Learning from Comments (Part 2)

Do you read comments ? There is a huge amount of discussion doing on in comments section, however many readers do not find time or interest to dig into the comments and follow the discussions, I would say comments have more knowledge than the article itself , as there are personal experiences and knowledge from many different readers, there is a threaded discussion on some topic in comments, which are more lively and engaging. So if you are just reading articles and not comments, you are missing a lot of things . So I went through some articles comment one by one and consolidated some learning and facts for my readers . ( See  Learning from Comments Part 1)

1) Partha Iyenger shares what will happen to your mutual funds units if you bought it from Demat account and Company went bankrupt

If your online distributer Financial institution and asset management companies in India are regulated by RBI and SEBI. They constantly monitor the balance sheets and other relevant data of these firms and the respective regulators have put together necessary steps to ensure that the investors are protected by taking corrective steps. For eg.. when global trust bank collapsed, it was merged with Oriental Bank of Commerce and clients/depositors who had funds/securities in dmat accounts were able to get it back or transferred to the new Oriental Bank of Commerce account.. The process takes a while but you would get it. In India, we have excellent systems and process (much better than developed world) partly due to conservative policies framed by RBI and others regulatory bodies. For more information on the GTB scam related to deposits and demat accounts, you can read the link here . Another interesting aspect is that your order verification (on equity and etf purchases/sales) is posted on the NSE site on the same day. Your can ask your broker for the unique order number for the trade executed by you. You can verify the stock, price, qty, etc through this unique order number in the nse site. The orders are archived for a period of 8 years!

If am not wrong, NSE is probably only one or very few exchanges to have this facility for investors. This is a valid documentary proof for transactions done by you, which you can use in case your broker fails to send you the contract notes or ledger statements or if there are any discrepancies. Apart from this, the clearing corporation ensures that investors are protected from defaults by members by acting as third-party and your transactions are cleared. For more information you can read the RBI circular here . Next, all asset management companies have to follow strict guidelines in terms of their financials as prescribed by SEBI. The foremost criteria is 40% of net worth of the AMC has to be brought in by the sponsor. A sponsor is a company/consortium/institution which would like to float the asset management company. It also appoints trustees who oversee the amcs. The trustees have the authority to monitor and replace the asset management company , if they fail to perform their duties effectively at any point of time.. This is apart from the regulators and government.. Of course, one needs to be more careful while choosing your broker and investment companies and constantly monitor news and events related to the company.. If at any point of time you get uncomfortable, you could pull out your investments and park it in other stronger firms. (Link)

2) Milind Kotibhaskar shares his experience with a ULIP Agent (over email with me)

Many years back, I was studying in the college and staying in hostel. One evening, one decent looking young man entered my room. He told me that he was from my home town and gave me few references. He thus established a good rapport with me. Then he gently told me that this night he has to leave for Delhi ( or Bangalore or such place ) to attend a job interview. But he has lost his train ticket and he does not have money to buy new one. This job is a lifetime opportunity for him, but he will not be able to make it due to lack of money. So would I be so kind as to lend him some money so that he can travel and attend the interview ? He looked sincere and genuine. I gave him whatever money I had. He thanked me and said that he will return my money as soon as possible. Later when I told this to my friends, they started laughing at me and said I will never see him again in my life, and that is what happened.

Years after, 6 months back, ABN Amro people visited me ( I have salary account with them ). All dressed nicely ( tie and all that ). They wanted to sell me ULIP. They made impressive speech, talked about the returns that I would get etc. All this to a fellow who has crossed 50. I think these people were no different from the conman that duped me in the hostel. I know mutual fund agents who persuaded their clients to sell their existing MF schemes and buy NFOs ( agents used to get very good commission on NFOs ). I know LIC agents who ask their clients to surrender existing policies and buy new one so that these agents can meet their annual targets and to earn hefty commissions on Insurance policies . I feel sorry for the conman who took few rupees from me, and if caught in the act, would have faced police action. Instead he should have become an LIC agent or ULIP agent. He then could have conned more people without fear of police action and got more money in return.

3) Partha Iyenger shares How Real Estate prices gets manipulated by handful of big players .

During the period of Nov 2007-January 2008, large number of high net worth investors got carried away by the bull market assuming that they could make quick returns by booking profits when the sensex moves to 25,000. A large sum of the money allocated for real estate investments (in parts or full) by these investors were moved to stock markets and commodity markets. When the markets crashed immediately, which they did not expect, they were struck. The couldn’t pull out the monies, due to losses. The real estate market which was also on a bull run till then, found the buyers who had shown interest earlier [some of them made advance payments], specifically in premium apartments, backing out. Read Real Estate Returns in India

Hence the Mumbai markets went through a period of correction (though the cycle was shorter) and picked up again gradually when the markets started its rally since April 09..In fact, some of the developers to speculate [through leverage as well] in the stock markets and move it back to their business.. As usual timing is very difficult and that’s why one of the problems faced in the last two years by real estate markets is ‘cash’.. Which means not completing projects in time!

The single word for this phenomenon is ‘liquidity’. I am afraid you could get reliable statistics on real estate, since India lacks transparency[ be it in title deeds or transaction mechanisms] and we are yet to have real estate investment trust vehicles or REITS which would help track data and give a better picture. It should happen soon… (Link)

4) Pramod Moudgill shares his excellent insight on how to look at Fund houses and Fund managers

a) Whether it has some discipline and process set for investments or it is only a One man show i.e. fund manager is calling all the shots.  The former is always better.

b) Whether the fund is keeping an eye on the funds if they are being true to their mandate and the fund manager is not deviating from the mandate for the sake of returns.

c) Whether the motive of fund house is to make money for investors first for the long-term or just to Raise it’s AUM via a flurry of NFOs.

d) What is the performance and association of the investment team with the fund house. Is it changing fund managers every year ? if so then a big problem.

e) I dont know about others but to me the important point is the credibility of the parent company.

Let us evaluate fund houses on above parameters

1) Sundaram has a strict cap that none of its diversified funds will invest more than 5% in a single stock (Except select focus – Its mandate is to remain focus), At FT the  stock selection is done by a team of experts and the same is true with HDFC. These things make sure that one person can not skew the investments to his will.

2) Sandip Sabharwal is arguably the shrewdest fund manager India have ever seen. If you see the portfolio of SBI funds then you can observe that all the diversified funds had 90% stocks in common, so a global fund a contra fund a midcap fund and others were same despite their different mandates. Now look at DSP top 100 it doesnt have a single midcap stock, DSP midcap not a single large cap. Same with HDFC Top 200 and Sundaram midcap or Growth fund. When I invest in a large cap fund I know that I will be geting a large cap fund for sure. FT blue-chip and Prima do not have a single stock in common. Look at some good Equity Mutual funds

3) DSP has only seven equity funds and is winning so many awards based on that only. HDFC has only one sectoral fund. Sundaram recently has launched some new funds but if you compare these houses are conservative with new launching. They have every kind of funds and that is good. Look at Tata , Birla, Reliance they work like NFO Factory. The sole aim is to get money via NFOs.

4) Fund managers, – Prashant Jain is with HDFC for 10 Years, Naganath with DSP for a decade, Sukumar ans Siva Subramaniam with FT for over 12 Years. other that Anup Bhaskar no fund manager has left Sundaram in a long time. Can others (of course Nilesh Shah and Madhu Kela are there) boasts of such long relations.

5) Finally the corporate governance, Check yourself about the credibility of Sundaram and HDFC. Other two are internationally acclaimed.

OK that is the criteria I used, There are some others which may be fitting in these parameters but then performance is foremost and you can check about the consistency for these funds over many years. It has not been a flue. Keep a watch on IDFC and ICICI. Former is transforming itself and the latter is relatively new. Somehow I feel that 2010 will belong to these two guys. In the first quarter fall they have shown character. (Link)

Comments please , Did you like these comments and the learning ?