GREETINGS TO ALL OUR READERS FOR
70th INDEPENDENCE DAY OF INDIA.
Thought
for the day
"Man has no right
to kill his brother. It is no excuse that he does so in uniform."
—Percy Bysshe Shelley
(English, 1792-1822)
Word
for the day
Polyphonic (adj)
Consisting of many voices or sounds.
Malice
towards none
Indian Railway proposes to
allow private parties to buy train names for a fee.
Would be great source of
revenue and peace if the government makes it a policy and sells the names of
all its schemes, e.g., Dhirubhai Ambani Gram Sadak Yojna or Godrej Worli Sea
Link!
First random thought this morning
Almost every day, newspapers carry reports raising doubts about
how Dr. Zakir Naik might be working against the national interest for long.
If these reports are even partially true, the security apparatus
of the country might need a complete overhaul.
Not having done in the aftermath of 26/11, should be considered a
brazen lapse on the part of the administration.
Overeating invariably leads to indigestion
In our country - SIP, Asset Allocation and Diversification are
indubitably most misunderstood and misused terms in the context personal
investing, in my considered view.
With due regard to the utility, competence and integrity of the
investment advisors and wealth managers, I feel that their training and
orientation lacks the understanding of investment basics. This deficiency in
understanding is transmitted in the behavior of common investors and fully
reflected in their investment patterns.
For example, consider the following—
(a) A systematic investment
plan (SIP) is typically used to meet multiple objectives, e.g., investment
discipline, benefit of compounding, avoiding the need to time the market, ease
of managing investments, etc.
However, it is common
to see advisors recommending SIP as a tool of cost averaging. Conceptually,
cost averaging can only done in a static asset. How is it possible to do
average cost in a dynamic asset like mutual fund portfolio that may change
almost every day. In India even the constituents of benchmark indices have
changed rather frequently!
(b) Asset Allocation (AA)
is a procedure usually followed to bring the asset portfolio of an investor in
synch with his risk appetite and life cycle. The task cannot be completed
unless the advisor has a complete knowledge of the investor's assets, both
financial as well as non-financials. This is seldom the case in Indian context.
Tell you an
interesting anecdote relating to this.
Once I was sitting
with the promoter of a south India based pharmaceutical company, who had
material stakes in real estate business also. His wealth manager from a
renowned global bank was also sitting with him. The promoter had got a few
crore in dividend from his company and wanted to invest the money.
The wealth manager was
privy to only 0.5% of his total asset portfolio. Nonetheless, he suggested him a
50:40:10 Equity:Debt:Gold allocation. In the equity part he suggested a set of
mutual funds including a pharma sector fund and a mid cap diversified fund with
37% exposure to midcap pharma companies. In debt he suggested FMPs with
material exposure to real estate bonds.
These suggestions were
made to a person whose ~90% legal networth was invested in the equity of a
single pharma company; 9% networth was in rent yielding (fixed monthly income)
real estate and 1% was cash. Being a Andhra landlord, it is anybody's guess
that he must have few kilos of gold at home that does not reflects in his
balance sheet.
In this case, what
would you think of the advisor suggesting the referred asset allocation plan,
that I leave it to you.
(c) In the name of
diversification, investors are many a times sold a variety of mutual fund
schemes which not only are similar in risk profile, sectoral exposure, but in
fact contain the same securities.
The point I am trying to make is that the greed dominating the
investor's sentiment near the peak of a market cycle and fear overwhelming them
closer to the bottom of a typical market cycle is no co-incidence.
It is the understanding, training, orientation and skilling of
both investors and advisors that is lacking.
Unfortunately, it is not the investors & advisors alone, but
the regulators & government may also be wrong about the dynamics of the
equity investment in India.
In my view, post liberalization of trade and commerce in 1990’s,
the number of self entrepreneurs has certainly increased in the country. This
has coincided with the sharp fall in public sector employment. The aggregate
private sector employment level has not been able to compensate for fewer
opportunities available in public and unincorporated private sector.
Consequently, the total number of employees on live payrolls has fallen sharply
since early 2000’s.
The combination of two – lower employment opportunities and
liberal business rules – has perhaps forced people towards entrepreneurship. The
number of self owned enterprise has swelled in past one decade, implying people
are investing in more in equity, but not in listed equity.
As per 67th round of NSSO survey (June 2011),
there were 58million unincorporated enterprises in India (excluding
agriculture, construction and those registered under Factories Act). Over 85%
of these enterprises are run by the owner himself, without any hired worker.
44% of these were run from the residence of the owner. These enterprises
employed 108mn people against just 39mn on the live payroll in organized
sectors, including 11mn in private sector.
These self owned enterprises generated annual gross profit of
Rs628.36bn; whereas all listed companies in India generated gross profit of
Rs610.44bn in FY12. 1/3rd of this profit was earned by top 36
PSUs. Top 100 listed companies accounted for over 76% of this value addition.
The point I am making is that there is a strong equity culture
amongst Indian households. However, factors like fewer employment
opportunities, better business opportunities and dismal performance of
publically traded equity have led them to invest more in their own business
and/or home equity rather than listed equity.
Advising these people to invest in equity, directly to through
NPS, EPF, ULIP etc. may actually not be a good idea. Because, these are the
people who are highly aspirational but can ill afford any additional risk. They
are therefore easily swayed by the forces of greed and fear.
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