Of late many of you, my BLOG readers, have written to me requesting me to increase the frequency with which I write articles on my BLOG. I am happy to know that I have great folks out there waiting to read what I write on the subject of Investing Personal Finance and admit that I should write more frequently. I know I that I suffer with bad frequency or shall I say BAD TIMING in writing my BLOG and I fully admit my mistake. I shall endeavor to correct myself and write more frequently in future. Your opinions, suggestions and constructive criticism are more than welcome. While I was thinking about bad timing, I thought of the googling for AWARDS that are given for worst performance in any field, just out of curiosity. And to my surprise, in many categories there are many WORST PERFORMANCE AWARDS given every year. Have a look at the table below:
AWARDS given for WORST Performance
|AWARD||Presented for what?|
|Golden Raspberry Award||An award presented for the worst performance in the Hollywood film industry; worst film, worst director, Worst actor of the year etc.|
|Golden Kela Awards||Awards the worst performances in Hindi cinema; Worst film, worst Director, Worst actor etc.(This came as a surprise to me too; Google is great)|
|Top 10 Worst Awards Show Hosts||Recognises Anchors who have hosted a mega show and have done their job really badly|
|Bekaar Advertisement Award||Worst advertisement in India in print or TV awarded by The Economic Times’ “Brand Equity” supplement|
|Worst Dressed Oscars Award||Given to worst dressed actor or actress at the Oscars|
|Worst Company in America Award||As the name suggest, given to the worst company of the year in USA|
|Roger Award||Award for the Worst Multinational company (MNC) of the year awarded by Former Finance Minister of New Zealand Mr. Roger Douglas( hence the name)|
|Nostradamus Award||Awards the Worst Economists of the year who made the worst economic forecast that particular year|
|Worst Company in the World Award||A Swiss group, The Berne Declaration, gives the title of “The Worst company in the World” which they call “Noble Prize of Shame” to those companies that are likely to cause the worst environmental & financial damage.|
Ya I know that this is a Personal Finance BLOG. Then why am I talking about all these crazy awards???Give me a minute and I shall come to the point. Now, you must be wondering why I am taking of WORST rather than the best. This usually is not my nature. Well the objective of this BLOG is to single out the BEST Investment avenues for my Blog readers. But is that all! My objective and duty towards YOU, my Blog reader, is to also SAVE and PREVENT YOU from Investing in undesirable financial products and save you from a possible financial loss. this BLOG article is written keeping this objective in mind. I think it’s time the Financial Services Industry in India should also come out with a few awards in the Worst category, especially on these lines: 1.A “WORST FINANCIAL PRODUCT OF THE YEAR AWARD” to recognize the worst financial product introduced during the previous year.
- A “BAD TIMING Award” to recognize a financial product that was introduced at the worst possible time of the year.
Let us concentrate on the 2nd award in this BLOG article; the BAD TIMING AWARD and try to find out the Nominations for the same… Now let me come to the point… The Indian Financial Services Industry represented largely by the Insurance Industry, the Mutual Funds Industry and the broking community keeps introducing various products in the market from time to time. Some of these new product or product categories go on to become great products , some are talked about when they are launched and later forgotten and some become notorious or shall I say INFAMOUS for the great pain and loss that these cause to the Investing community. I shall in this BLOG article talk about 3 product categories of the 3rd type that have now become infamous and nobody wants to touch them with a barge pole. BUT the situation was diagonally opposite when all these three product categories were launched. I am really amazed at the TIMING with which some financial products were launched in our country over the last few years; in hindsight, if we analyse their timing, there couldn’t have been a worst possible timing to launch those products or product categories. In this BLOG, I shall be discussing 3 such Financial Product categories that are Nominees for the Worst Product Oscar AWARD or wait a minute, I think all the 3 have actually won the BAD TIMING OSCAR AWARDS. All the 3 product categories were launched with great fanfare, with very aggressive marketing and record sales were booked in each of these categories. Let me start with a product category that can win both the above awards in one go; the Worst Financial Product Award as well as the BAD TIMING Award.
I. Highest Guaranteed NAV Plans (“Little Guarantee of returns but full guarantee of high expenses high commissions”) Invest in the fund and get highest NAV (net asset value) of last 7 years guaranteed. Now, this sounds lucrative and attractive, doesn’t it? Such funds are called the Highest NAV Guaranteed Plan’s. They came in hordes last year and created a buzz. Bet you would have seen at least one advertisement on hoardings or in newspapers or magazines on these products during the past two years. These products are in news again, but this time for wrong reason.
Insurance Regulatory and Development Authority or IRDA, the agency which regulates the Insurance Industry in India, has with effect from JULY 2012, banned selling of Highest NAV Guaranteed Plans by all Insurance companies in India. ( http://www.business-standard.com/india/news/irda-bans-productshighest-nav-guaranteed/474272/) But alas, as it happens in many hindi films, by the time the COP reaches the scene of crime, the DAMAGE IS ALREADY DONE. It is great and appreciative of IRDA to finally wake up, realise the truth and ban these products in July 2012. JAB JAAGO TAB SAVERA… But over a period of around 18 to 24 months, since the time these products were launched and before this ban came into effect, these plans were sold aggressively by many Insurance companies and at their peak Guaranteed NAV Plan’s which are a type of ULIPs (I am willing to bet that most of the Investors in this plan were not aware that a Highest Guaranteed NAV plan is an avatar of ULIP, the most notorious financial product ever to be launched in India which as everybody knows, has attracted loads of negative media coverage over past few years) accounted for more than 20% of all the premium income of Insurance companies. JUST IMAGINE. The product which is sold so aggressively by insurance companies that it becomes the highest selling financial product for most companies, but the same top selling product, in hindsight, turns out to be so bad that the insurance regulator IRDA is forced to ban the entire product category.
THINK about it for a second… So how it all did began: According to market experts, “The Highest NAV Guaranteed Plans were launched in early 2010 after the recent crash in the market, and companies were taking advantage of the fact that Investors were looking for some kind of a SAFEinvestment product plus the upside of equity markets. Hence, were launched these Highest NAV Return ULIP’s which confuse investors and make them (the investors ), believe that they are going to get the highest return from the Stock market in long run – generally the tenure is 7 yrs, for these plans. You have to read in between the lines; Investors need to understand that these schemes guarantee the “Highest NAV”, READ AGAIN! , its Highest NAV and not “Highest Returns”.
Normal Investors don’t give much thought before buying these products and normally assume that the returns will be linked to the Stock Markets. The Highest NAV Guaranteed Plans Launched after the 2008-09 market crash to lure investors who had lost money in the 55%+ fall in the Sensex and who were now looking for safety rather than high returns. IRONY is, the Stock Market, represented by the Sensex, went up by more than 81% within a year after the launch of these plans which are yet to deliver returns good enough to even beat Bank Fixed Deposits. The major controversy is around the term ‘highest NAV’.
There is a difference between what the insurance holders understand by highest NAV and what the insurance companies mean and what the agents portray. Insurance companies certainly mean the highest NAV of the fund while the insurance holders confuse it with highest market level. Hence, they may assume the Sensex or the Nifty as benchmark for the highest NAV. The guarantee part can be adverse for investors. As the funds are supposed to provide the highest NAV, they do not take the risk and invest major part of the fund in debt instruments. This reduces the returns that otherwise may be possible from typical mutual funds over the long term.
Moreover, management fees and administration charges eat up portions of the profit which can further deteriorate the returns from the highest NAV guaranteed funds. Another aspect of discord is the management fee charged by the insurance providers. The fee could be as high as 40% of the policy premium in the first year which needless to say, eats into Investors returns. Over the last one or two years, all major life insurance companies launched highest NAV guarantee products and some of the companies also came up with more than one version. Even India’s biggest life insurer, which enjoys great trust & confidence of the Indian public, launched two such products — Wealth Plus and Samridhi Plus — which ensured returns based on the highest NAV.
However, both these plans have now been withdrawn.But not before damage was done. And mind you, this insurance major planned to garner, hold your breath, Hold…, Hold……………………, a whopping Rs. 25,000 Crore from the sale of Wealth Plus alone in the form of first year premium income. Imagine the magnitude of the damage, Rs. 25,000 Crore of our money getting locked in a good for nothing, long term product, bearing very high expenses & expected to deliver very nominal returns, and that too in a product category that later on gets banned by the insurance regulator. NOW, let me ask you one very basic question…
When will you INVEST in the Stock Market ? & When will you Book Profits & EXIT from the Stock Markets? Situation (A) The Stock Market has CRASHED and VALUATIONS are very low i.e.; Stocks are available at a DEEP DISCOUNT to their actual price Situation (B) Stock Market Valuation is at its PEAK, with very high unreasonable & unsustainable valuations I don’t know about you but I shall prefer Situation (A) to INVEST in the Stock Market & Situation (B) to EXIT from the Stock Market. And I am sure any reasonable Investor would do the same. Right!!! Now, one more question. When shall you, if you will, invest or need a plan like a Highest Guaranteed NAV Plan. In Situation A or Situation B? Well, the answer is obvious.
If the Stock Market has already crashed and stocks are cheap, the probability of them falling further from that point is minimal and the chances of an Investor making money in situation A is high. Therefore, in case of situation A, I shall invest in Equity Diversified Mutual Funds rather than Invest in a Highest Guaranteed NAV Plan and incur very high expenses and at the same time put a cap of my returns when the chances of getting handsome returns are the highest.
It is only in Situation B that I might , if at all, invest in a Highest Nav Guaranteed Return Plan. As per this LOGIC, these plans should have been launched in late 2007 & early 2008 when the Stock Market valuations in India were at its all time peak and not in early 2010 when the Stock Markets had already crashed by more than 55%. BUT, when were these Highest Guaranteed NAV Plans actually launched??? In Feb 2010 when the Stock Market has already CRASHED by more than 50% and VALUATIONS were very low i.e.; Stocks were available at a DEEP DISCOUNT to their actual price and the probability of getting good returns from this point were at its highest. Now, this is what I call BAD TIMING…
II. Jeevan Aastha (Jeevan is left but I have little Aastha of getting good returns) It was in Dec 2008, that India’s biggest insurance company with more than 50% market share launched its plan JEEVAN AASTHA, a single premium life insurance product with guaranteed benefits on maturity and death, with great fanfare. Basically, Jeevan Aastha is a single premium assurance plan which offers guaranteed benefits on death or maturity. In simple terms, this policy is like a fixed deposit that offers a certain guaranteed return and a certain specific amount of insurance upon the death of the investor. The scheme was offered with five and ten-year terms giving a guaranteed ten per cent and nine per cent per annum of maturity sum respectively. This is how it was stated in various advertisements in Newspapers & periodicals.
Now who would not like to invest in a plan that offers 9% guaranteed return for 10 years. BUT, THAT”s where the GLITCH lies. As in a fixed deposit, the premium (investment) has to be paid once, at the beginning. In insurance jargon, this is known as a single premium plan. Now, It is in school that we are taught the basic difference between simple and compound interest.
We are taught the fundamental principle that compound interest and not simple interest is the effective rate of return on any investment. However, it increasingly seems to me that this is a lesson that is either not learnt well or is forgotten way too early. Jeevan Aastha essentially is a fixed deposit that, depending upon the age of the investor, offers at best 7.32% per annum (p.a.) and at worst a 4.32% p.a. return according to most market experts. While it is true that Jeevan Aastha offers insurance along with investment, regular readers of my BLOG would know that I do not encourage combining insurance and investment.
Always buy a term insurance plan, which is the most economical insurance that you can buy and then try and optimise your investment returns by investing in Equity Diversified Mutual Funds. Though it is generally believed that insurance policy proceeds are free of tax, as per Sec. 10(10D), if the premium payable on any insurance plan exceeds 20% of the sum assured, the proceeds cease to be exempt and instead will be fully taxable. In the case of Jeevan Aastha, the single premium will always in all cases be more than 20% of the maturity proceeds.
Would this not make the maturity amount from the plan fully taxable? So from a Fixed deposit like, Insurance cum Investment plan, that promises 9 to 10% tax free returns but that is actually likely to deliver a simple rate of return in the range of 6.75% to 7.25% per annum in most cases and which is likely to be taxed, this insurance company powered by its mammoth team of agents managed to garner a whopping, hold your breath, Rs. 5,000 to 8,000 Crores in premium income in 2008 on its launch.
Now the Rs. 8,000 Crore question is? Why did the insurance company launch this plan in Dec 2008? Well, when markets have crashed by 50%+ in a single year what do Investors look for? High Returns??? No. They look for SAFETY. SAFETY of the CAPITAL invested. It is this fear of the markets which was fresh in Investors memory that this insurance company wanted to bank on, according to news reports. Hence it came out with a Fixed Deposit like plan. But was it worth it??? Look at the table below:
|Month & Year||Event||Average Sensex Levels for this month||Percentage returns from the last Event (%)|
|Jan, 2008||Sensex touches all time high||20,325||–|
|Dec, 2008||Jeevan Aastha launched||9,647||-53%|
|Dec, 2009||1 year after Jeevan Aastha’s launch||17,464||81%|
|Particulars||Absolute Returns (%)||Value of Rs. 1 lac after 10 Years||Value of Rs. 1 lac after one Year|
|10 year returns from Jeevan Aastha@ 7.25% pa||72.5%*||1,72,500||–|
|1 Year Returns from Sensex a year after JeevanAastha was launched||81.0%**||–||1,81,000|
*estimated based on what most market experts have to say ** Actual returns Yes, what return Jeevan Aastha is expected to give in 10 years, Sensex gave 8% more returns then that within a single year of its launch… another great example of BAD TIMING…
III. INFRASTRUCTURE FUNDS New Fund Offers (NFO’s) (Over hyped Sector, Little Funds left for Investors) Although very few, alas, even my pet Mutual Funds Industry has its own share of judgemental timing errors, the chief amongst them is the slew of Infrastructure Mutual Fund New Fund Offers (NFOs) that were launched during the boom years of the stock market prior to the huge 55% odd fall of the Sensex in 2008. Have a look at the graphic below: Infrastructure Mutual funds New Fund Offers (NFOs)
|Calendar Year (CY)||No. of Infra Fund NFO’s launched during the year||Percentage of Total Infra Funds launched till date||Average Sensex Level during the year||Average Sensex P/E Level during the year|
|CY 2008 (Jan to March)*||5||19%||16,957||22.65x|
|CY 2008 (April to Dec)**||NIL||0%||13,052||16.61x|
|CY 2011 (till July 2012)||1||4%||15,454||19.21x|
|Total Infra Funds NFOs||27||100%||–||–|
*prior to the market crash** after the market crash had begun As is evident from the table above, between Jan 2006 and Mar 2008, just before the Indian Stock Market suffered its 2ndbiggest fall, more than half ie 56%(15%+22%+19%) of all Infrastructure Mutual Funds NFOs were launched. This coincided with the period when the Stock Market valuations in India were at its peak. I mean the stock market in India was at its most expensive levels in the recent past during Jan 2006 to Mar 2008. Notice the P/E levels* during this period (highlighted in red). *A Price to Earnings Ratio or P/E ratio is a very good indicator of how expensive a stock market is and is considered the standard parameter to measure how cheap or expensive a stock market is. So, higher the P/E Ratio, more expensive the market and lower the P/E ratio, cheaper the market. The Sensex P/E levels were upwards of 20x times during the period when 15 out of 27 New Infrastructure Funds were launched.
The average P/E levels of Sensex over the past 30 years is 14.0x to 16.0x and any levels beyond these is considered to be expensive and hence not a very good time to enter the market. A 20.0x or 22.0x P/E level is 46% more expensive than the average accepted level of 15X. Now, this was the time period when 15 out of 27 Infra funds that are in existence today or 56% of all Infrastructure Funds were launched.
THIS IS BAD TIMING… What? You Want PROOF? The table below gives the 1 year, 3 year and 5 years performance of Infrastructure funds and compares them with the returns given by the Sensex and the Equity Diversified Mutual Funds over the same time period. Performance of Infrastructure Funds v/s Sensex v/s Equity Diversified Mutual Funds
|Fund Category||1 Year Return (%)||3 Year Return (%)||5 Years Return (%)|
|Equity Diversified Funds(average for Large & Mid cap funds)||-5.11%||11.38%||3.72%|
- Returns for 1 year are absolute returns
- Returns above 1 year are average compounded (CAGR) returns
- Data as on July 15, 2012
As is clear from the graphic above, over a 1, 3 and 5 year period, the Infrastructure Funds have underperformed both the Sensex & Equity Diversified Mutual Funds. The difference is wide in a 3 year period wherein the Infrastructure funds have given a mere 3.39%CAGR (compounded average) returns compared to a 8.70% CAGR returns for the Sensex and 11.38% CAGR returns by Equity Diversified Mutual Funds over the same period. Need more proof guys!!! So, The NOMINEES for the BAD TIMING AWARDS are: 1.Highest NAV Guranteed Plans
- Jeevan Aastha
- Infrastructure Fund NFOs (launched before Mar 2008)And the winner is……….. Well, owing to very very tough competition, the JURY has unanimously decided to grant the OSCAR to all the 3 contenders. Yes, History is in the making, for the first time, 3 contenders shall jointly shares the OSCAR.
- 3 cheers for the WINNERS… To CONCLUDE: Whenever YOU AND I Buy any Consumer Product, the basic underlying principle is that of “CAVEAT EMPTOR” or BUYERS BEWARE which means that it is the Buyers primary responsibility to keep himself aware of the market environment and check for himself before buying any product. I think the same holds true for Investing in financial products as well… CAVEAT EMPTOR or BUYERS BEWARE (do write to me with your opinion on this blog article; would appreciate your opinion/comments/constructive criticism.)