Luring distributors to overcome the market downturn

From giving a kilo of gold to ensuring trips abroad for distributors, mutual funds are adopting new tricks to increase AUMs

In the last month or two, there have been a few mutual funds that have launched insurance-linked products. The reason – the markets are down and so are the investments into equity mutual funds. So how does one entice the investor? Spice it up with insurance. Suddenly there is a huge surge of applications into equity funds.

Now you may ask the reason why? What has the linking of insurance got to do with sudden upsurge in the number of applications? Well, the distributors are being lured with ‘exciting guaranteed gifts’ ranging from movie tickets to a kilo of gold, bikes and even a trip abroad. All that he has to do is to bring in as many applications as he can. And what are the distributors doing to win the race – if you want to invest Rs 5,000 in a mutual fund, he will convince you to sign 5 forms. Then he will fill in the forms for you and submit 5 applications. The terms and conditions in fine print are not even mentioned, forget being evaluated and compared.

Being a distributor myself, I am appalled to see fellow distributors and sales managers of mutual funds running against time to ‘log in’ applications. I am not against marketing, but this is pure self-gratification. The investor’s interest is the last thing on the distributor’s and sales manager’s mind. Both are simply trying to achieve targets at the expense of the poor investor. Knee-jerk reactions like this to increase AUMs (assets under management) will increase mis-selling and kill investor interest.

Are we here to advise on mutual fund investments or is it just another ‘grand sale at a shopping mall’? I wish that the authorities realize what is going on and put an end to this ‘gift mania’ before it gets out of hand.

Who is 'KING'? Equity, debt or cash?

This is one helluva time for investments. With stock markets down and interest rates on an upwards spiral, all the three instruments today are ‘kings’ in their own right

This is one question which everyone today is confused about. Should one invest in the equity markets now or in fixed maturity plans (FMPs) and other debt instruments or is it best to be in cash (meaning cash at bank or in liquid funds; I am not referring to bundles stashed underneath your mattress).

The answer would vary from one individual to another. Of course, it would depend on certain factors like risk profile, tenure of investment, allocation, etc. But if I were to speak from a general point of view, I think this is a good time for all round investment. In short, all the three components are king!

Equities have had a downward roller-coaster ride since January 2008. The Sensex has slipped by over 30% since the beginning of this year with sectors like real estate and banking being pummeled by over 50%. With most people being caught between the devil and the deep sea, it is more out of compulsion that they are not in a position to sell their stocks today. So is this the ‘right’ time to get into equity or equity-related instruments? Well, I would say yes. But your perspective should be long-term perspective. In the short-term, your investments will encounter more volatility. Therefore, the selection of quality funds / stocks is imperative.

Now you would ask – “what about debt?” With deposit rates moving up, both FMPs and fixed deposits look attractive. With indicative ‘post-tax’ returns of 9-9.5%, FMPs and liquid funds are attractive options for the risk-averse, who fall in the highest tax bracket. For those in the nil or lowest tax bracket, FDs present a good investment avenue.

For those who are ‘convinced’ that markets have not bottomed out yet, cash is the ultimate answer. I would still recommend you to invest via the SIP option rather than trying to catch the bottom (which, in any case, is more a matter of chance than actual skill).

This is one of those ‘rare’ times when investing in both equity and debt is a good option. It is extremely rare to witness times when good opportunities present themselves both in the equity and debt segments. And with such volatility in the markets, it is always good to keep some cash ready to invest -- either when the markets slips further or when the interest rates rise again. Happy investing!

Inflation and its impact on our investments

Price rise or inflation is a ‘silent killer’ of our investments. The return you get must be higher than the inflation rate for your investments to serve their real purpose.

Inflation is a hot topic of discussion these days. Newspapers and TV channels are full of reports that talk about how inflation, or price rise, is affecting the lives of Indians. Every week, the inflation numbers are more eagerly awaited and discussed than the Friday’s film release.

So what is inflation? And how does in impact us in the long run?

We have all heard stories of their good old days from our parents and grandparents tell us about how you could get a litre of milk in twenty five naya paisa and eat a meal out for Rs 5; how movie tickets used to cost 50 paise and more recently how with one hundred rupees of petrol in your car you could drive to office and back for a week.

“Look how times have changed. Things are so costly now,” they tell us. In layman language, this is inflation. It is nothing new. And yes, it is reflected in the prices of all items we buy.

But let’s look at it from another angle – inflation suggests that the purchasing power of money has come down. In short, for example the Rs 100 that could get us to office and back has probably become Rs 1000 today. In order to get the same service or product we have to pay 10 times more now.

This is one truth that most of us don’t budget for while planning for our future.

Inflation is a ‘silent killer’ of the investments that we are making today. A client of mine had purchased an insurance plan wherein after paying Rs 12,000 p.a. for 10 years, he was ‘promised’ a return of Rs 1,50,000 after 10 years. Looks good on the face of it? But look at the return that you are getting after an investment of 10 years – 6-odd percent per annum, which is lower than the inflation rate. So in reality your money at that time will not even allow you to purchase what it can, today. A sheer loss and a waste of time and opportunity!

Let’s take two examples and look into the future:

Assumption – you are 30 years old today and inflation rate is 10% p.a.

- If your monthly household expenses are Rs 30,000 today: at age 45 you would need Rs 1,25,000 to meet these same expenses.

- Rs 10,00,000 today would be worth Rs 2,05,000 by the time you are 45.

Whenever we buy products like insurance or invest in mutual funds or PPF, etc. with the purpose of achieving a financial goal, we must always take into account the impact of inflation on our end-corpus. It is definitely not going to be worth what the numbers today indicate. It is imperative that the return on our investments beats inflation in the long-run. Only then will we be able to meet our future requirements.

So the next time your ‘advisor’ tells you that so-and-so policy will get you Rs 1 crore in 25 years, do ask him what that Rs 1 crore will be worth then.

How can I become a crorepati?

Most of us want to become one, but ‘believe’ that crorepatis are born and not made. Wrong!

As Noel Whittaker (a well known Australian money columnist) put it: “Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do….it is a matter of managing your money properly”.

Some people believe that ‘they’ cannot make money. Wrong again! Money can be made by anyone and everyone. All it requires is planning and discipline. Any investor who takes care of these factors is bound to make money in the long term. There’s nothing like a quick buck. If you made it, consider yourself lucky and not skilful.

The legendary investment guru, Warren Buffet (his net worth in 2008 is USD 62 billion or Rs 2,48,000 crore) has said: “Time spent IN, is more important than TIMING the market”.

The more time you give your money to grow the more it will grow. In other words, the younger you start investing, the more money you will have at your retirement. Each year delayed would mean a loss in earnings. Let us look at an actual example:

Investment: Rs 5,000 per month up to age 60
Expected Return: 7% per annum

Notice how the ‘cost’ of a 10-year delay is HALF the amount.

The chart above clearly indicates that the best time to invest is NOW! More so, when markets are down and the long-term picture looks encouraging. Every day, every month, every year that you delay is an opportunity lost. And the loser is no one else but you!

To conclude, as Mary Kay Ash (a business woman and author of three best-selling books) says: “Don’t limit yourself. Many people limit themselves to what they think they can do. You can go as far as your mind lets you. What you believe, remember, you can achieve.”

When is a good time to invest?

Focus on your long-term goals. And stop trying to time the market. Even the wisest pundits have failed to predict the ‘top’ and the bottom of stock markets

When should I invest? Whether the markets are up or down, this is a million dollar question that constantly looms over an investor’s mind. Should he/she invest now or wait for the markets to fall even further. This waiting for a ‘more opportune’ time goes on and on. As a result, time passes us by.

Over the last two years, I have seen people withhold the decision to invest, despite my spending considerable time with them to convince them to make the investments. Their reason - they feared that the market has ‘topped’ or they had the ‘greed’ to wait for the markets to hit the bottom.

It is not possible to time the market. Even the wisest pundits have more often than not failed to predict the exact ‘top’ and the ‘bottom’ of stock market.

So is there really a ‘right’ time to invest or is it merely a myth or an illusion? The answer is a YES and a NO. ‘No’ because there is nothing like a right month or a date to begin. And ‘yes’ the right time to start (if you already haven’t) is NOW!

There is an old adage – ‘buy low and sell high’. But reality is a lot different from that. Most investors actually end up doing the reverse. They get into the market after the prices have risen because they believe that the ‘bull run’ is back. Such investors tend to panic the minute the prices begin to slip.

Investors must have a horizon for all equity or equity-related (mutual funds) investments of at least 5 years. The longer the better, since only then will they realize the ‘power of compounding’. Discipline and planning are crucial to achieving the goal that the investor has set (be it his own retirement or children’s education or marriage, or any other goal).

As a basic thumb-rule, during volatile markets (like the one we are currently witnessing) invest every time there is every dip. There should be no fear in the investor’s mind if he/she has a long horizon. In the near term, he/she may see negative returns because of volatility. If he looks at the big picture and has a long horizon, he should just keep plugging in the money. The returns will happen in due course.

If you wait to time the market, fear (of seeing short-term negatives) and greed (of trying to catch the bottom) may leave you stranded, thereby seriously affecting your long-term goals and objectives.

Caveat Emptor

Investors, beware of advisors who ‘guarantee’ you high returns on insurance policies. Though the fancy returns may or may not happen on maturity, your advisor will certainly be a satisfied person.

Around three months back, I met a young lad at a call centre - he wanted to invest in mutual funds that would give him at least 40% returns per annum. For a brief moment, I was stunned. When I tried to explain to him that it’s impossible to guarantee such a return, he told me that he had just bought a product from an advisor (from a well-known private insurance firm) who had told him that if he invests Rs 30,000 p.a. he could redeem double the money (i.e. around Rs 2 lakh) after 3 years. He showed him some numbers to convince him and clinched the deal.

It’s not just the educated who get taken in by such advisors. Last week, I got a call from my father’s ex-driver who said that someone from a bank was with him, who was promising him Rs 1 lakh after 5 years, if he deposits Rs 10,000 per annum for 3 years. I was shocked that someone from a reputed bank (coincidentally, I bank with them) was actually trying to dupe poor people of their hard-earned money.

I wonder when all this will stop. Will advisors stoop to any level to earn a living? These advisors are trying to make a living by ‘mis-selling’ insurance products - by guaranteeing returns these policies just won’t fetch. And since there is ignorance at the buyers’ (and in most cases the seller’s, too) end, these agents are getting away with it (and with fat commissions to boot).

What happens at the time of maturity – which maybe anywhere between 10 to 25 years away? I am sure the agent would probably have retired, thanks to the commissions he made during his ‘selling’ days. The agency manager would have moved on. While the insurance company would exist, they’d probably tell you that you didn’t read the fine-print.

Our friendly neighborhood advisors are getting away with making false and unrealistic promises. Unfortunately, the “sab chalta hai” culture has trickled down to even the personal finance industry. But it’s your hard-earned money, after all. It’s only you who will pay the price for your ignorance and not anyone else.

Shouldn’t there be a minimum qualification in finance / financial products before one is allowed to advise on such products? And no, I am not talking about the IRDA certification. Because almost everyone (even your neighborhood aunty or your office receptionist is now selling insurance) who has tried his hand at ‘clearing’ this exam has managed to do so and is now an ‘advisor’.

To pay or not to pay – is that your question?

Fee-based financial planning service is still new to this country. Though there are firms and individuals who charge for their advice, the number is still very small. Investors often wonder, as to why they should pay a fee when they can get the same advice for ‘free’. Is that really so? Is that ‘free’ advice in your interest?

Let me explain this point through an incident. Some time back, a senior executive of a BPO firm had called me to discuss his financial plans. When I told him that I charge a fee for my services, his facial expression changed. “I’ll get back to you.” He curtly told me. I realized what that meant and why he had said that.

I decided to try and reason it out with him. I pointed out to the two insurance policies that he had taken a year back. Till we started the discussion, he did not even know the name of the policies he had bought nor what kind of policies those were - whether it was a term plan, an endowment policy or a ULIP.

During our discussion, he realized that one of the policies (a ULIP) was not going to be of any use to him in the long-run since he needed the money after 4 years. His ‘advisor’ had told him that he could pay for 3 years and redeem the policy in the 4^th year. What he did not tell him was that in the first 3 years almost 40-50% of his premium paid would be charged as fees (for his advisor) and that out of the Rs 3 lakh that he was going to invest over 3 years only Rs 1.50-1.80 lakh was going to be actually invested. (Don’t read me wrong, I am not against ULIPs. ULIPs, as investment products, are suitable over long horizon -- of over 10 years -- but absolutely unsuitable if your investment tenure is going to be short.)

To cut a long story short, he was actually paying a fee of Rs 1.50 lakh over a three year period. Since he was unaware that he actually shelled out that kind of a fee, he didn’t seem to mind it. And just because I asked him for a fee upfront, he was upset about it. (Incidentally, he would be paying me a similar fee for almost 10 years of unbiased advice, for a host of financial products, not just insurance).

Isn’t it better to know upfront the fee you are paying for getting unbiased advice, as compared to paying a huge fee and not having a clue about it? The ‘free’ advice feeling is actually just a misconception. The reality is far divorced from that. As we all know – ‘there are no free lunches’ in life.

Why hesitate in paying up for financial advice? After all, the financial planner is spending considerable time with you to understand your needs, your lifestyle and a host of other parameters in trying to help achieve your financial dreams. He/she is sharing his/her knowledge and expertise.

It’s better to know what you are paying for. If you don’t, you too may get mislead and will have to pay for it quite dearly (both in terms of cash outflow and a wrong product). And you won’t even realize it…till it’s all too late.

An introduction to financial planning

Here’s a lowdown on financial planning and how it can help you lead a life of your dreams.

Welcome to my first blog. Let me begin by introducing myself, my firm - Knowledge Partners - and our philosophy. I am an Associate Financial Planner and have also done my PGCBM from XLRI, Jamshedpur. In 2005, I moved to Gurgaon after spending 14 years in equity research, media and marketing at various firms in Bombay & Calcutta. Numbers always intrigued me. So did various financial instruments. But I also saw how people all around me were getting mislead by so-called ‘advisors’ and ‘agents’. While everyone wants a financially secure future, most people were either unaware or confused as to where and how to start. The result - decisions got indefinitely postponed; or wrong products were bought based on misinformation.

That’s what reinforced my decision to start my own financial advisory. And in 2006, Knowledge Partners took shape.

Financial Planning, as a concept, is still quite new to India. Traditionally, financial advice in Indian homes (invariably) comes from a family elder - who is, more often than not, heavily under influence of an insurance agent or a family friend.

Often, agents and advisors give you an improper advice so that they can make a quick buck. They often sell you a insurance policy or a mutual fund that gives them the highest commission or brokerage.

At Knowledge Partners, we believe in having a long-term relationship with all our clients and advise them to buy financial products they actually need. Our endeavor is to be a partner of our clients till the time they achieve their financial goals.

Have you planned your financial future?

You can get answers to this question by answering these simple questions:

· Have you started planning for your retirement?

· Have you wondering how to plan for retirement, children’s education and marriage in the face of rising inflation?

· Do numbers boggle you?

· Are your savings fetching you sufficient returns?

· Have you ever thought as to how many years you can maintain your current lifestyle if you were to take a sabbatical / retire?

· Is your money lying ‘idle’ in your savings/current bank account – would you not like to earn more than the meager 3.5%?

· Most of us limit our investments to tax saving instruments – or the amount that is to be covered under section 80C. But is that enough to meet all your future expenses? Will that create a sufficient corpus?

If these are some of the questions that are bogging you down, Knowledge Partners could be of help. We are a Gurgaon-based firm offering fee-based services in the area of financial planning having a clientèle in the Delhi-NCR region, primarily, and also in Bombay and Calcutta.

How do we go about it?

Our investment process begins with you. We perform a careful assessment of your individual needs and aspirations, and our evaluation is based on:

· Goals and objectives,

· Investment time horizon,

· Liquidity needs,

· Desired rate of return, and

· Tolerance for risk

The result is a complete understanding of your personal profile that will serve as the foundation for defining a long-term investment strategy tailored to your specific needs and preferences and not just catering to your ‘tax planning’ requirements u/s 80C.

Our philosophy is designed to achieve long-term investment goals, and is based on the following core principles:

1. Identify Your Unique Needs, Goals and Objectives

2. Build an Asset Allocation Roadmap

3. Formulate a Plan & Portfolio Selection

4. Continuous Portfolio Monitoring

We educate our clients so that with time they are more focused to achieve their goals and objectives with the help of their financial advisor, rather than by relying blindly on the latter.

Our fee-based approach is designed to eliminate conflicts of interest and results in unbiased and honest advice.

Money isn’t everything, but having control and confidence about how you are managing it can allow you to concentrate on other things like your family, your career, and your future. We believe that all your dreams are achievable and we look to partnering you so that you can live your dreams!