No Entry Load on Indian Mutual Funds

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There is some good news for the small time investors in India. SEBI has abolished entry loads in Mutual Funds. Previously, any investment made through a distributor attracted an entry load of 2.25% which was paid as commission to the distributor. If the investment was made directly to the Mutual Fund, it attracted no entry load. By abolishing entry loads, SEBI has acted in favour of small time investors like us because it means we will now be able make our investments at reduced cost.

My understanding is also that distributors and investors can negotiate the amount of commission to be paid for an investment. This commission can be paid separately and directly and does not have to come out the original investment. This will allow the client to evaluate the service provided by the broker. While some of these brokers provide enough information which allows the investors to make informed decisions, others simply collect cheques, fill up forms. Why should both types of brokers make the same kind of commission? The obvious concern from the distributors and brokers is that it is a loss of income for them. The investors will now in many cases not pay any commission or pay a small negotiated amount. As a small time investor it is not really a concern that I share. From my perspective, it's a great move because I get to benefit from it. If I approach a broker from a piece of advice or a recommendation, then it must not be a particular product just because it will give the broker maximum benefits. The recommended product must be good for my investment needs and not the profits the broker makes out of it.

Brokers have also been guilty of 'portfolio churning'. I once met a guy who under advisement of his broker invested in over 40 different mutual funds over a period of 3 years. Every time there was a new fund offer, his broker would call him and convince him to make an investment in the latest schemes. 3 years later this guy had a heavily fragmented and over diversified portfolio while the broker continued to make merry. If he didn't have money to invest, then the broker would advise him to get rid of an underperforming fund (with 40 to choose from, there were plenty of them). Then this guy would sell off an underperforming fund and invest into another new fund. To say that this guy made a loss on his investments because of the greed of his broker is an understatement. It would be interesting to see how much this guy would have actually stood to gain had he invested in the same money under proper advice. This change of policy by SEBI should put to rest such unscrupulous acts by brokers. It ensures that the best chance for the broker to continue to make money is if his clients stay invested in the fund. This way the broker will continue to get a trailing commission from the fund.

I have another concern. Now that mutual funds will not get as much commission for the broker, what will he resort to? There are other investment products in the market that are not regulated by SEBI and which fetch much better commission rates, sometimes ridiculously high. These products are insurance related investments which the financial industry recognizes as ULIPS. ULIPS are essentially investment vehicles that provide insurance as well and equity investments, all bundled into one product. In India, they are extremely expensive and also fetch good money to the broker who convinces his clients to invest in them. ULIPs being part of the insurance industry are regulated by IRDA. SEBI has historically been more investment friendly than IRDA and that doesn't look like it's going to change anytime soon. While SEBI's move may well be a boon for the informed and educated retail investors, it may also drive gullible investors into the arms of gleeful insurance companies, who are more than happy to extract high commission rates and pay some of it to the brokers.

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The Investment Paradox

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Ever wondered what is the most effective way to make investments in equity markets or mutual funds? When I decided that I wanted to create an investment portfolio, I spent a decent amount of time researching on the internet, speaking to people and reading popular investment magazines and books. It would have been foolish to put money on something without actually understanding what it entails, the pitfalls and the rewards, the dos and the don'ts. I had seen markets surge forward and knew of people who made a bundle of money. I had seen the markets tumble to new depths and the same people lost money and it was more than a bundle. What is the best way to invest money in the markets and at the same time protect yourself from the volatility that comes with the territory?

One of the strategies that appealed the most to me was to have a systematic investment plan. The basic premise behind systematic investment plan (SIP) is to allocate a fixed amount of money every month and invest it. Stock markets are cyclical in nature. There will be months when the stocks are trading high and there will months when they are trading low. By investing systematically every month you are effectively averaging out the cost of your investments, reducing your risks in a volatile market and increasing your gains. There are other advantages to consider, you will avoid having to make lump sum investments. When the money is going out of your pocket (or bank) in small amounts, it doesn't hurt. The bottom line is that to think big in investments, start by thinking small.

Now it's time to discuss the paradox. Systematic investments are nothing new. They have been around for many years now and many people have benefitted from it. The odd thing about these investments is that whenever the market falls, people stop their monthly debits. The flow of monies into the funds reduces alarmingly. At the same time people try to liquidate their investments putting redemption pressures on the fund itself. The point that perplexes me so much is that when equities crash, it's precisely the time to continue with the monthly investments because you are buying stocks are much lower valuations.

Take the example of ELSS equity funds in India. March 2008, saw an inflow of 1317 crores in ELSS funds (approx. 263 million dollars @ 50 rupees a dollar). Subsequently the markets crashed like never before. April 2009, saw an inflow of 93 crores (approx. 18 million dollars). What that means is that while the markets crashed more and more people stopped investing in the market. Monthly inflows were not even 10% of when the market was at its highest.

That sounds logical doesn't it? Why invest in equity markets when the value of your investments is going to fall and not grow? Flawed thinking in my opinion.

If you have invested in equities in 2007 and the early part of 2008, then you have purchased them at a higher value (compared to what transpired later on). If you stopped your investments at that time then you have deprived yourself of buying the same equities at a much lower price. Think of it another way, would you buy your favourite brand of jeans if it was on sale for 70% off? So why wouldn't you apply similar thinking to your favourite equity which over a period of time will go back to its original price if not more. Not investing when the markets are down actually makes it very difficult for you to recover investments made when the valuations are high.

The problem I see with most investors is that they think of today or think about the next 6 months which is short sighted when you want to create wealth in an asset class such as equity. In order to be truly profitable when buying equities, I think requires a waiting period of at least 5 years or more. If your investment horizon is much shorter then you should look for alternate asset classes that can give you guaranteed but lower returns.

The last two months have seen an incredible growth in the Indian equity markets. The Sensex jumped from below 8,000 points to over 15,000 since the beginning of March 2009. Guess what, now that the markets are going back up, everyone is investing again. People tend to invest on higher valuations than lower. Strange, don't you think?

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Identities – Part VI – The Politics of Identity

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Identity Politics is an attempt to empower a group of people that have a basic differentiation from the rest based on their race, colour, religion, caste, ethnicity, culture, region, sex, sexual orientation and a multitude of such other identifiers. Many of its practitioners are well intentioned highlighting the plight suffered by their group. For example, there have been multiple feminist movements across the world. These movements often run campaigns on issues like female infanticide, dowry harassment, sexual harassment, domestic violence, equal rights, honour killing etc. Another example is Gay Rights Activists, running campaigns on equal rights for Gays. Highlighting these Identity based issues plays in important role in a civil society that promises to give equal rights to all its members. It is an attempt to address a problem area that confines a particular group to the backwaters of a society.

The problem I have is that Identity based politics can get a lot uglier when the same practitioners look for political representation. I am not talking about feminism, gay rights, environmentalists and various such other groups. I am talking about Identity groups that seek to enter mainstream politics. Groups that cater exclusively to black or white, Christian, Muslim or Hindus, Yadavs or Dalits etc

Let's take a classic example. The British National Party is an exclusive whites-only political party in the United Kingdom. Party membership is limited to "Indigenous Caucasians". One of the objectives of the BNP is to see an all white nation. It wants to send all immigrants back to their home country. What about non-Caucasian people who are now naturalised British citizens or non-Caucasian people who were born in United Kingdom? Well, tough luck if you are one of them. They want to send you back "home" as well, never mind that you don't know of a home outside mother England. The BNP however does not have a problem with white immigrants. Those folks are fine and dandy. Thankfully the British public has so far denied the BNP any representation in the Parliament. They do however manage to win a handful of local council elections. Interestingly, the wards in which they do win are some of the most economically backward wards in the whole of Britain.

Alas, United Kingdom is not the only country that has to deal with far-right winged politics. Germany has National Democratic Party of Germany to contend with. This political setup is very similar to the BNP in its ideology. News about them reached even India when Obama was elected President of the United States. They apparently felt his presidency was the result of "the American alliance of Jews and Negroes". Like UK and Germany, almost every democratic country in the world has to tolerate such divisive and hate based politics.

You would want to elect a candidate based on a development platform, based on election promises that focus on improving our day to day lives. But instead we have to deal with candidates who don't have any focus of development. Their basic premise is to induce mass paranoia among the general public. It's almost like they are thinking – 'Let's scare them so much that development is no longer the most important issue. Let's make them insecure, unsure, hesitant and suspicious. They will have no choice but to vote for us'.

I cannot discuss Identity politics and not discuss India. It is like talking about flying reindeers and not talking about Santa Claus. India is a country with amazing diversity, diversity in its languages, regions, religions and caste permutations. It's the Promised Land for all Identity Politician wannabes. Unlike other countries, Identity politics can actually get you political mileage and the elusive seat of power. Interestingly many of the identity politicians in India are not far-right in their ideology. They are so self-serving that often their ideology is obscured and relatively unimportant in the larger scheme of things.

I list below just three such interesting identity political parties.
Shiv Sena – Can claim to be one of India's first right wing political parties. This politic party was born out of perceived marginalization of Marathi people living in Maharashtra and a strong advocate of a pan-Indian Hindu identity. It was also vehemently anti-Muslim in the 1990s but these days its ire is concentrated on the immigration of North Indians to Bombay (Mumbai)

Bahujan Samaj Party – Stands for the rights of Dalits. The political setup is controlled in an authoritarian manner by Mayawati, U.P's current Chief Minister. Her net worth today runs into hundreds of millions of rupees. She has no ideological leaning worth talking about, having opportunistically aligned with BJP, Congress, SP and the Left during various elections in the last 15 years. It is her ambition to be the next Prime Minister of India. God have mercy on us.

DMK and AIADMK – Both political parties represent the Dravidian movement and have a strong presence in Tamil Nadu. So strong that since 1967 Tamil Nadu seen 16 Chief Ministers - all of whom are either from DMK or AIADMK. The Dravidian movement started out as an anti- Brahmanism, opposition to Hindi and even cessation from India much of which subsided in the 1960s.

The most encouraging factor of the 2009 Indian General Election has been the defeat of many of the identity based political parties. Caste and race permutations failed in this election. For instance, Shiv Sena lost in its stronghold of Bombay, BSP lost seats even in constituencies where the scheduled castes were in a majority. Is our electorate getting wiser? Only time will tell.

Part I - Groups and Affiliation
Part II - Stereotypes
Part III - Ghettos
Part IV - Zeitgeist
Part V - The Fear of Small Numbers

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Identities – Part V – The Fear of Small Numbers

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Part I - Groups and Affiliation
Part II - Stereotypes
Part III - Ghettos
Part IV - Zeitgeist

The title to this blog entry is inspired by a newspaper article I read a few months back on a book written by Arjun Appadurai called Fear of Small Numbers: An Essay on the Geography of Anger. For those of you who want a copy, it can found on any of the regular online book stores, like Amazon. I have never actually read the book, only the review in the newspaper. Still, I found the title of the book in itself is very fascinating. I have found no other book title so compelling in recent times. It made me pause, take a deep breath and contemplate on the meaning and its significance. When you spend time thinking about it, so much unravels. This blog entry is an attempt to pen down those thoughts. Mr. Appadurai apparently explains about globalization and co-relates the global unrest and terrorism to it. While his thoughts are those of a seasoned anthropologist and intellect, mine are from a layman's perspective and they have absolutely nothing to do with globalization.

'The fear of small numbers' makes me wonder why we fear small numbers in the first place. Why is it that minorities are viewed with so much indifference, suspicion and sometimes hate? In certain societies, minorities feel they don't have equal rights to the majority even if in the modern free democratic world we are all supposedly equal in the eyes of the law and we have the same rights granted to us by the constitution. While some minorities feel like second class citizens others feel oppressed and discriminated against, not to mention those hordes of people who lost their lives imply because they were not in the majority. Indo-Fijians constitute over 35% of the population of Fiji, yet their political representation has been scuttled over a series of coups since the 1980s. They represent a classic case of a community that feels at times as if they don't have the same rights as the rest of the country. The African American population and the civil rights movements to restore equal rights are well documented throughout American history. It's hardly surprising that over 90% of African Americans voted this time in Obama's historic election to the White House. This is the very same building where people of Obama's race were not allowed to enter in the early parts of the 19^th century unless they were part of the housekeeping staff. The African Americans are examples of a race that faced discrimination in the form of brutal slavery and blatant unequal rights.

We can go as far back in history as we want to look at how a dominant group over powers a minority. The indigenous Australians, Aboriginals today constitute less that 3% of the population on the land mass that once completely belonged to them. A majority of their culture, customs and languages are today considered endangered. Under the Australian law, children of mixed heritage were forcibly removed from their parents so that they could assimilate into the Australian culture. Their neighbors, the Maoris, suffered a similar fate of cultural and numerical decimation. In many ways, the natives of Australia and New Zealand fared much better than those of Latin and Central America – the Mayans, the Incas and the Aztecs. We can go back to biblical times, the times when the Hebrews were enslaved to the Egyptian Pharaohs and oppressed to such a degree that God sent to them a Prophet who liberated and took them to the Promised Land.

In modern times, there is no such thing as the Promised Land. There is no land free of occupation. The independence of countries like Uganda, Kenya and Tanzania lead to a mass exodus of people of Asian (read Indian) origin from these countries to places like England. Zimbabwean land reforms in the last decade lead to the redistribution of land to the majority population as the government contended that the whites while numbering only a percent of the population held a majority of the land. This redistribution in turn has led the large scale displacement of the population and the collapse of the economy. Many of the displaced white minorities have now migrated to all parts of the world. The average life expectancy of a Zimbabwean is 36 years.

Slavery, cultural annihilation, displacement and racial/religious discrimination aren't the lowest levels we can stoop to. Our humanity is capable of falling off a cliff. We are a species that's capable of Ethnic Cleansing. The slaughter of 6 million Jews in World War II is not the only example in our history. As recently as 1994, saw the genocide of Tutsis by the Hutus majority in Rwanda that saw the death of over a million people. Around the same time, the largest mass murder in Europe since World War II was perpetuated in Bosnia by Bosnian Serb forces against Bosnian Muslims. This happened despite the area being declared a safe zone by the UN and despite UN peacekeeping forces deployed there. Further crimes against humanity were committed across Bosnia, Kosovo and Croatia. In each and every case of genocide in our bloody history, victims were selected, separated, segregated, stripped, raped and brutally killed in unimaginable ways because of one and only one reason – their identity.

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