Envy: An (Un) necessary evil

Warren Buffett has apparently said in jest that out of the seven deadly sins, envy is the worst….because at least we enjoy while committing the other six sins. In case of envy it is only pain and no pleasure.

Despite this, I notice that envy is widespread in our society. Here are a two instances:

  • A client of mine met me last week. I noticed that he was not his usual chirpy self. When I inquired about the reason for his despondency, he explained that he was perturbed to note that while his Portfolio Management Scheme (PMS) Account with our firm had given him a return of 12% over the past year (no mean feat, considering the the broad indices were actually down by 17%). It perplexed me that instead of being ecstatic he was downcast but I soon knew why. Apparently, his friend had invested in another PMS account which also invested in Gold Exchange Traded Funds. Hence his friend had earned a return of 21% on his investment, which apparently gave him bragging rights over my client.
  • Every year once the annual bonus is distributed among colleagues at my company, I always notice a few glum faces. In most cases, they are not glum because they feel shortchanged, but are dejected because a few of their colleagues have received slightly more than them.

How do we deal with this debilitating feeling? While I do not profess to be a psychologist or psychiatrist, here are a few options that work for me. Continue reading

New Year… Not so new Resolutions…..

Happy New Year! 2012!Its that time of the year again…A time to look back, reflect and ruminate. It is also a time to look ahead, resolving to learn from our past mistakes.

The year gone by has not been a happy one for equity investors. But such is the nature of the game. Equity returns are lumpy and not linear. Sharp bursts of performance are followed by periods of slumber. Investors, who are lured into purchasing equities due to their outsized recent returns, often end up disappointed. This leads to widespread aversion towards equities, which in turn sows the seeds of the next bull market.

While shifts in market cycles rarely coincide with the turn of a calendar year, this is as good a time as any to re-orient ourselves and jettison certain calcified behavioural tendencies which may be detrimental to our financial well-being. Continue reading

Mutual Funds: The missing “I” in Monthly Income Plans

Jayant Pai | jayant@ppfas.com

I feel that the financial product with the most misleading moniker is the ‘Monthly Income Plan (MIP)’ offered by mutual funds. The nomenclature suggests that these schemes assure some income to their unit holders every month but this is far from reality. Many of these schemes not only declare dividend at irregular intervals, even the quantum of dividend declared each time varies widely. A bigger irony is that most MIPs offer a “Growth” option too, something which is anachronistic, to say the least. In a nutshell, “True-to-label” MIPs are more the exception than the rule. Continue reading

Zero Exit Load…A boon for speculators

Jayant Pai | jayant@ppfas.com

I saw an advertisement on the Value Research website last week. It showed a family exulting in the fact that their child had secured “Zero” marks in the examination. The father was holding a placard stating that “Zero is the new Hero” and the mother was doing a jig. The ad screamed “Zero exit load on two of our flagship funds”.

The ad could be considered hilarious, if it were not so depressing. What is the mutual fund trying to communicate? Equity mutual fund managers espouse the cause of long-term investing and the virtues of “time in the market rather than timing the market”. Is such a development in sync with this belief? It will only encourage hot money to enter and exit at zero impact cost. It will also prevent the fund manager from taking a long-term view w.r.t. investments. For instance, in the normal course, a fund manager could have allocated 20-25% of the corpus to promising mid-cap and small-cap stocks which were relatively illiquid. That will now be virtually impossible as the sword of untimely redemptions will always be hanging over his/her head. Consequently the manager will play safe either by keeping aside large amounts of cash or investing in liquid stocks even if they are not the best choices at that moment in time.

This appears to be a clear case of the fund’s sales team triumphing over the investment team. Such moves to boost assets will be counter-productive in the longer term. Once a fund house becomes notorious as a channel for “hot money”, investors with a longer-term outlook shy away from it, as it is well known that sharp ebbs and flows in assets in any scheme hurts the longer term investor more. When SEBI jettisoned the entry-load concept, most of the major fund houses increased the exit load. More than earning income, the objective was to discourage quick entry and exit. Unfortunately, the battle for survival amongst the smaller funds has induced them to opt for this “100% Free” route.

I hope this does not lead to a competitive free-for-all (no pun intended) amongst such funds, who will be competing against one another on price and not on investment performance. This will be detrimental for the whole industry and this time they will not be able to blame the Regulator for the same….

The watchdog can also bite

Many a times, one becomes cynical about the ways of justice and rule of law in India. Instances like the delayed process of law in the Bhopal Gas Tragedy lead one to question whether the rules and regulations really matter.

In such an environment it is heartening to see the painstaking investigation and action by SEBI in the matter of front running by a Mutual Fund dealer. Victims in fraud cases and in ponzi schemes are easy to identify and they are the ones who demand justice. On the other hand front running and insider trading are seen as what is called “victim less crimes”. It is difficult to precisely identify the victims of such crimes. The victims in such cases may not even be aware that they have been defrauded.

The current case was especially difficult to investigate as the front entities indulging in the trades had no apparent connection with the Mutual Fund in question. It must have been a difficult task indeed to have identified the connections and then to have confronted the individuals with the evidence. Cases of insider trading and front running have been difficult to prosecute in other countries as well. In the face of such odds SEBI seems to have done well in getting sworn admission of guilt from the accused in this matter.

Suspension of such individuals from the market and recovery of the ill gotten gains is only the start. One would want to see criminal prosecutions in such matters.

The is a warning to all those who indulge in insider trading, front running and market manipulation. The watchdog can also bite.