to care about. And also everything that a  child cares about is inadvertently and life savingly important at that age too. A child cares to buy so many things, but does not have the means to do so. They see their friends with fancy gadgets, cool toys and more often than not end up demanding things only to hear a big “NO”.  See how they care to have a good time too. I come from a North Indian household, where men in the family often sit together for a rendezvous over drinks, sometimes the women join in too. The look on my children’s faces at times is “Why on earth can’t I have that thing you are having?” One more reason they surely care to grow up. I remember growing up to so many wants which were repeatedly refused, restrained in the name of discipline and so many other middle class values; also some were simply beyond means. Wonder then if we really can term such a life carefree from a child’s perspective. Add to this the fact, that today’s kids are so bogged down with being the perfect child for their parents; where he/she should apart from school work, know how to swim, dance, play some instrument, learn shlokas, pursue some sport and blah. Where is the carefree time?

Cessation of my Observation

What we now reminiscence so fondly is not just the joy of childhood but we grow up to appreciate and be thankful for all the succumbed wishes, unfulfilled desires and superfluously painful memories of not having received all that we want. We now realise how it has helped us shape into better and well reasoning adults. Iron can only be casted into desired shapes when it is hot and molten; Clay can only be moulded when wet and muddled. Grown-ups can only thrive with the right kind of upbringing which needs a fair amount of rough exposure as a child.

There is an English idiom “Keeping up with the Joneses” which is so prevalent in the developed and the upper strata of the world. I see it fast catching up in the middle and lower echelons of our society too. It means comparison of one’s social and economic class with the others. I belong to a generation, where most of us and my friend’s parents were never under such severe pressure to ‘Keep up with the Joneses’. Now, increasingly though I notice that we, if not for ourselves, atleast want our kids to keep up with their Joneses. Don’t we desire the best for them?

But in doing so, somewhere we are giving them an extremely, protective, cushioned and shaded childhood. These children may actually grow up to realise that their childhood life was really better than adulthood. But that is not how it is meant to be. Childhood is meant to be rough and tough. IT BETTER BE TOUGH

Client’s Well Wisher OR Client’s Wealth Wisher

I had promised to do a post on how to find out the right advisor (the most challenging part) and here I am doing it at a lightning fast speed. I need more of such 4 day holidays. Please Stars! Do align accordingly more often. The previous post on Mutual Fund Distribution was about me being a free messiah. Here I decided to do some role reversal and act like the devil’s advocate.

Warning: Many in the distribution fraternity who liked my earlier post may find themselves befuddled with this one. The good news is, that was also true and this is also true. The bad news is, earlier truth was easy on the palate and this one is going to be tad difficult to digest.

The asset breakup of Indian Mutual Funds shows a very interesting trend as per broad categories:

Category	Equity Assets	Fixed Income Assets
Retail	42%	3%
HNI	42%	26%
Institutions	16%	71%

In a 13 lac crore industry, the retail investor stands at a meagre 15% at 2 lac crores. Retail investors hold 170000 crores of equity assets but only 24000 crores of fixed income assets of the mutual funds. These are rough estimates. There must be something egregiously erroneous in our approach from the very beginning as to why the numbers look so despondent. With us, I mean AMCs and Distributors. Since the beginning, when regulations were also not stringent, not much has anyways been done to reach out to the real retail investor. To put it plainly, no one has ever bothered about them.

More than 90% of financial savings of an average Indian household are in Fixed Income Instruments like Bank FDs, NSC Certificates, PPF, Kisan Vikas Patra, Post Office Saving Schemes, etc. His investment into direct equities has only come down. But, when it comes to mutual funds, it is evidently clear that an average retail investor has only been sold more and more of equities with great disregard to asset allocation or his personal needs and preferences. Though it is also true, that such investors should only hold equities through mutual funds for several reasons (please google). Clearly, if he later has a bad experience in the funds, it leads to an investor lost eternally for the industry to other assets like Gold, Real Estate, Bank FDs and blah.

The elusive retail investor is like a star which shines bright, they are in abundance and everyone wants to reach them, but they are too far (read scattered everywhere). Also, they are so tiny that it is not worth the effort to approach (read not remunerative). We rather focus on the easy money. And continue to serve the well served.

In the race to gather AUM and climb the ranking charts, few AMCs in collaboration with select few in the distribution fraternity are guilty of indulging into unhealthy practices. Why bother with a slow tortoise race when there are many a hares eager to run fast and reach the finishing point using shortcuts.  

The Collective Distorted Motto: 

Show the rich, the well informed and the well served investors; even better

ways  of getting rich and extra informed to serve them the best

Like they say a few rotten apples, spoil the barrel. Similarly, few participants (be it the distributors or the AMC) give the entire Mutual Fund Industry a bad name. This post is not supposed to be a rant, but in a commercial/luxurious trips/five star meets driven distribution network, even those distributors who try to do genuine good work by wanting to learn, enhance their skill set and get trained while simultaneously educating their clients, will go unnoticed and remain discredited.

It has always mesmerized me as to why; Not always but most of the times, a new skeptical investor into mutual funds is not introduced through the fixed income route? Why don’t we let him have a positive experience of positive returns through fixed income funds and later graduate him to equity funds?

Clearly relatively poor revenue in those funds is the culprit. So much for investor protection (or brokerage protection)!

The average working class Indian does not know much. I say this out of experience. Doesn’t know the products, doesn’t know the markets, has faint idea of his / her goals. Most don’t know the importance of saving right though we definitely know how to save. We Indians are expert at it.

So then how can a true blue retail investor be sure whether the trusted distributor he is dealing with has his welfare in his heart and not the brokerage warfare in his mind, when he himself is clueless many a times about his own financial goals?

Instead of telling investors what to look for, I think they should know what to watch out for as signals that you need to RUN. Run really far and wide from cronies who will portray the role of an advisor in the garb of pushing the maximum revenue products.  Also, the ones in this profession should do a serious reflection and contemplate whether they are guilty of the same and are they willing to alter their client approach in the future. As a client, RUN when you see these:

·   

•  He promises you that he can deliver a magical CAGR of 18% to 20% on all your investments year after year. If he does, he is serious competition to Warren Buffett.
•  He mindlessly loves NFOs / IPOs / New launches. All of them. These actually give him a professional orgasm and he loves to sell you at par value, saying how cheap it is.
•  He easily recommends funds without spending time with you, trying to understand your investment horizons, investment psyche, risk appetite and risk profile. 
• He has never bothered to know your insecurities, goals, long term plans, desires and aspirations. He is just interested in knowing how much money you can spare at the end of the month, what salary hike you received this year and how can you top up that SIP.  In short, what you have with this person is a transactional relationship, while what you need to have is a transformational relationship. Starkly different. 
• He never bothers encouraging you to save or discouraging you from needless spending. He never counsels you on EMIs, credit card spends, etc. 
• Meeting often?? Hell, Who does that as long as the investments roll in and the brokerages are trailing. 
• He recommends only Equity fund, Direct Stocks (typically multi baggers) or ‘safe high accrual’ funds in Debt.  
• Psychometric test for the client!!! Ehhhh….what is that??? I am a psycho and also a metric pass. 
• Action, action and more action. Re-balancing, churning, booking profits, booking losses is always recommended. It then becomes quite easy to justify his ‘value’ to the gullible retail investor. 
• Every investment recommended is the best investment advice of the year. Also it cannot be postponed. It cannot wait. It has to be done NOW. Else, you will be too late as the golden goose of an investment which has to lay golden eggs will run away to some other planet.
• Shows you excel sheets of great past performance. Trust me this is the easiest and the dumbest way to recommend. Continuously chasing five star rated funds only make third grade distributors and investors. 
• Always agrees with you whenever you wish to invest, especially in equities. He always thinks it is the right time. As no time is wrong time to make higher commissions, right?
• Tax planning, Insurance, a holistic financial plan is something he only dreams of for you.

     In short, what I just mentioned is what financial advisors / planners are made of. But, in my opinion the consumer in our country is not yet prepared to dish out fees for such financial planning and thus it is the inherent duty of a distributor to double up as a financial advisor.

    

     Word of mouth really helps in identifying a good advisor. Also, if the correct thing to do is to not do anything at the moment, a good advisor will tell you the same. He is supposed to address your worries, concerns, calm your nerves when you see volatile markets. Mom! He / She is your Financial Mom. What clients need is a Saarthi, the Krishna – a Mentor who can guide them towards attaining financial independence.

How many in the distribution community can live up to such expectations? It is going to be a survival of the fittest.

Mutual Fund Distribution : Pride or Penalty

Since the time the latest SEBI regulations have come on disclosures, a lot of water has flown under. A lot has been written, argued and some Twitter experts have already passed their judgement on how this is the best thing to have happened to the country after Mahatma Gandhi. Oh wait or is it Rahul Gandhi!!!

On a more serious note, disclosures are all good.  How much? Is the key. Imagine a burqah clad woman and you will be intrigued with what is behind the robe. You never know there could be a man dressed as a woman. Opacity is surely bad. But does she need to bare it all completely, to prove that she is a woman? If she does then that my friends, becomes X-rated material. Too explicit for comfort. This is what the latest guidelines have done. They have completely stripped the distributors of comfort. So the account statement will not just mention the brokerage he has made but also tell you the difference between expenses of direct and regular plans. So much porn, sorry I mean so much fun.

The intention is noble, but the action seems not.  

We have a strange habit of aping the West. We look up to the USA as a benchmark for everything that we do. So we have experts comparing costs, load structures of US mutual funds with Indian mutual funds. Ever tried comparing the mutual fund penetration, existence of different share classes and disclosures for distributors/ advisors in the USA or incomplete knowledge is convenient?

How about some statistics:·       

•  An average 45% of US households own mutual funds in USA compared to 2% of Indian households.
• Total Mutual Fund assets in US were at 241 Bn$ in 1981, India in 2016 is at 200Bn$. This data will make no sense until you compare it with the GDPs of both economies. In 1981, US GDP was 3.211 Trln $, which means US MFs were at 8% of GDP. In 2014 US GDP was 17.41 Trn $, the MF assets were a whopping 91% of the GDP at 15.85 Trn$. While as per 2014 data, Indian MF assets stand at 9.75% of 2.05  Trn$  Indian GDP.

Source : ICI Website

So in terms of penetration Indian mutual funds stand almost 

where US mutual funds were in 1981.

The only reason I mentioned these numbers was to highlight, how we try to blindly compare their practices with ours without giving a thought as to how developed that market is and how grotesquely under penetrated we are. Be it the loads, expenses, rush for ETFs (Exchange Traded Funds) or the RIA (Registered Investment Advisor) model.

Why an Advisor / Distributor:

When we need a haircut, we go to a salon. When we need medical help, we go to a doctor. When we need to file a law suit, we go to a lawyer. When we need a well stitched suit, we go to a tailor. Sadly, when it comes to seeking investment counselling, everyone thinks he/she is an expert. The DIY (Do it Yourself) investors who seem abundant on Twitter, must realise that they are a negligibly feeble minority out there. I have conducted many an investor education workshops to come to the conclusion that most people need help. And how on earth can we reach out to masses without enabling distributors?

I shall not make the distinction between an advisor and a distributor at this juncture as I feel we as an economy are not educated and exposed enough to appreciate the difference. The entire notion that a distributor is only interested in making higher commission and an RIA will be holier than thou is a flawed one to my mind. Many IFAs trying to do genuinely good work for their clients are berated for suggesting regular plans. 

RIA model remains the best, but to try endorsing it so aggressively so as to succumb the distributors, we need to understand that a developed market will automatically gravitate to low cost funds and efficient advisory models. Trying to coerce investors by force feeding them information on expenses of direct and regular plans, brokerage payments may only help alienating the investors in an industry which is just trying to find its legs, forget walking or running. I am concerned that ill informed investors may try to do it themselves and hurt their portfolio in the long run My whole worry is the big fish, the so called private wealth managers and private bankers shall still remain unhinged but the small time distributors will suffer.

Ever checked the bill when you pay for any service? The consumer always bears the service tax. When it comes to mutual fund distribution, this tax is also paid by the distributor. Now, if the regulator has decided to disclose his income to the investors, they must also allow the distributor to mention his electricity bill, rentals for running the office, and other costs of running his setup. Why show only the income to the client who will feel entitled to ask for this money back in case he is not asking for it already.

On US Mutual Funds:

Do we know the different share classes for mutual funds in US do not yet allow a small time retail investor to buy without paying a higher entry load or in case of zero loads fund without a higher expense. The investors who can manage a higher amount get benefits of Class 1 shares (similar to our Institutional Plans). Also to benefit on lower expenses, most funds need commitment for a minimum number of years. RIAs though are entitled to buy for clients under Advisory account where expenses are lowest.

Too many permutations and combinations, but the common theme across is: Use a distributor or advisor and pay him or we pay him. Or have bulk amounts for investments to gain the benefit of lower expenses. This is one big reason why low cost ETFs have gained immense popularity in the US. Not to mention the huge data to support how active funds there have been underperforming ETFs.

Coming Back to India:

As a country, we are averse to paying tips unlike most developed countries where tipping is not just a norm but compulsory. Be it in a restaurant, at the valet parking, salon services or any place you can think of, we are bad at making voluntary payments. I know people who do not want to go to good doctors because ‘He is expensive’.  What then makes us think that the people who do not even think beyond Real Estate and Gold will move to financial services easily by ‘paying’ fees? Who then, will educate and inform the prospective investors about the benefits of mutual funds? Why will they not move to more toxic products like market linked insurance plans or to exotic investments for their wealthy clients?

Somewhere, we as an industry need to share the blame for such tough regulations as we have encouraged and endorsed many unhealthy practices (some still do) to gather AUM. Our own malpractices are now coming back to haunt us with such regulatory moves.

 A liquid fund has not been sold as an alternative to current account but as the best fund

 compared to that of the competition.

I also still have to understand the Maths of  Retail = Long Term = Equity

In a country, where more than 90% of financial savings are in fixed income products like Bank FDs, NSC Certificates, PPF, Kisan Vikas Patra and more, no attempt has been made by the industry or distributors to popularize fixed income funds to retail investors due to their poor margins.

Investor education fund was a great idea by the regulator, again not used to the full potential by our brethren. Instead of making the distinction between expenses of different plans available on account statements, it would have been better if the regulator had bought more entry barriers into who can act as an advisor or distributor. By ensuring a minimum qualification as to who can distribute mutual funds. Qualification may not always bring ethics, but in the least it will bring some responsibility to the role. Thus, AMCs, Distributors, Regulators are all collectively at fault for where we stand today.

We have done away with loads, high upfront payments which are all very healthy. It is only in India, that an investor investing Rs 5000 or 5 crores is charged the same expense. This does not still happen in USA, the most developed market. But, in the bargain of administering healthy practices, we are hurting the small time distributors the most who are the only one who can help get the true retail investor. The big wealth management firms and private bankers anyways do not care for a hard core retail investor. They are busy rubbing shoulders with the big and the wealthy. But a school teacher, an IT professional, a pharma co manager, these kind of people who really need help and need to be catered to will get alienated. There will be a risk of them being served more and more insurance policies over mutual funds.

Though, I would like to maintain that finding a right distributor or advisor is the biggest challenge. And how to identify one, has been covered Here

But the way things stand today! For any mis-selling after October of toxic investment products or insurance policies, can the distributor be solely blamed?

Disclosure : I am neither a distributor nor an advisor for Mutual Funds 

Home IS where the Holy Grail is

This is a late post. Late by many years, considering how old my thoughts on this one are and how the property prices have ballooned. But if you have read any of my earlier posts, by now you know I am a lazy writer, so blame my moods not me.

A few weeks back, I read this post by Jason Zweig. If you read it, I do not need to write on the emotional aspect of owning a house any more. But, there has been too much chatter on why investing into a house is not a great idea. Too many people who claim how pure equity investing is Oh! So much more lucrative and better for you as an investor.  Too many people glorifying the fact that renting it out is so efficient for your portfolio and may take you to heaven when you die. Now, don’t you get me wrong! I haven’t been paid by the builders to write this post nor am I trying to seduce you into Real Estate. I am better off evangelising mutual funds over Real Estate any day; at least the former is healthy for wealth creation and fetches me a cute pay check at the end of the month too.

Before you read ahead you may want to know that:

•  I am not a fan of real estate but strongly believe in owning one debt free house in which you  aspire to live immediately or eventually.
•  This investment should be done as early in your career as possible.
•  I am strictly against buying many properties for rental income. It is like buying a dairy farm    when you need 1 litre of milk. In short, you have better options for ‘side income”.

Now that I have fairly immunised myself from hearing your criticism for recommending real estate, I shall try to tell you why investing into a ‘home’ is much more than just that ‘investing’. It is a way of life.

Most of us have read about the renowned investor Rakesh Jhunjhunwala, about how he sold his CRISIL shares in 2005 for 27 crores and bought a flat at Malabar Hill. If he had remained invested, that money would have been worth some 600 crores by 2015. The flat at that time was worth some 65 crores. This story has hindsight wisdom written all over it. Imagine if instead of CRISIL he had shares of Hindalco. 27 crores worth of Hindalco shares would have been approximately worth 18 crores at the end of 2015. This story reeks too much of survivorship bias. Also, what he did made his mother and wife much happier. He probably saved his marriage and ensured that his mom continues to make the best Dal Baati Churma for him. Jokes apart, no stock market returns can parallel the happiness of your near and dear ones. Sometimes you do things to comfort the people in your life who matter. When you enter your grave, nobody will remember how much CAGR you earned on your portfolio but people will remember how much love and respect you earned from those around you.

I had come across these beautiful lines by Prof Robert Shiller in one of the articles “A rental doesn’t have the same permanence as an owned property. There is an instinctive sense of territoriality shared by people and animals that a rental probably can’t fully satisfy”. Did you know many animals mark their territory by peeing in that area? We are then humans for god sake. The most evolved thinking animal. Homo sapiens have that natural tendency to mark their area too. Not by peeing of course but by buying it. We are quite decent that way. The emotions, the sense of belonging, memories, attached to a house that you own can never be matched by a rented property. I remember the TV ad of a Housing Finance Company, where the child is colouring the walls with crayons and the mom lets him do by saying ‘Apna hi ghar hai’. You don’t have to be careful where you hammer the nail for that painting, that the wall colours are not as per your taste, that the windows need attention but the landlord has no time and you are not willing to change them as you only pay rent. Owned house, however small it may be feels home but a rented apartment however magnificent it may be; will never make u feel the same. Partially may be but totally, nope.

Another ludicrous suggestion I read off late was to invest into equities in formative years and then buy a property in late forties, assuming you have built wealth investing by then. I found it quite cute the assumption that you will continue with your job and high salaries to be able to pay EMIs in your late forties or early fifties, when I see voluntary and sometimes forced retirements all around me. By late forties, you may have gotten used to a certain lifestyle which could be difficult to cut down with the huge expenditure of a house and sudden erosion one will see on their liquid portfolio (for a drawdown to pay for the house). If the same house is bought early, you learn to live within your means. One tends to work out their lifestyle accordingly. Stable EMIs with rising salaries only further helps to improve one’s standard of living. Also, rent is nothing but a sunk cost. The lower the better, even if you are claiming tax benefit, it remains money spent which did not build you an asset. I wonder how many of us are truly judicious with our disposable income, most of us end up spending on too many things to impress others and depress our investments anyway.

Leverage if used efficiently and prudently is one of the most beautiful financial concepts to my mind. Reckon, that leverage when used to buy a property fetches us tax exemption but the same leverage used to buy stocks popularly known as derivatives is considered a taboo by many a prudent investors. Warren Buffett has rightly called them the ‘weapons of mass destruction’. What is important to my mind is the leverage multiple when you buy that mortgage. To put it simply, it is the Total Loan to CTC ratio. The essence is to keep this multiple in check. Stretch it too much and suffer sleepless nights, too low and you probably look foolish few years later for having bought a property much below your aspirations. The look, feel and comfort of a tangible asset can be very satisfying and will continue to remain so at least till the time you are able to stay in those demat accounts where you run huge leveraged positions. Can u ever comprehend leveraging yourself heavily year after year to buy the most convincing stock ideas? It is an extremely specialised field and requires phenomenal skill to make money out of leverage trades in markets, but owning a house does not need any special skill. There is a surety that after paying a certain number of EMIs, I shall have a roof which I can call my own.

Staying on rent forever with a great equity portfolio sounds quite exciting when you are young.  Do you want to take a minute and imagine getting old??? Trust me, when you get old this same idea may sound criminal to your mind. One does not have the energy, patience, willingness or strength to endure the burden of a rental home. Because all said and done, you still remain at the mercy of your landlord or land lady who may decide to pack you up if some eventualities arise. Also if you are pinning hopes on you children to stay with them at that age, you may also want to pin hopes on night outs with their friends. The moot point being, have no expectations from anyone but you.

Another argument I usually get is: But, I do not intend to stay in this city. I am working here and I need to access the best facilities while I stay in the best of locations. Ok. Fine, I see no problem in this one. A very valid argument, but ever heard of the word ‘future-planning’?? So plan, decide and buy a livable property  in some corner of the world, be it Timbaktoo, as early in your career as possible. The place which will shelter you when you are out of this rat race rubbing tea tree oil on your weak knees.

I can at this juncture entertain disagreement in this entire argument depending on who is buying the property: Salaried person or a Business person. I am kind that way. When the stream of income is pre-defined like in case of salaried employees, buying a house makes more sense. But if you are living by the adventures of self -employment or upcoming business, etc. renting it out and not hurrying into buying a house can be a more logical thing to do. As your return on capital employed in your business will be far higher than blocking money into a house (Or so I hope and wish is the case with entrepreneurs)   

Reverse mortgage is another fantastic financial innovation. Where a couple gets a stipulated amount every month depending on the value of their property and when they both die, the bank will offset the accrued interest and principle of the annuities given and whatever remaining is passed on to the rightful owners. I am not saying this is the most efficient or cost effective tool but all I am saying is this benefit also exists. Why would I want to leave my house to my kids after I die? Why can’t I instead, live a better life even when I get old with zero expectations that my children should bear my monthly expenditure, medical bills or cost of travels? I personally aspire to give them the best education and then leave them to fend for self. Sounds great, till they don’t read this!

Your wealth can dwindle, plans can go haywire, money can be philandered or lost, businesses can wipe out, medical ailments or court cases can leave you broke but a house remains. When I was a child, I remember my dad suffering a huge business loss. Eventually, it stripped us of all our savings but the house which he had bought in earlier days stayed. He was desperate to sell it and get rid of the bad loans. I remember having prospective buyers at my home but my mom would send them away, saying the house was not for sale. The house remained. It also gave us a reason to be in the city and fight it out. My parents together struggled, suffered but the house remained. We sought comfort in the fact that we eventually have some final asset left to bail us out of the mess. That gave strength. The house was our strength.

I gravely deride all the suggestions of 100% equity investing and firmly believe in owning a tiny abode somewhere. It will leave you with reminiscences and peace of the unmatchable variety. Go Get it.