Never try and time the market. You may get it right a few times, but more often than not you will be wrong.
Be a regular and disciplined investor. Even the wisest cannot predict the market. Warren Buffet lost billions in the crash of 2008. Ratan Tata went on record saying that if he had known of the coming slump in global markets, he would not have gone ahead with the Corus and JLR deals, at least not at the prices that he paid. In 2008, when the Sensex slumped from 22000 to 8000 every equity fund slipped by at least 50%. When the markets rose by 50%, from 8000 to 12000 most funds managed only a 15-20% upside.
What I am trying to get to is that even the best of the best in the business find it impossible to predict such movements. As a retail investor you don’t stand much of a chance of being correct. Even if you manage to catch the downside or the upside, it is more a question of luck than any skill.
FINANCIAL PLANNING : A Reality Check
Friday, June 26, 2009
Friday, June 19, 2009
SEBI’s latest ruling on mutual funds - its impact and after-effects
SEBI’s recent announcement on mutual funds has two important bearings:
1. There would be no entry load on any mutual fund investment
2. Distributors would have to negotiate their commission with their investors
No arguments about the first point, it is of immense benefit to the investor. This will probably lead to a higher exit load which is good for investors since they would be incentivized to hold their investments long-term. A couple of years back when there was no entry load for SIPs, but was later withdrawn.
As far as the second point is concerned, I think it is a good move, but ahead of its time. The Indian investor is still not well informed in matters relating to investments and mutual funds. Besides, the penetration of mutual funds is rather low. Insofar as investor education is concerned, we have a long way to go before we can bring ourselves at par with the developed markets (whose systems and methods we are keen to emulate).
Though in the long-term the move will prove to be good for the financial planning industry and for the investor, it will have several short-term impacts that may be deterrent to the interests of the small investors, distributors as well as the mutual fund industry.
1. INVESTORS MAY END UP PAYING A HIGHER COMMISSION: On the commission issue, I foresee a lot of unnecessary bargaining happening between the distributor and the investor. In fact, distributors maybe charging a higher rate now -- say Rs 500 on Rs 5000 investment. Even if the investor bargains and brings it down by 50%, he would still be paying a much higher fee / load than was applicable earlier. Since a fair percentage of investors today are not even aware of the kind of commission the distributors get or that there is anything called an entry load, they might feel happy about the bargain. However, they could be paying a much higher percentage as commission.
2. COMMISSIONS MAY BE PAID IN CASH: Distributors may also charge commission in cash, leading to loss of both service tax (that the distributor would now be liable to pay) and as well as income tax to the government. Small amounts of commission – perhaps in the region of Rs 1000 or more may be passed on in cash to the distributor.
3. SIPs MAY SUFFER: SIPs or systematic investment plans may suffer since the investor may not be open to paying commission each month, or paying a lump sum at the beginning of the SIP term. So the distributor would probably stay away from recommending SIPs as lump sum investments are good and less hassle for him/her.
4. DISTRIBUTORS WILL FOCUS ON ULIPs: Distributors may start focusing more on ULIPs where there is low transparency regarding the commission going out to the agent. Since commissions are much higher in ULIPs, the obvious tendency for ‘sellers’ of both would be to maximize their revenue by proposing ULIPs and presenting them as mutual funds. Again, the small retail investor will lose out. As it is there is enough talk of ‘mis-selling’ of ULIPs.
5. EXPENSES TO INCREASE AFFECTING NAVs OF MUTUAL FUNDS: To get into more nitty-gritty of things, the charges are going to go up. One reason for this would be that mutual fund houses would probably work on higher trails and various marketing schemes to keep distributors happy (incidentally 90% of all business of mutual funds comes from distributors). Where would money for all this come from? From charges, which result in reduction of the NAV. Again who will suffer more? The small retail investor.
There is immense amount that SEBI and mutual fund houses can and need to do to increase investor awareness and grow the market. Ad hoc measures like this and an uneven playing field among various financial products would only lead to more confusion initially and consequent mis-selling by distributors. Unless tackled at a much broader level, the small and uninformed investor will continue to pay the price and will remain a small participant.
1. There would be no entry load on any mutual fund investment
2. Distributors would have to negotiate their commission with their investors
No arguments about the first point, it is of immense benefit to the investor. This will probably lead to a higher exit load which is good for investors since they would be incentivized to hold their investments long-term. A couple of years back when there was no entry load for SIPs, but was later withdrawn.
As far as the second point is concerned, I think it is a good move, but ahead of its time. The Indian investor is still not well informed in matters relating to investments and mutual funds. Besides, the penetration of mutual funds is rather low. Insofar as investor education is concerned, we have a long way to go before we can bring ourselves at par with the developed markets (whose systems and methods we are keen to emulate).
Though in the long-term the move will prove to be good for the financial planning industry and for the investor, it will have several short-term impacts that may be deterrent to the interests of the small investors, distributors as well as the mutual fund industry.
1. INVESTORS MAY END UP PAYING A HIGHER COMMISSION: On the commission issue, I foresee a lot of unnecessary bargaining happening between the distributor and the investor. In fact, distributors maybe charging a higher rate now -- say Rs 500 on Rs 5000 investment. Even if the investor bargains and brings it down by 50%, he would still be paying a much higher fee / load than was applicable earlier. Since a fair percentage of investors today are not even aware of the kind of commission the distributors get or that there is anything called an entry load, they might feel happy about the bargain. However, they could be paying a much higher percentage as commission.
2. COMMISSIONS MAY BE PAID IN CASH: Distributors may also charge commission in cash, leading to loss of both service tax (that the distributor would now be liable to pay) and as well as income tax to the government. Small amounts of commission – perhaps in the region of Rs 1000 or more may be passed on in cash to the distributor.
3. SIPs MAY SUFFER: SIPs or systematic investment plans may suffer since the investor may not be open to paying commission each month, or paying a lump sum at the beginning of the SIP term. So the distributor would probably stay away from recommending SIPs as lump sum investments are good and less hassle for him/her.
4. DISTRIBUTORS WILL FOCUS ON ULIPs: Distributors may start focusing more on ULIPs where there is low transparency regarding the commission going out to the agent. Since commissions are much higher in ULIPs, the obvious tendency for ‘sellers’ of both would be to maximize their revenue by proposing ULIPs and presenting them as mutual funds. Again, the small retail investor will lose out. As it is there is enough talk of ‘mis-selling’ of ULIPs.
5. EXPENSES TO INCREASE AFFECTING NAVs OF MUTUAL FUNDS: To get into more nitty-gritty of things, the charges are going to go up. One reason for this would be that mutual fund houses would probably work on higher trails and various marketing schemes to keep distributors happy (incidentally 90% of all business of mutual funds comes from distributors). Where would money for all this come from? From charges, which result in reduction of the NAV. Again who will suffer more? The small retail investor.
There is immense amount that SEBI and mutual fund houses can and need to do to increase investor awareness and grow the market. Ad hoc measures like this and an uneven playing field among various financial products would only lead to more confusion initially and consequent mis-selling by distributors. Unless tackled at a much broader level, the small and uninformed investor will continue to pay the price and will remain a small participant.
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