With commercial banks increasing their fixed deposit (FD)
rates to double digits, a lot of citizens are moving towards this investment
vehicle. And why not? The alternatives today are not confidence inspiring —
markets have fallen by 15% in the past six months, gold and silver have moved
into bubble territory, and land has taken its 20-35% leap over the past year.
On the other side, inflation is eating into the purchasing
power of money, pushing Reserve Bank of India (RBI) to increase India's policy rates
nine times in 13 months, the last one being a 50-basis-point increase in the
repo rate (rate at which RBI lends to commercial banks) to 7.25% last Tuesday.
That effort seems to be in vain, however — all that RBI and
the government have been able to transmit are promises of lower inflation, but
no real action. As a result, while borrowers are feeling the pinch of higher
rates on their home loans, lenders are gradually rediscovering an old
investment flame: fixed deposits (FDs). At more than 10%, FDs could give senior
citizens the higher returns they're seeking at virtually zero risk. In the
short term, say, for the next three years or so, that is probably a good
idea.
But in the longer term — and many senior citizens in their
early 70s will live well into their 90s — fixed deposits may not be quite the
place to park all that money. To protect their money from inflation, they must
keep 25% or more in equities. For the young, it should be 75% and more.
An economy that grows at a 'slower' rate of 8% that makes
India the world's second-fastest growing economy after China means the earnings
of the underlying organised sector companies that are listed will, on an
average, grow by 20% or more. To miss this biggest-ever ride of Indian equities
would be an investment error. The trouble is that investors confuse getting an
'equity exposure' with 'buying stocks'. The latter is best left to experts,
brokers, fund managers. But as far as equity exposure is concerned, India today
has the world's cheapest product — mutual funds — that investors must buy into.
At an annual cost of less than 2% or less, you can get
access to some of the best-performing mutual funds that deliver 20-50% returns
every year. But unlike FDs, these returns are not consistent — they may fall in
some bad years, could double or treble in very good years. But at the end of 20
years, you can expect a return of 15-20% — meaning you can multiply your money
30-fold.
From the noises I am hearing in newspapers through select
leaks, however, it looks as if Securities and Exchange Board of India (Sebi)
under its new chairman UK Sinha is planning to reintroduce 'loads' — the price
that an investor must pay while buying into an equity fund. Knowing the
investor-friendly DNA of Sinha, I don't think he will succumb to the pressure
of distributors to fatten their bottomlines.
Load was a burden previous Sebi chairman CB Bhave had ended,
making mutual funds even better for investors. Following this, the equity
assets of the industry fell by a statistically-insignificant 2%.
In fact, over the past 12 months, a new wave of investors,
armed with systematic investment plans(a small amount, say R5,000 every month)
have invested in mutual funds with a never-befre-seen enthusiasm. It is this
set of investors that Sebi needs to keep in mind and serve as its primary
constituency.
Globally, this is where the markets are moving — UK plans to
end entry loads on all financial products by 2012; other countries are going to
follow. At a speech to financial planners from 23 countries I made last year in
Taipei, I argued for two points. One, the world must learn from India and end
all entry loads on financial products. And two, while financial planners must
charge for the advice they give, they must be regulated. Instead of
reintroducing loads, Sinha would do well to work towards regulating advisors.
source: HT
