Investing - stay away from the toxic products! (Part 1)
Investment products need to be broadly investor centric catering to the genuine needs of a wide range of small investors rather than favor a few big fish(es). Ironically, investment products rolled out are based on public policies
which gets formulated based on corporate-bias (in developed world) or
government-bias (in developing countries). A good example of investor centric product is PPF which is offered on an individual basis (no corporate accounts allowed) and enjoys EEE (exempt-exempt-exempt) status on all three counts - amount invested, interest earned and maturity proceeds. Several bad and notorious examples exist in the market which needs no mention.
A constructive example of how public policy combined with good regulatory oversight has helped fortify the retirement nest of the working class is Chile's pension system. The insurers are tightly regulated on two fronts - costs and performance. Insurers are required to bid for managing the annuities of pensioners, thereby lowering recurring costs as well. Similarly any failure to produce returns commensurate with the market participants is penalized by moving funds from the non-performing insurer to a performing insurer.
A not-so-constructive example of how public policy combined with poor regulatory oversight has destroyed the wealth of an entire generation is India's insurance policies. Per Mint's Monica Halan (http://www.livemint.com/Money/BBr9bjBtIuDBoV1Dj7k9SK/When-you-have-20-trillion-of-cheap-money-why-reform.html), the government gets Rs.20 Trillion in cheap money from the 600million insurance policies in force and from all of our fixed deposits in banks. The insurers keep their money with the government, deduct administrative and other expenses (including whopping commissions paid to agents) and provides the investor a paltry 4% annualized return. The insurers are not penalized for mis-selling toxic products such as Ulips and the regulator itself is not taken to task for failing to protect the investor interests.
Toxic products keep sprouting up in the name of financial innovation all the time. So, in the absence of strong regulatory system, how could an investor protect his/her savings/wealth? One time-tested method is to stick to the 2 golden rules of investing:
A constructive example of how public policy combined with good regulatory oversight has helped fortify the retirement nest of the working class is Chile's pension system. The insurers are tightly regulated on two fronts - costs and performance. Insurers are required to bid for managing the annuities of pensioners, thereby lowering recurring costs as well. Similarly any failure to produce returns commensurate with the market participants is penalized by moving funds from the non-performing insurer to a performing insurer.
A not-so-constructive example of how public policy combined with poor regulatory oversight has destroyed the wealth of an entire generation is India's insurance policies. Per Mint's Monica Halan (http://www.livemint.com/Money/BBr9bjBtIuDBoV1Dj7k9SK/When-you-have-20-trillion-of-cheap-money-why-reform.html), the government gets Rs.20 Trillion in cheap money from the 600million insurance policies in force and from all of our fixed deposits in banks. The insurers keep their money with the government, deduct administrative and other expenses (including whopping commissions paid to agents) and provides the investor a paltry 4% annualized return. The insurers are not penalized for mis-selling toxic products such as Ulips and the regulator itself is not taken to task for failing to protect the investor interests.
Toxic products keep sprouting up in the name of financial innovation all the time. So, in the absence of strong regulatory system, how could an investor protect his/her savings/wealth? One time-tested method is to stick to the 2 golden rules of investing:
- If a product is not simple enough for you to understand, it is not for you, stay away from it.
- And remember there is no such thing as extraordinary returns (as taught by Benjamin Graham, guru of Warren Buffet), so stay away from any product that promises to offer you that.
Comments
Post a Comment