ENagar

Prax recently forwarded me this SEBI circular about ban on entry loads for all Mutual Funds.

Now I agree that it is beneficial for the consumers. But was it a much needed reform? This move will do more harm than good. Here is why:
In spite of the fact that we have very high taxation rates and our savings rate is also amongst the highest in the world, most Indians do not understand financial markets or tax planning. Mutual funds have been valuable learning ground and one of the best stepping stone for these individuals and has helped them to understand how the markets operates and what are returns.
It teaches people how the growth in economy translates into increase in valuations of stock market and how they can tap into it and make money.
The mutual funds disclose their portfolio and hence gives chance to a common man what good companies are and how to pick and choose a company.
the sector funds help us identify the areas where growth is likely to happen
and the debt funds teach us what inflation is and how the interest rates are expected to behave in future.

In gist, in the past 5 years, through mutual funds Indians have been able to channelize their money into stock market and not only benefited from it, but also helped several industries to raise funds, expand their operations and fuel the growth of the nation.
But the real warriors which helped the mutual funds bring in such a revolution were the Agents. They painstakingly sat with each individual, explained them the risks, benefits, the strategies etc and helped the mutual fund market grow to proportions it is today. If the mutual fund industry was not there, then a few thousand Indians and FII would have cornered the entire market kept the entire benefit of the growth in indian economy.

Few years ago, when I had a good entrepreneur idea, a wise man had said:
“Its a good idea and you can help thousand of people with it. But the only problem is that you cannot make money out of it. It is almost impossible to hope that Indians will pay the right price for any service/advise/assistance. They will pay thousands for a piece of equipment, but they want all their software, and advise for free.”

Thats exactly what has happened with the mutual funds. If you want to reform them, reduce the Asset Management Charges (which are the highest in the world), do not starve the poor agents. With one stroke of pen, SEBI killed an entire booming industry

Another reason why I say this step was counterproductive because already there were several funds which charged zero entry/exit load.
1) Exchange Traded Funds
2) Index Funds
3) Liquid funds
4) NFO (the entry load is hidden)
Yet they were not popular and most people are not aware of their existence. Had people be as cautious as the SEBI claims towards the entry load, then we would have seen more and more money flowing towards these funds and this would have put a competitive pressure on the traditional mutual funds to cut costs.

A lot of people still need hand holding, and by killing the financial advisory we have robbed them of their road to riches.

Because of the constant booming stock market, the lot size in futures and options market desperately need revision.
eg: Essar Oil is quoting close to 350 and has a lot size of 5650 shares which makes a single contract worth about 1.9 Million INR (worth more than the entire portfolio of majority of the investors)

Similarly NIFTY (the most popular contract) has a lot size of 50. Being trading at 6218, it makes a single contract size of 310k INR.

This huge lot size has introduced illiquidity in the market. Because very few traders have the nerves to trade in such big lots.
Because of low volumes and huge margin requirements, nearly all the trade happen in the near month contract (i.e. ones that end on last thursday of the same month)
Also the spreads are very large. Which leaves a lot of room for arbitrage.

The solution would be to chop down the lot size to reflect the recent surge in the price. But NO, NSE had to introduce a new contract MINIFTY… (basically NIFTY with a lot size of 20)
I would have welcomed this change had it been a new index with a different basket of shares/weights, but it is no different than ordinary NIFTY.
I have no idea why the stock market has to complicate things so much?
Why should the same scrip/index trade under 2 different names?
Reducing the lot size from 50 to 20 is a welcome move, but is it that revolutionary that you need to rebrand it?

Also one more question… BSE sensitive index is the most widely recognized index to measure the market sentiments. But why doesn’t BSE’s index trade in the futures market like NIFTY and other sector index?

This a a beginner’s guide to the stock market which advanced investors can safely skip.

What is a bonus issue?
This a mere book manipulation where a company increases the number of shares outstanding by giving a bonus share in a ratio called the bonus ratio and such an issue is called bonus issue.

What is a split?

Split is book entry wherein the face value of the share is altered to create more number of shares outstanding without calling for fresh capital or without altering the share capital account.
For example if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into two shares of face value Rs.five each and a person holding one share now holds two shares.

Usually it is a much welcomed development and leads to a surge in the stock price. However, both of these are mere book manipulation the extra shares one gets due to these issues neither increase one’s holding in the company, change the company fundamentals, or create any extra wealth for the company.

Then why do the company does it:
1) To enhance liquidity:
Buying a stock is like carrying the currency notes. If you want to carry cash: you might not like to carry the entire amount in 1000/- bills for changing them for small bills would be cumbersome, nor you would like to carry then in 10p coins for that might mean lugging a sack around.
Similarly people often have reservations in investing in companies like Berkshire Hathaway because 136,500 USD per stock is much more than what many of us want to invest. nor do we want to invest in penny stocks… for it would be too cumbersome. Hence the companies come up with splits/bonus etc to modify the face value of the stock to keep it in the liquid range.

2) Tax Implications:
In India, tax on stocks is computed at the time of sale. So day traders often utilize this opportunity. They buy the stock before the record date and sell it the next day. So their book shows a loss on the difference in the price of the 2 shares + some shares (of the value equal to the loss) obtained at zero cost. This gives them tax breaks and is usually the reason why the prices surge before the split.

3) Generate PR:
There are over 800 stocks listed on the sensex and their numbers increase every day. So one of the best way for a medium size company to advertise itself and encourage people to invest/analyze its stock is to announce a split/bonus.

All said and done, the long term valuations/fundamentals of a company remain unaltered due to these cosmetic book changes. Hence an investor should not time his investment decisions based on a rumor/news of a split.

Strange it may sound, but in spite of all the hulla gulla, jazzy marketing, more than half of the mutual funds perform far worse than how the BSE performs. And whats worse is that its almost impossible to find out which fund is good and which one is not. If you give me a stock, I can find out whether it is undervalued/overvalued etc. but these analysis does not seem to work for mutual funds… for almost all of them are traded at the NAV (net assets value). (except some wonderful closed ended funds like Morgan Stanley Growth fund which is now trading at a discount of 10% from the NAV)

I think its high time that these mutual funds should stop concentrating on collecting funds, creating new funds and jazzy advertisements and start concentrating on creating wealth… because end of the day this is what matters.

I was reading this article at Bloomberg and it made me think that how much is the lack of a well developed Bond Market hurting we commoners.

Although some of our money is invested in risky financial instruments like Stocks and Mutual Funds, the bulk of our funds are usually parked in fixed return instruments like Fixed Deposits, NSC, ppf etc. Now although it always feels good to have as much wealth as possible, what good is the money if it is not there when you need it.

It is then when we realize that how the government and the banks exploit lack of market tradeable bonds for their own selfish needs. Money parked in NSC is locked for 6 years and no matter what one does, we cannot get a penny out of it. The only way one can take money out of a LIC policy or ppf is by taking a loan… So effectively I pay interest to LIC for my own money??????

In eras of fluctuating interest rates, banks should be grateful that somebody is prematuring closing a fixed deposit.
eg: I had a 6 month old fixed deposit which gave me 9.5% rate of interest. Since current rate is 8.5%, by closing this FD, I effectively save the bank 1% p.a. on interest alone. However instead of being happy about it, the bank coolly deducted half of the interest which I had already earned as preclosure penalty.

Had I had invested in bond market, I could have easily gone and encashed these bonds at NSE/BSE and even made a handsome profit because these high interest bearing deposits are worth a lot more than what bank gives me credit for.

ICICI Direct is one the most expensive brokerage sites. It charges almost 1% as brokerage, and 500/- p.a. to maintain an account and then on that of it, although NSE and BSE work on T + 2 system (the payment/share transfer happens 2 working days after the transaction date) ICICI wants all the shares/money upfront (even before the actual transaction happens)

I was living to all this crap thinking that since I do not transact very often, this high brokerage should not reduce my profitability much. If you charge premium prices, then give service worth it. But all you will get from ICICI is either very slow website or website down. Market (esp the midcaps are up today, but ICICI website was down all day. Hence I could not make the sale on time.

here is the snapshot of the most familiar page on ICICI-direct. (more…)

Recently ICICI announced the launch of ICICI Prudential Real Estate Securities Fund. Its advertisement came with the picture of how the landscape of bangalore has transformed over the years, so naturally I became interested. However, the moment I started reading its offer documents, I realized that this fund has no intentions in owning and developing a property. All it will do is take your money and invest in a debt scheme/bonds.

Similarly, a couple of months ago a lot of global funds were launched which claimed to invest in international securities. I was keenly interested in them, because it would help me in hedging my risks, and reduce my portfolio’s dependence on the performance of BSE Sensex. However, yesterday, when I visited their website to check their portfolio, all I found that they were either sitting with huge stockpiles of cash or 90% of their portfolio consisted of either Indian stocks or ADRs of Indian stocks…. which totally contradicts their advertisements, or investment rationale.

Today there was an article in moneycontrol how all the index funds (irrespective of the fund house) have underperformed the index… Surprised!!!! well this is what happens when index funds does not invest in stocks which forms the index.

The point is that that please do not fall for the jazzy advertisements and facade…. go check the history of the fund and its current portfolio before giving them their money.

In India it is very common for the promoters to sell substantial stake in the company when the price is right. Then immediately after that do a preferential allotment to themselves or kins and relatives.

Often this preferential allotment is made in form of warrants. Promoters, who subscribe to such warrants, are required to pay upfront only a small portion of the warrant issue size and pay the balance amount in 18 months. Promoters, in most cases, exercise the option of converting these warrants into shares only if the share price of the company is higher than the pre-fixed price of the equity warrant.

By law each and every investor is an equal partner in any company. So why were the common investors not allowed to subscribe to this issue?
The management of all Indian companies are always rewarded generously for their efforts. They are given huge salaries, bonus, perks and even stock options (ESOS) I am OK with that, but these warrants are embezzlements. They dilute the holdings of the common investors at a throw away price and wipe out all the profits which we had expected. What hurts me the most is that most people are oblivious to this malpractice.

One of the biggest problem faced by Indian stock market is that even though by law, the investors are an equal partner, in the promoter’s minds, it still belongs to him.