Archive for Product Review

HSBC Suspending MF, Insurance Sales in India – Who is to Blame??

Who is to Blame??
No sooner had SEBI announced of its move to treat mis-selling as fraud, there were reverberations felt around the entire mutual fund industry. Coming close on its heels was the news of the london -based banking giant HSBC suspending MF, insurance sales in India amid allegations of mis-selling and certain “sharp practices.” Many other ‘big players’ were sufficiently ruffled.

Better late than never.

But this is neither the first nor a random instance.

Like HDFC Bank selling ULIPS by falsely projecting them as Fds, a Citi relationship manager embezzling clients money to the tune of Rs 400 crores, or Kotak Mahindra bank hustling its HNI clients to buy high-cost low-growth investments, or Aditya Birla Money incorrectly representing the risk associated with one of its products. These are some of the instances that dot the mis-selling Wall of Shame. » Read more..

Has the government bitten off more than it can chew with GAAR?

Has the government bitten off more than it can chew with GAAR?

Amar Pandit

The introduction of General Anti-Avoidance Rules (GAAR) in budget 2012-13 has set off the proverbial storm in a teacup. Foreign investors, who will be primarily affected by this rule, are up in arms, and are lobbying furiously with the Finance Ministry for its withdrawal. So far the latter has refused to budge on the essentials, though it has promised to soften the rules so that honest investors are not unduly harassed by the tax man.

What is GAAR and why has it perturbed FIIs so much? India has a Double Taxation Avoidance Agreement (DTAA) with countries such as Mauritius and Singapore. A large number (by some estimates, as much as 50 per cent) of FIIs have until now routed their investments via Mauritius in order to avoid paying taxes on their investments in India. This status is now threatened by GAAR. » Read more..

MFA View on the Fundamentals and Markets

Goldman Sachs’ recent announcement that it is upgrading the Indian equity market from underweight to market weight has created a palpable sense of excitement. In a market where good news is hard to come by, many market participants have seized upon this piece of news just as a drowning man clutches at straws. Our view is one of guarded optimism. At the end of the first quarter of 2012, the domestic and international problems that led to the Indian markets nose-diving by almost 25 per cent in 2011 are not quite over.

But first let us examine Goldman Sachs’ reasons for the upgrade. Its analysts argue that the European problems that had weighed heavily on the Indian markets have abated. The month of March has gone by without inflicting much damage: while the Congress Party’s performance in the state elections was disappointing, at least the budget was neutral vis-à-vis the markets. Moreover, Goldman’s analysts derive optimism from the fact that core inflation is softening. They also expect domestic growth to revive in the second half of the calendar year. They have also suggested that as the year progresses earnings estimates for 2013 could get revised upward. And finally, they argue that current valuations are attractive compared to the 10-year average of the MSCI India index. » Read more..

Offers that lead to despair

Publication : Business Standard, Mumbai; Date : December 13, 2009

Beware of investment products that promise the moon.

A friend recently asked, “Is there some HDFC Standard Life or ICICI Prudential Insurance single-premium product that will double my money in five years?” Quite a surprising question because insurance companies, even if they are selling unit-linked insurance plans, do not offer, and definitely cannot guarantee such high returns.

So, the answer seemed rather simple. But while explaining the guidelines that insurance companies have to follow, I was stumped by this message, which read, ‘Invest in LIC FD Plan. Rs 1 lakh (one time). Returns after 5 years – 224,705; 10 years – 529,515 and 15 years – 1,250,665. As per current growth rate. The plan has been extended up to 15 December.’

I showed him the message and asked him if he understood what it meant. His response, as expected from an potential investor, was, “This translates into returns of more than 15 per cent. I did not know fixed deposits (FD) could double your money in five years.”

The numbers certainly were tantalising. But the ‘tiny clause’ — as per current growth rate — was the operative sentence.

Double-digit returns, coupled with safety of an FD, is definitely a lure. But one should always be on the lookout for ‘conditions apply’. And it will always be there in one form or another. Every person, who has invested in FDs, would be aware that the rate of interest is clearly spelled out in advertisements. Importantly, they are never a fuction of market conditions. and would know that any FD will have a clear interest rate mentioned. The sms, which was sent to me, was cleverly crafted to hide the exact rate of return.

The big lesson to be learnt here is ‘look before you leap’. Another example of this is when investors get carried away by a new investment opportunity and fail to assess its ability to generate returns.

Recently, it was reported that Osian Art Fund’s was unable to make complete payments on its maiden art fund redemption.

Investors in this fund were promised 30 per cent returns by their wealth managers. However, there were several basic questions that the investors missed like — Is there a big market for art? How do you price art? What is the track record of the art fund? What are the costs and risks associated with an art fund? What happens if the art fund is unable to sell its inventory?

There are many other misleading messages which every investor will come across. The recent one I came across was, “Invest your money and double it in 21 days.” It is quite surprising and unfortunate that time and again, people fall for such misleading messages. It is not just the retail or affluent investor who falls for such traps. Even sophisticated and smart institutional investors fall for such garbage. This was very evident from the Bernie Madoff scandal that rocked the financial world.

So, what to do when you come across such messages and pitches?

If it is too good to be true, then 90 per cent of the time, it will not be true. So, ask some very basic questions, such as – Are these normal returns or abnormal returns? What are the risks associated with the investment?

In the FD example, ask if an FD really gives 16 per cent annual compounded returns. If yes, why is ‘as per current growth rate’ mentioned? What returns are other FDs giving?

You would do extremely well to just ignore the noise and sleep over it. A non-resident Indian (NRI), who wanted to double his money in one or two years, bought real estate in Dubai. When the speculative price was up 40 per cent, he invested more. Today, he cannot exit at even a 50 per cent discount. Similarly, builders in India are making pitches urging people to buy now with promises of higher returns. One must tread with caution in this space. The reality is that there is an inherent growth rate every asset can deliver. Understand the conservative returns that every asset class can give you. For instance, debt can deliver 6-9 per cent pre-tax, equity can deliver 12-15 per cent a year, gold, after a correction, can give around 8 per cent a year (generally in line with inflation but in an uncertain scenario, returns can be higher, as we have witnessed in the past couple of years) and real estate gives 8-12 per cent a year. These are broad returns over a long period of time that can be expected.

Remember the adage, ‘a fool and his money are soon parted.’ And don’t fall for misleading messages the next time you see these. Avoiding costly mistakes is the bedrock of sound financial planning and so just avoid it.

The writer is director, My Financial Advisor

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Blinded by lustre?

Publication: Business Standard; Date: November 8, 2009

On saturday, gold prices hit yet another high. Should you invest or book profits?

The Reserve Bank of India(RBI) made headlines this week when it announced purchase of 200 tonnes of gold valued at Rs 31,490 crore from the International Monetary Fund (IMF). Though RBI said the purchase was done as part of its foreign exchange management operations, a lot of people suddenly took notice and wondered if it was a great time to buy gold. RBI, like many central banks, is just trying to diversify its foreign exchange reserves, generally held in dollars, into gold. Most central banks around the world are not bullish on the dollar and this move is taken to hedge exposure from a sharp decline in the dollar. This is because gold is not just a commodity but also an alternate currency. » Read more..

Fret not on stocks

Publication : Business Standard, Date: July 19, 2009

Why timing your buys doesn’t matter beyond the short term

After the Budget, the markets went down from 14,900 to around 13,400 in the next few days. Then there was a sudden turnaround and the markets are once again back to around 14,300. There are several reasons that can be attributed to the rise or fall of the index and a lot of dissection can be done. Does it do any good for people planning to invest? In fact the volatility of the markets and some of the stupid buy points that are suggested causes anxiety, and people end by not doing anything.

When the Sensex level went to 12,500 in September, an avid viewer of stock markets said, “These are excellent levels to buy and I am starting to invest.” However, in the next few days, the markets plunged by a further 40 per cent to 8,000 levels. Now, if 12,000 were » Read more..

Lock, stock, exit

Publication: Business Standard, Mumbai; Section:Fund Fundamentals; Date: July 20, 2008

With the Sensex tottering at 13,000 levels, a whole lot of investors would be wondering if they should exit their mutual funds or stop their monthly systematic investment plans (SIPs). While the latter does not make sense, especially if you are in good equity diversified funds, the former can be contemplated in certain cases.

Generally, getting into a mutual fund is associated with a long-term relationship whereby, there are good times as well as bad times. However, most investors are willing to enjoy the upside, but at the slightest hint of a downside, they start crying foul. Here we address the issue of when you should take the tough call of exiting your mutual fund.

» Read more..

The R Factor: Draw up a risk-return equation

Publication: The Economic Times Mumbai; Date: May 27, 2008; Section: Personal Finance; Page: 19

Don’t go by size or what’s hot. Make an informed investment decision, says Amar Pandit

Just a couple of weeks ago, I met up with an investor who had invested in Reliance Vision Fund through his old broker.

I was checking his statements when I saw that exactly nine days down the line, his funds were switched from Reliance Vision Fund into Reliance Regular Savings Fund by an unscrupulous broker. He cited reasons such as Reliance Vision is too big to be managed and Reliance Savings being a smaller fund, would deliver higher returns.

» Read more..

Investing – A really bad idea

Publication: The Times Of India Mumbai; Date: Apr 22, 2008; Section: Your Money; Page:40

WHO would buy a product which has a minimum 35% cost in the first year and 5% from second year onwards, with a return of only 5-6%? You’d think not many sane people would do it. Yet, time and again, countless people buy such products for the wrong reasons,likesaving tax, forced savings, and investment. You guessed it—I’m talking about traditional life insurance policies.

Traditional insurance products such as endowment and money-back policies have for long escaped the cost scrutiny that most financial products are subjected to. These products, from LIC or private insurance companies, are sold with a strong emotional pitch, and people who buy it seldom think about what they are getting into. Rarely do they pay attention to what kind of cover they are getting, such is the single-minded focus on what they’ll get back at maturity.

» Read more..