Deepak Shenoy's blog
A small story at Yahoo on the choice: Ulips or Mutual Funds.
(Posted in entirety)
It was the day they’d talked about 9 years ago. The first day of 2011.
“I’m on my way.”
Ganesh Raghupathi sighed. He had known Arnold would be late. But then, Arnold had two kids, and you always give that species a little more respect, and a little more time.
Arnold D’Souza was looking forward to the meeting. He walked in to the coffee shop, while Ganesh was clumsily switching on his laptop.
“Over here”, said Ganesh, raising his hand.
“Hi Guns!”, said Arnold. “Happy New Year! Let’s get started. To recap – it’s the 1st of January, 2011 and we are here to compare our retirement choices. I chose a Unit Linked Insurance Plan (ULIP) and you bought something else. Let’s see where we are today.”
“Thanks for the wishes, Arnie, and the same to you.”, said Ganesh. “Let’s see the chart:”
I wonder why I get all worked up when I see utterly bizarre Sensex EPS estimates. Basically, the modus operandi seems to be:
Pick a number out of
- Blurt it out on TV or other media with a tie on, and carry the name of big-name finance company.
In the Sensational Sensex EPS Story, in July 2008, I noted that projections of the Sensex EPS between Feb and March 2008, for the EPS ending March 2009 (note: nearly two years ago) was 1000. Four big name fellows said so. Where were we at the end of March 2009?
750. The Sensex EPS was Seven hundred and fifty. A full 25% below what they thought just one year earlier.
The Senseless Sensex EPS Prediction story continues.
I write at Yahoo! about Taking Stock of Commissions:
On May 1, 1975, fixed commissions were abolished on Wall Street. From an era of charging fixed commissions on a per-share or percentage basis, the model moved to "negotiated" commissions - charge anything they wanted. The day was called "Mayday" - an indication of the distress the industry felt about losing the profitability of cartelized price control. On October 27, 1986, the same thing happened in the UK, and the day was called the "Big Bang Day". Losing fixed commissions seems equivalent, in the industry, to Armageddon; but in both the cases above, after a brief hiatus, the UK and US have only benefited with the reform. They are now the largest markets in the world.
India has only started down this route - let's see where the primary investment avenues lie with respect to commissions.
In India, stock broker commissions are not fixed, but they are strangely convoluted. When you buy a stock, you usually get charged a percentage of the trade value - that is, quantity multiplied by the share price, usually between 0.1% and 0.5%. And that's just brokerage. My contract note - a sheet that has everything that's charged to me for each trade - has all these additional charges:
- Service tax and Cess: a 10.3% tax on the brokerage, paid to the government.
- Securities Transaction Tax (STT) : 0.25% of the trade value, only applicable when I sell, goes to the government.
- Stamp Duty, Turnover Charges: Regulatory fees payable to the state, exchange or SEBI, usually a percentage of trade value - about 0.004%. This is so small they might only quote it as "400 rupees per crore".
In addition, some brokers charge a demat fee of about Rs. 15 per transaction and annual demat or account charges. To complicate matters further, brokerage, STT and exchange fees are different for intraday trading (buying and selling within the day), futures and options. Specifically in options, the brokerage is ridiculously high - upto 2.5% of premium paid or received with a minimum "per-lot" charge, usually Rs. 50 or so.
Trading then might cost more the advertised brokerage shows, and usually shocks first-time investors. But one question has to be asked - just why are commissions a percentage of trade value?
A long time ago, trading was done in the open-outcry format, where you found a crowd of (mostly) men in the well of a stock exchange, making strange hand signals and recording trades. That, anyone will agree, involves more work for more shares and proportionate fees are acceptable. All stock trading is electronic now, and the hard work of making strange signals is now the responsibility of silicon, not a carbon based life form. Then why should selling 1000 shares cost more than selling 10, especially when it comes to brokerage paid (one might understand STT or exchange fees)? Why is the "pay-per-trade" model, so prevalent in the US today, not popular among brokers to get market-share?
Some of the current efforts are half-baked - like a Rs. 5,000 for trades upto Rs. 7.5 crore, which is just another percentage brokerage concept, or a Rs. 1000 per month but the trading tools are unreliable. Others are in their infancy. (Disclosure: I'm advising a company offering fixed pay-per-trade rates.)
In order to move in this direction, technology needs to catch up at the broker and retail ends. You have absolutely fantastic trading terminals at brokerages in the US, but very little innovation seems to have happened in the area in India. The big players in this space in India are partly owned by companies who are owners of the stock exchanges themselves (NSE and MCX, for instance) and brokers have invested precious little in technology that lets investors gather data and make their own decisions. Lower commissions from competition might actually prompt innovation.
Readings after a hiatus:
Dhirendra Kumar takes a jab at the labour ministry for asking for a “guarantee” of equity returns. The labour min seemingly asks for a guarantee and a minimum return – yeah, what’s different between that and buying government bonds, one would think. The EPFO looks screwed, with the corpus of 5 trillion (lakh cr.) that needs to pay out either 8.5% or 9.5%; if they fall short, they will need the government to put in money.
Primary articles is up 2% since last week, and stands at 15.35%.
I’d mentioned that last year this was a benign period, and I expect headline inflation numbers to stay high for the next few weeks anyway. Add to it the fuel price hikes, skyrocketing onion prices, increase in sugar prices (not yet in India) and the transition into manufactured goods and WPI as a whole is likely to stay very high.
(Note: Overall inflation is only reported once a month. PA inflation is announced every week)
Past revisions continue to be a problem, as the 16 Oct. data was revised to 17.91%, substantially higher than the first reported 16.62%.
Reader S writes in:
I am invested in 2 ULIPS.
1) Birla Sun Life SaralWealth : 35800 anually since Feb 2010 ( paid 1 premiums) current fund value is 25629.
2) Birla sun life Dream Plan: 12000 anually since Jan 2009 ( paid 2 premiums) current value is 20762
I also have a term policy of Birla sunlife premium of 7k annually and cover of 50 lakhs.
I was totally shocked to see 11000 deducted as loading charges on SaralWealth.
Please advice what would be the right time to get out of the policies and which policy should I retain.
At Yahoo, I write about Innovations and Curses:
In the last 10 years, India has grown at a rate that defies belief. Yet, the rate of growth and the dramatic increase in technology that accompanies it has come with certain curses — the side-effects of what has been a fantastic decade for India.
Curse #1: Floating Rates, Pre-closure charges, Teaser-rates