By Dhirendra Kumar | Nov 23, 2009
A few days ago, the Securities and Exchange Board of India (SEBI) issued an order opening up a new channel for investors to buy mutual funds. Stock brokers, operating through the same system as used for stock transactions, will be able to act as fund distributors. This is an entirely new way to route mutual fund transactions and promises to offer many conveniences that the current system doesn’t. However, based on my interactions with investors over the last few days, it also offers considerable potential for confusion, which it’s worthwhile to try and clear.
The biggest confusion seems to be between the new system and the trading of closed-end mutual funds that has been done on the stock exchanges for more than a decade now. A number of investors have asked if funds will be available at a discount to the net asset value (NAV) from brokers, just as closed-end funds typically are. The answer is that no, they won’t; the two systems have nothing to do with each other. Listed closed-end funds are bought and sold on the exchanges just like shares. This trading is done between investors; the fund company is not involved in the transaction.
Typically, closed-end funds cannot be redeemed from the fund company till their tenure is over. Fund companies are required to provide an early exit option for such funds by listing them on a stock exchange. Investors who need to redeem their investments prematurely can do so by selling them to other investors on the stock exchange. Since these transactions are typically driven by the seller’s need to encash his holdings, they are often done at a discount to the NAV of the fund.
The new system has nothing to do with this. It is basically a way of extending the stock exchanges massive network to facilitate the buying and selling of mutual funds. This network extends to over 2 lakh terminals in 1,500 cities and towns across the country which are linked to a centralised system. Apart from an extended reach, the new system offers greater convenience for investors. Investors will need to get their KYC (Know Your Customer) identity verification done just once and use it seamlessly for all their investments. Also, they will be able to hold their fund units in dematerialised form and get a single, consolidated statement of holdings just as they get for stocks today.
Investors who already have a depository account and have had their KYC done through a depository participant need not do so again. The new system essentially uses the existing stock exchange mechanism as a system for routing mutual fund investments from investors to fund companies. However, this is early days and some details of the system are not yet clear and will probably evolve as the system is implemented.
Beyond the mechanics of this system, its success will depend on stockbrokers and sub-brokers getting into the business of selling mutual funds. Its not as if every one of them will get up tomorrow morning and be raring to go out and sell funds. They’ll have to take the trouble of getting an Association of Mutual Funds of India (AMFI) certification and everything else that is needed to set themselves up as fund sellers. It remains to be seen how many of them will find the commercial motivation to do so after the abolition of entry loads.
Nonetheless, this is an innovative move that has the potential to become a significant milestone in the development of mutual funds in India. Hopefully, all the pieces that are needed to fulfil that potential will fall into place quickly
Sunday 29 November 2009
Tuesday 24 November 2009
Indian PSUs
In the era of globalisation and finance capitalism, the PSUs with their conservative management emerged as a countervailing force. In his Budget speech this year finance minister Pranab Mukherjee made a statement that left many wondering. While emphasising on the economic success of the previous UPA regime, Mr Mukherjee talked about the 'critical' role played by the public sector banks in insulating the Indian economy from the adverse affects of the global financial crisis. He talked in a manner that justified the nationalisation drive undertaken by the former prime-minister Mrs Indira Gandhi nearly 40 years ago.
The majority of Indians of this generation have grown up in an environment where government owned enterprises dominated our life; be it the slow moving telecom utility, or an airline which would not fly on time, or the local power distributor which could never match the rising demand. The situation was equally worse in the all important banking and financial services sector, where employees never seem to have the time or inclination to serve retail customers.
So when the Indian economy opened up in 1991 and the private sector was allowed entry into sectors earlier reserved for the public sector, it gave an opportunity to Indians to teach a lesson to the state-owned companies they used to deal with. In almost every sphere, PSUs lost market share and customers flocked to the new private sector entrants, who turned out to be much smarter and sleek in serving the customers. It was a new experience for Indians, who were used to standing in queues to buy everything-from a telephone connection to an airline ticket to a domestic gas connection.
Given this, Indians especially the urban middle class is not wrong in viewing PSUs in a certain manner. But it tells only half the story. The consumer's side of the PSUs was always small and has shrunk further in recent years, as private sector has made inroads in one consumer segment after the other. The public sector with their elaborate systems and procedures was never built to be great consumer organisation. Rather they were supposed to provide economic ammunition to the country.
The idea of PSUs was conceptualised at a time when, India hardly had any industrial infrastructure to talk about and it could not have been left to the domestic private sector or foreign companies to provide it. This is because, establishing the infrastructure is a long-drawn process, which may not have yielded profits in the short to near term. Besides, the projects of these kinds are highly capital intensive and was mostly beyond the scope of the fledgling private sector in 1950s and 1960s.
If India today is effortlessly implementing some of the world's largest and most complex industrial and infrastructure projects right from power projects to refineries to dams to mass rapid transit systems, it's because, there is expertise and resources available locally. It was not the case a few decades ago. In the decade following India’s independence, the biggest constraint that India faced was technical know-how and the ability to successfully implement large and nationally important projects. And worse, the technical expertise was either not available in the international market or it was prohibitively expensive. Now that India has successfully nurtured anchor companies across strategic sectors-BHEL (capital goods), SAIL (steel), Indian Oil (oil refining), Bharat Electronics (defence electronics), NTPC (Thermal Power), ONGC (oil exploration) and GAIL (gas) among others, the country has the requisite industrial ecosystems to conceptualise and implement the biggest and the most complex of projects. In fact, the presence of these large domestic companies is now forcing foreign firms to look at the Indian market in favourable terms and this has helped to boost the competition in the domestic market and has thus aided India’s growth story.
The situation was not very different in banking industry either. Though India had a thriving banking industry in 1950s and 60s, its presence was limited to urban areas. But a sustainable economic growth required them to open branches in smaller towns and villages. Not just for equity, but by mid-1960s, the country was facing a food crisis, also called wage-good constraint in development economics. Without cheap food readily available in urban areas, industrialisation was just not possible.
In such as situation a forced industrialisation would have resulted in spiralling wages making entire project economically unviable. Stepping up food production however required investment in new technology and inputs. But given the income levels in rural areas, farmers were not in a condition to invest in fertilisers, modern seeds, pesticides and farm mechanisation on their own. They needed credit and that also at favourable terms. The private sector dominated banking systems was however not geared for it. The agriculture credit was expected to be much less profitable than industrial or consumer loans. So why would a privately owned enterprise take a hit on its profitability?
This had put the government in a Catch 22 situation. So when the push came to shove, the then prime minister Mrs Gandhi did the unconceivable-nationalisation of all large commercial banks in 1969.
The nationalisation led to a massive expansion in the bank branches and farm credit that helped the country to step-up farm productivity and by early 1980s, India was self-sufficient in food. This eliminated the risk of food-price inflation that had weighed heavy on the India’s economic growth in the past. The newly nationalised banks also spread the reach of the formal economy in the farthest corner of the country, which dramatically improved the effectiveness of monetary and fiscal policies. This in itself was a big achievement. Another beneficial impact of a nationwide bank network was a sharp rise in domestic savings, which was now available for investment. In early 1950s, India’s gross saving rate was around 9% of GDP. In next twenty years, it grew at a snail's pace and was 12% on the eve of bank nationalisation. Given India’s long-term capital-output ratio of around 4x, this savings rate would have supported a GDP growth of not more than 3-4% per annum and this was that we were achieving in those days. In the next 20 years country's savings rate rocketed to reach 25% of GDP on the eve of the economic reforms of 1991. Now the Indian economy was ready for the take off.
So in many ways, the current generation is reaping the benefits of the economic plumbing provided by the PSUs. The government-owned companies have proved beneficial in other ways as well. In the post-1991 era, when unfettered globalisation and aggressive finance capitalism acquired the status of a religion, the PSUs with their conservative management style and commitment to the domestic economy emerged as a countervailing force.
While initially this approach was criticised by market men for being anti-growth and typical of PSUs inability to change with times, it proved to be a masterstroke. It saved nation's economic fabric in the aftermath of the global economic crisis. And nowhere was this more visible than the financial market. At the height of the credit crunch in second half of 2008, large PSUs such as State Bank of India and Life Insurance Corporation emerged as the lender of last resort for India Inc. "Many private sector and foreign banks withdrew from the market just when their clients needed them most. In contrast, PSU banks not only honoured their commitments but tried to their best to fill the vacuum," says SBI chairman Mr O P Bhatt. In the stock market LIC emerged as a large investor even as foreign investors were fleeing in hordes putting companies and retail investors in great peril.
A big complaint against PSUs has however been their lacklustre financial performance. But it seems to a case of stereotyping them. PSUs account for nearly half of the combined dividend payout by all listed companies in FY09. The stock market is now also waking up to this reality. In the past, market used to give PSUs a discount. Now companies such as BHEL, SBI, NTPC and Power Grid, among others, rank among one of the most valuable companies in their sectors. (See PSUs lead the way on page 67)
Also while analysing PSUs' past record we must also keep in mind that most of them are much younger than we believe. For instance, BHEL is nearly 20 years younger than its nearest peer L&T, while NTPC was established as late as 1975 compared to its private sector peer Tata Power, which is nearing 100 years of existence. So many of their past investments are still to bear fruit and it may be early to pass a judgement on their finances.
While PSUs are believed to be conservative and slow moving, the last few years have shown that they can be agile in spotting new opportunities and milking them full. Nothing illustrates this better than the MRPL acquisition and swift turnaround under ONGC's management despite stiff bureaucratic opposition. Subir Raha, the then chairman of ONGC still remembers, "The petroleum ministry refused to recognise the public sector status of MRPL for many more months." The deal was however recognised as best M&A deal in Asia in 2003 by Asia Money. The company's total investment in this acquisition was around Rs 1,000 Crore, less than 10% of a Greenfield refinery of same configuration and complexity. The oil major followed it up with large overseas acquisition of Imperial Energy, which it closed at the height of credit crisis last year.
In the banking industry meanwhile, PSUs have learnt their lessons and most of them are investing huge sums in brand building and promotion. (See Today's mega corporations, tomorrow's big brands on page 54). A similar revolution is sweeping through other sectors. For instance, NTPC, which is implementing its 10-year vision plan, has begun the preparatory work on drawing out its corporate plan for next 25 years. Just as last 15 years saw the emergence of a select band of global brands from India’s private sector, the next 20 years may see the emergence of global corporation from the public sector.
****Thanks are due to ET Intelligence Group's Krishna Kant
The majority of Indians of this generation have grown up in an environment where government owned enterprises dominated our life; be it the slow moving telecom utility, or an airline which would not fly on time, or the local power distributor which could never match the rising demand. The situation was equally worse in the all important banking and financial services sector, where employees never seem to have the time or inclination to serve retail customers.
So when the Indian economy opened up in 1991 and the private sector was allowed entry into sectors earlier reserved for the public sector, it gave an opportunity to Indians to teach a lesson to the state-owned companies they used to deal with. In almost every sphere, PSUs lost market share and customers flocked to the new private sector entrants, who turned out to be much smarter and sleek in serving the customers. It was a new experience for Indians, who were used to standing in queues to buy everything-from a telephone connection to an airline ticket to a domestic gas connection.
Given this, Indians especially the urban middle class is not wrong in viewing PSUs in a certain manner. But it tells only half the story. The consumer's side of the PSUs was always small and has shrunk further in recent years, as private sector has made inroads in one consumer segment after the other. The public sector with their elaborate systems and procedures was never built to be great consumer organisation. Rather they were supposed to provide economic ammunition to the country.
The idea of PSUs was conceptualised at a time when, India hardly had any industrial infrastructure to talk about and it could not have been left to the domestic private sector or foreign companies to provide it. This is because, establishing the infrastructure is a long-drawn process, which may not have yielded profits in the short to near term. Besides, the projects of these kinds are highly capital intensive and was mostly beyond the scope of the fledgling private sector in 1950s and 1960s.
If India today is effortlessly implementing some of the world's largest and most complex industrial and infrastructure projects right from power projects to refineries to dams to mass rapid transit systems, it's because, there is expertise and resources available locally. It was not the case a few decades ago. In the decade following India’s independence, the biggest constraint that India faced was technical know-how and the ability to successfully implement large and nationally important projects. And worse, the technical expertise was either not available in the international market or it was prohibitively expensive. Now that India has successfully nurtured anchor companies across strategic sectors-BHEL (capital goods), SAIL (steel), Indian Oil (oil refining), Bharat Electronics (defence electronics), NTPC (Thermal Power), ONGC (oil exploration) and GAIL (gas) among others, the country has the requisite industrial ecosystems to conceptualise and implement the biggest and the most complex of projects. In fact, the presence of these large domestic companies is now forcing foreign firms to look at the Indian market in favourable terms and this has helped to boost the competition in the domestic market and has thus aided India’s growth story.
The situation was not very different in banking industry either. Though India had a thriving banking industry in 1950s and 60s, its presence was limited to urban areas. But a sustainable economic growth required them to open branches in smaller towns and villages. Not just for equity, but by mid-1960s, the country was facing a food crisis, also called wage-good constraint in development economics. Without cheap food readily available in urban areas, industrialisation was just not possible.
In such as situation a forced industrialisation would have resulted in spiralling wages making entire project economically unviable. Stepping up food production however required investment in new technology and inputs. But given the income levels in rural areas, farmers were not in a condition to invest in fertilisers, modern seeds, pesticides and farm mechanisation on their own. They needed credit and that also at favourable terms. The private sector dominated banking systems was however not geared for it. The agriculture credit was expected to be much less profitable than industrial or consumer loans. So why would a privately owned enterprise take a hit on its profitability?
This had put the government in a Catch 22 situation. So when the push came to shove, the then prime minister Mrs Gandhi did the unconceivable-nationalisation of all large commercial banks in 1969.
The nationalisation led to a massive expansion in the bank branches and farm credit that helped the country to step-up farm productivity and by early 1980s, India was self-sufficient in food. This eliminated the risk of food-price inflation that had weighed heavy on the India’s economic growth in the past. The newly nationalised banks also spread the reach of the formal economy in the farthest corner of the country, which dramatically improved the effectiveness of monetary and fiscal policies. This in itself was a big achievement. Another beneficial impact of a nationwide bank network was a sharp rise in domestic savings, which was now available for investment. In early 1950s, India’s gross saving rate was around 9% of GDP. In next twenty years, it grew at a snail's pace and was 12% on the eve of bank nationalisation. Given India’s long-term capital-output ratio of around 4x, this savings rate would have supported a GDP growth of not more than 3-4% per annum and this was that we were achieving in those days. In the next 20 years country's savings rate rocketed to reach 25% of GDP on the eve of the economic reforms of 1991. Now the Indian economy was ready for the take off.
So in many ways, the current generation is reaping the benefits of the economic plumbing provided by the PSUs. The government-owned companies have proved beneficial in other ways as well. In the post-1991 era, when unfettered globalisation and aggressive finance capitalism acquired the status of a religion, the PSUs with their conservative management style and commitment to the domestic economy emerged as a countervailing force.
While initially this approach was criticised by market men for being anti-growth and typical of PSUs inability to change with times, it proved to be a masterstroke. It saved nation's economic fabric in the aftermath of the global economic crisis. And nowhere was this more visible than the financial market. At the height of the credit crunch in second half of 2008, large PSUs such as State Bank of India and Life Insurance Corporation emerged as the lender of last resort for India Inc. "Many private sector and foreign banks withdrew from the market just when their clients needed them most. In contrast, PSU banks not only honoured their commitments but tried to their best to fill the vacuum," says SBI chairman Mr O P Bhatt. In the stock market LIC emerged as a large investor even as foreign investors were fleeing in hordes putting companies and retail investors in great peril.
A big complaint against PSUs has however been their lacklustre financial performance. But it seems to a case of stereotyping them. PSUs account for nearly half of the combined dividend payout by all listed companies in FY09. The stock market is now also waking up to this reality. In the past, market used to give PSUs a discount. Now companies such as BHEL, SBI, NTPC and Power Grid, among others, rank among one of the most valuable companies in their sectors. (See PSUs lead the way on page 67)
Also while analysing PSUs' past record we must also keep in mind that most of them are much younger than we believe. For instance, BHEL is nearly 20 years younger than its nearest peer L&T, while NTPC was established as late as 1975 compared to its private sector peer Tata Power, which is nearing 100 years of existence. So many of their past investments are still to bear fruit and it may be early to pass a judgement on their finances.
While PSUs are believed to be conservative and slow moving, the last few years have shown that they can be agile in spotting new opportunities and milking them full. Nothing illustrates this better than the MRPL acquisition and swift turnaround under ONGC's management despite stiff bureaucratic opposition. Subir Raha, the then chairman of ONGC still remembers, "The petroleum ministry refused to recognise the public sector status of MRPL for many more months." The deal was however recognised as best M&A deal in Asia in 2003 by Asia Money. The company's total investment in this acquisition was around Rs 1,000 Crore, less than 10% of a Greenfield refinery of same configuration and complexity. The oil major followed it up with large overseas acquisition of Imperial Energy, which it closed at the height of credit crisis last year.
In the banking industry meanwhile, PSUs have learnt their lessons and most of them are investing huge sums in brand building and promotion. (See Today's mega corporations, tomorrow's big brands on page 54). A similar revolution is sweeping through other sectors. For instance, NTPC, which is implementing its 10-year vision plan, has begun the preparatory work on drawing out its corporate plan for next 25 years. Just as last 15 years saw the emergence of a select band of global brands from India’s private sector, the next 20 years may see the emergence of global corporation from the public sector.
****Thanks are due to ET Intelligence Group's Krishna Kant
Red Alert: The Second Wave of The Financial Tsunami
The Wave Is gathering force & could hit between the first & second quarter of 2010
by Matthias Chang
Many of my friends who have been receiving my e-mail alerts over the last two years have lamented that in recent weeks I have not commented on the state of the global economy. I appreciate their anxiety but they forget that I am not a stock market analyst who is paid to write articles to lure investors back into the market. My website is free and I do not sell a financial newsletter so there is no need for me to churn out daily forecasts or analysis.
However, when the data is compelling and supports an inevitable trend, it is time for another review. This Red Alert is to enable visitors to my website to take appropriate actions to safeguard their wealth and welfare of their families in the coming months.
Since the last quarter of 2008, unrelenting currency warfare has been waged by the key global economies and while this competition thus far has been non-antagonistic, it will soon be antagonistic because the inherent differences are irreconcilable. The consequences to the global economy will be devastating and for the ordinary people, massive unemployment and social unrest are assured.
The policy-makers of these countries faced with the total collapse of the international financial architecture have concluded that the solution, the only solution is quantitative easing (i.e. massive injection of liquidity) to salvage the “too big to fail” banks and reflate their depressed economies. This is best reflected in Bernanke’s candid remark that, “the US government has a technology, called the printing press (or today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost”.
This is the crux of the problem!
The Irreconcilable Differences
Some two decades ago, it was decided by the global financial elites that the framework for the global economy shall consist of:
1) A global derivative-based financial system, controlled by the US Federal Reserve Bank and its associate global banks in the developed countries.
2) The re-location from the West to the East in the production of goods, principally to China and India to “feed” the developed economies.
The entire system was built on a simple principle, that of a FED-controlled global reserve currency which will be the engine for growth for the global economy. It is essentially an imperialist economic principle.
Once we grasp this fundamental truth, Bernanke’s boast that the “US can produce as many US dollars as it wishes at no cost” takes on a different dimension.
I have talked to so many economists and when asked what is the crux of the present financial problem, they all respond in unison, “it is the global imbalances... the West consumes too much while the East saves too much and consumes not enough”. This is exemplified by the huge US trade deficits on the one part and China’s massive surpluses on the other.
Incredible wisdom and almost everyone echoes this mantra. The recent concluded APEC Summit was no different. This mantra was repeated as well as the call for freer trade between trading nations.
This is a grand hoax. All the current leaders on the world’s stage are corrupted to the rotten core and as such have no interest to call a spade a spade and expose the inherent contradictions within the existing financial system.
The call for a multi-polar world is meaningless when the entire global financial system is based on the unipolar US dollar reserve currency. This is the inherent contradiction within the present system and the problems associated with it cannot be resolved by another global reserve currency based on the IMF’s Special Drawing Rights as advocated by some countries. It was stillborn, the very moment it was conceived!
The leaders of China, Japan and the oil producing countries of the Middle East are all cursing and pissing about the current situation, but they don’t have the courage of their convictions to spell it out to their countrymen that they have been conned by the financial spin masters from the Fed acting on the instructions from Goldman Sachs.
Tell me which leader would dare admit that they have exchanged the nation’s wealth for toilet papers?
The toilet paper currency pantomime continues.
We have now reached a stalemate in the current currency war, not unlike the situation of the Cold War between the NATO pact countries and the Warsaw pact countries. Both sides were deterred by the MAD (Mutually Assured Destruction) doctrine of nuclear wars. The costs to both sides were horrendous and it was only when the Soviet Union could not continue with the pace and cost of maintaining a nuclear deterrent and was forced into bankruptcy that the balance tilted in favour of the NATO alliance.
But it was a pyrrhic victory for the US and it allies. What kept the ability of the US to maintain its military might and outspend the Soviet Union was the right to print toilet paper currency and the acceptance of the US dollar by her allies as the world’s reserve currency.
But why did the countries allied to the US during the Cold War accepted the status quo?
Simple! They were all conned into believing that without the protection of Big Brother and its military outreach, they would be swallowed up by the communist menace. They agreed to march to the tune of the US Pied-Piper.
The next big question – why did the so-called “liberated” former communist allies of the Soviet bloc jump on the bandwagon?
Simple! They all believed in the illusion that was fostered by the global banks, led by Goldman Sachs that trading and selling their goods and services for the toilet paper US reserve currency would ensure untold wealth and prosperity.
But the biggest game in town was the Asia gambit. Japan, after a decade of recession following the burst of her property bubble did not have the means and the capacity to bring the game to the next level as envisaged by the financial architects in Goldman Sachs.
And China was the biggest beneficiary. The senior management of Goldman Sachs brokered a secret pact with China’s leaders that in exchange for orchestrating the most massive injection of US dollar capital and wholesale re-location of manufacturing capacity in the history of the global economy, China would recycle their hard-earned US toilet paper reserve currency wealth into US treasuries and other US debt instruments.
This was the necessary condition precedent for the global financial casino to rise to the next level of play.
Why?
The New Game
The financial architects at Goldman Sachs had a master plan – to dominate the global financial system. The means to achieve this financial power was the Shadow Banking System, the lynchpin being the derivative market and the securitization of assets, real and synthetic. The stakes would be huge, in the hundreds of US$ trillions and the way to transform the market was through massive leverage at all levels of the financial game.
But there was an inherent weakness in the overall scheme – the threat of inflation, more precisely hyperinflation. Such huge amounts of liquidity in the system would invariably trigger the depreciation of the reserve currency and the confidence in the system.
Hence the need for a system to keep in check price inflation and the illusion that the purchasing power of the toilet paper reserve currency could be maintained.
This is where China came in. Once China became the world’s factory, the problem would be resolved. When a suit which previously cost US$600 could be had for less than US$100, and a pair of shoes for less than US$5, the scam masterminds concluded that there would be no foreseeable threat to the largest casino operation in history.
China agreed to the exchange as it has over a billion mouths to feed and jobs for hundreds of millions needed to be secured, without which the system could not be maintained. But China was pragmatic enough to have two “economic systems” – a Yuan based domestic economy and a US$ based export economy, in the hope that the profits and benefits of the export economy would enable China to transform and establish a viable and dynamic domestic market which in time would replace the export dependent economy. It was a deal made with the devil, but there were no viable alternative options at the material time, more so after the collapse of the Soviet Union.
The Next Level of the Game
The next level of the game was reached when the toilet paper reserve currency literally went virtual – through the simple operation of a click of the mouse in the computers of the global banks.
The big boys at Goldman Sachs and other global banks were more than content to leave Las Vegas for the mafia and their miserable billions in turnover. The profits were considered dimes when compared to the hundreds of trillions generated by the virtual casino. It was a financial conquest beyond their wildest dreams. They even called themselves, “Master of the Universe”. Creating massive debts was the new game, and the big boys could even leverage more than 40 times capital! Asset values soared with so much liquidity chasing so few good assets.
However, the financial wizards failed to appreciate and or underestimate the amount of financial products that were needed to keep the game in play. They resorted to financial engineering – the securitization of assets. And when real assets were insufficient for securitization, synthetic assets were created. Soon enough, toxic waste was even considered as legitimate instruments for the game so long as it could be unloaded to greedy suckers with no recourse to the originators of these so-called investments.
For a time, it looked as if the financial wizards have solved the problem of how to feed the global casino monster.
Unfortunately, the music stopped and the bubble burst! And as they say the rest is history.
The Goldman Sachs Remedy
When losses are in the US$ trillions and whatever assets / capital remaining are in the US$ billions, we have a huge problem – a financial black-hole.
The preferred remedy by the financial masterminds at Goldman Sachs was to create another hoax – that if the big global banks were to fail triggering a systemic collapse, there would be Armageddon. These “too big to fail” banks must be injected with massive amount of virtual monies to recapitalize and get rid of the toxic assets on their balance sheet. The major central banks in the developed countries in cahoots with Goldman Sachs sang the same tune. All sorts of schemes were conjured to legitimize this bailout.
In essence, what transpired was the mere transfer of monies from the left pocket to the right pocket, with the twist that the banks were in fact helping the Government to overcome the financial crisis.
The Fed and key central banks agreed to lend “virtual monies” to the “too big to fail” global banks at zero or near zero interest rate and these banks in turn would “deposit” these monies with the Fed and other central banks at agreed interest rates. These transactions are all mere book entries. Other “loans” from the Fed and central banks (again at zero or near zero interest rates) are used to purchase government debts, these debts being the stimulus monies needed to revive the real economy and create jobs for the growing unemployed. So in essence, these banks are given “free money” to lend to the government at prior agreed interest rates with no risks at all. It is a hoax!
These “monies” are not even the dollar bills, but mere book entries created out of thin air.
So when the Fed injects US$ trillions into the banking system, it merely credits the amount in the accounts of the “too big to fail” banks at the Fed.
When the system is applied to international trade, the same modus operandi is used to pay for the goods imported from China, Japan etc.
For the rest of world, when buying goods denominated in US$, these countries must produce goods and services, sell them for dollars in order to purchase goods needed in their country. Simply put, they have to earn an income to purchase whatever goods and services needed. In contrast, all that the US needs to do is to create monies out of thin air and use them to pay for their imports!
The US can get away with this scam because it has the military muscle to compel and enforce this hoax. As stated earlier, this status quo was accepted especially during the Cold War and with some reluctance post the collapse of the Soviet Union, but with a proviso – that the US agrees to be the consumer of last resort. This arrangement provided some comfort because countries which have sold their goods to the US, can now use the dollars to buy goods from other countries as more than 80 per cent of world trade is denominated in dollars especially crude oil, the lifeline of the global economy.
But with the US in full bankruptcy and its citizens (the largest consumers in the world) being unable to borrow further monies to buy fancy goods from China, Japan and the rest of the world, the demand for dollar has evaporated. The dollar status as a reserve currency and its usefulness is being questioned more vocally.
The End Game
The present fallout can be summarized in simple terms:
Should a bankrupt country (the US) be allowed to use money created out of thin air to pay for goods produced with the sweat and tears of hardworking citizens of exporting countries? Adding insult to injury, the same dollars are now purchasing a lot less than before. So what is the use of being paid in a currency that is losing rapidly its value?
On the other hand, the US is telling the whole world, especially the Chinese that if they are not happy with the status quo, there is nothing to stop them from selling to the other countries and accepting their currencies. But if they want to sell to the mighty USA, they must accept US toilet paper reserve currency and its right to create monies out of thin air!
This is the ultimate poker game and whosoever blinks first loses and will suffer irreparable financial consequences. But who has the winning hand?
The US does not have the winning hand. Neither has China the winning hand.
This state of affairs cannot continue for long, for whatever cards the US or China may be contemplating to throw at the table to gain strategic advantage, any short term gains will be pyrrhic, for it will not be able to address the underlying antagonistic contradictions.
When the survival of the system is dependent on the availability of credit (i.e. accumulating more debts) it is only a matter of time before both the debtor and creditor come to the inevitable conclusion that the debt will never be paid. And unless the creditor is willing to write off the debt, resorting to drastic means to collect the outstanding debt is inevitable.
It would be naïve to think that the US would quietly allow itself to be foreclosed! When we reach that stage, war will be inevitable. It will be the US-UK-Israel Axis against the rest of the world.
The Prelude to the End Game
The US economy will be spiraling out of control in the coming months and will reach critical point by the end of the 1st quarter 2010 and implode by the 2nd quarter.
The massive US$ trillions of dollars stimulus has failed to turn the economy around. The massive blood transfusion may have kept the patient alive, but there are numerous signs of multi-organ failure.
There will be another wave of foreclosures of residential and more importantly commercial properties by end December and early 2010. And the foreclosed properties in 2009 will lead to depressed prices once they come through the pipeline. Home and commercial property values will plunge. Banks’ balance sheets will turn ugly and whatever “record profits” in the last two quarters of 2009 will not cover the additional red ink.
Given the above situation, will the Fed continue to buy mortgage-backed securities to prop up the markets? The Fed has already spent trillions buying Fannie Mae and Freddie Mac mortgages with no potential substitute buyer in sight. Therefore, the Fed’s balance sheet is as toxic as the “too big to fail” banks that it rescued.
In the circumstances, it makes no sense for anyone to assert that the worst is over and that the global economy is on the road to recovery.
And the surest sign that all is not well with the big banks is the recent speech by the President of the Federal Reserve Bank of New York, William Dudley at Princeton, New Jersey when he said that the Fed would curtail the risk of future liquidity crisis by providing a “backstop” to solvent firms with sufficient collateral.
This warning and assurance deserves further consideration. Firstly, it is a contradiction to state that a solvent firm with sufficient collateral would in fact encounter a liquidity crisis to warrant the need for a fall back on the Fed. It is in fact an admission that banks are not sufficiently capitalized and when the second wave of the tsunami hits them again, confidence will be sorely lacking.
Dudley actually said that, “the central bank could commit to being the lender of last resort... [and this would reduce] the risk of panics sparked by uncertainty among lenders about what other creditors think”.
To put it bluntly what he is saying is that the Fed will endeavour to avoid the repeat of the collapse of Bear Stearns, Lehman Bros and AIG. It is also an indication that the remaining big banks are in trouble.
It is interesting to note that a Bloomberg report in early November revealed that Citigroup Inc and JP Morgan Chase have been hoarding cash. The former has almost doubled its cash holdings to US$244.2 billion. In the case of the latter, the cash hoard amounted to US$453.6 billion. Yet, given this hoarding by the leading banks, the New York Federal Reserve Bank had to reassure the financial community that it is ready to inject massive liquidity to prop up the system.
It should come as no surprise that the value of the dollar is heading south.
When currencies are being debased, volatility in the stock market increases. But the gains are not worth the risks and if anyone is still in the market, they will be wiped out by the 1st quarter of 2010. The S&P may have shot up since the beginning of the year by over 25 per cent but it has been out-performed by gold. The gains have also lagged behind the official US inflation rate. It has in fact delivered a total return after inflation of approximately minus 25 per cent. When Meredith Whitney remarked that, “I don’t know what’s going on in the market right now, because it makes no sense to me”, it is time to get out of the market fast.
In a report to its clients, Société Générale warned that public debt would be massive in the next two years – 105 per cent of GDP in the UK, 125 per cent in the US and in Europe and 270 per cent in Japan. Global debt would reach US$45 trillion.
At some point in time, all these debts must be repaid. How will these debts be repaid?
If we go by what Bernanke has been preaching and practising, it means more toilet paper currency will be created to repay the debts.
As a result, debasement of currencies will continue and this will further aggravate existing tensions between the competing economies. And when creditors have enough of this toilet paper scam, expect violent reactions!
by Matthias Chang
Many of my friends who have been receiving my e-mail alerts over the last two years have lamented that in recent weeks I have not commented on the state of the global economy. I appreciate their anxiety but they forget that I am not a stock market analyst who is paid to write articles to lure investors back into the market. My website is free and I do not sell a financial newsletter so there is no need for me to churn out daily forecasts or analysis.
However, when the data is compelling and supports an inevitable trend, it is time for another review. This Red Alert is to enable visitors to my website to take appropriate actions to safeguard their wealth and welfare of their families in the coming months.
Since the last quarter of 2008, unrelenting currency warfare has been waged by the key global economies and while this competition thus far has been non-antagonistic, it will soon be antagonistic because the inherent differences are irreconcilable. The consequences to the global economy will be devastating and for the ordinary people, massive unemployment and social unrest are assured.
The policy-makers of these countries faced with the total collapse of the international financial architecture have concluded that the solution, the only solution is quantitative easing (i.e. massive injection of liquidity) to salvage the “too big to fail” banks and reflate their depressed economies. This is best reflected in Bernanke’s candid remark that, “the US government has a technology, called the printing press (or today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost”.
This is the crux of the problem!
The Irreconcilable Differences
Some two decades ago, it was decided by the global financial elites that the framework for the global economy shall consist of:
1) A global derivative-based financial system, controlled by the US Federal Reserve Bank and its associate global banks in the developed countries.
2) The re-location from the West to the East in the production of goods, principally to China and India to “feed” the developed economies.
The entire system was built on a simple principle, that of a FED-controlled global reserve currency which will be the engine for growth for the global economy. It is essentially an imperialist economic principle.
Once we grasp this fundamental truth, Bernanke’s boast that the “US can produce as many US dollars as it wishes at no cost” takes on a different dimension.
I have talked to so many economists and when asked what is the crux of the present financial problem, they all respond in unison, “it is the global imbalances... the West consumes too much while the East saves too much and consumes not enough”. This is exemplified by the huge US trade deficits on the one part and China’s massive surpluses on the other.
Incredible wisdom and almost everyone echoes this mantra. The recent concluded APEC Summit was no different. This mantra was repeated as well as the call for freer trade between trading nations.
This is a grand hoax. All the current leaders on the world’s stage are corrupted to the rotten core and as such have no interest to call a spade a spade and expose the inherent contradictions within the existing financial system.
The call for a multi-polar world is meaningless when the entire global financial system is based on the unipolar US dollar reserve currency. This is the inherent contradiction within the present system and the problems associated with it cannot be resolved by another global reserve currency based on the IMF’s Special Drawing Rights as advocated by some countries. It was stillborn, the very moment it was conceived!
The leaders of China, Japan and the oil producing countries of the Middle East are all cursing and pissing about the current situation, but they don’t have the courage of their convictions to spell it out to their countrymen that they have been conned by the financial spin masters from the Fed acting on the instructions from Goldman Sachs.
Tell me which leader would dare admit that they have exchanged the nation’s wealth for toilet papers?
The toilet paper currency pantomime continues.
We have now reached a stalemate in the current currency war, not unlike the situation of the Cold War between the NATO pact countries and the Warsaw pact countries. Both sides were deterred by the MAD (Mutually Assured Destruction) doctrine of nuclear wars. The costs to both sides were horrendous and it was only when the Soviet Union could not continue with the pace and cost of maintaining a nuclear deterrent and was forced into bankruptcy that the balance tilted in favour of the NATO alliance.
But it was a pyrrhic victory for the US and it allies. What kept the ability of the US to maintain its military might and outspend the Soviet Union was the right to print toilet paper currency and the acceptance of the US dollar by her allies as the world’s reserve currency.
But why did the countries allied to the US during the Cold War accepted the status quo?
Simple! They were all conned into believing that without the protection of Big Brother and its military outreach, they would be swallowed up by the communist menace. They agreed to march to the tune of the US Pied-Piper.
The next big question – why did the so-called “liberated” former communist allies of the Soviet bloc jump on the bandwagon?
Simple! They all believed in the illusion that was fostered by the global banks, led by Goldman Sachs that trading and selling their goods and services for the toilet paper US reserve currency would ensure untold wealth and prosperity.
But the biggest game in town was the Asia gambit. Japan, after a decade of recession following the burst of her property bubble did not have the means and the capacity to bring the game to the next level as envisaged by the financial architects in Goldman Sachs.
And China was the biggest beneficiary. The senior management of Goldman Sachs brokered a secret pact with China’s leaders that in exchange for orchestrating the most massive injection of US dollar capital and wholesale re-location of manufacturing capacity in the history of the global economy, China would recycle their hard-earned US toilet paper reserve currency wealth into US treasuries and other US debt instruments.
This was the necessary condition precedent for the global financial casino to rise to the next level of play.
Why?
The New Game
The financial architects at Goldman Sachs had a master plan – to dominate the global financial system. The means to achieve this financial power was the Shadow Banking System, the lynchpin being the derivative market and the securitization of assets, real and synthetic. The stakes would be huge, in the hundreds of US$ trillions and the way to transform the market was through massive leverage at all levels of the financial game.
But there was an inherent weakness in the overall scheme – the threat of inflation, more precisely hyperinflation. Such huge amounts of liquidity in the system would invariably trigger the depreciation of the reserve currency and the confidence in the system.
Hence the need for a system to keep in check price inflation and the illusion that the purchasing power of the toilet paper reserve currency could be maintained.
This is where China came in. Once China became the world’s factory, the problem would be resolved. When a suit which previously cost US$600 could be had for less than US$100, and a pair of shoes for less than US$5, the scam masterminds concluded that there would be no foreseeable threat to the largest casino operation in history.
China agreed to the exchange as it has over a billion mouths to feed and jobs for hundreds of millions needed to be secured, without which the system could not be maintained. But China was pragmatic enough to have two “economic systems” – a Yuan based domestic economy and a US$ based export economy, in the hope that the profits and benefits of the export economy would enable China to transform and establish a viable and dynamic domestic market which in time would replace the export dependent economy. It was a deal made with the devil, but there were no viable alternative options at the material time, more so after the collapse of the Soviet Union.
The Next Level of the Game
The next level of the game was reached when the toilet paper reserve currency literally went virtual – through the simple operation of a click of the mouse in the computers of the global banks.
The big boys at Goldman Sachs and other global banks were more than content to leave Las Vegas for the mafia and their miserable billions in turnover. The profits were considered dimes when compared to the hundreds of trillions generated by the virtual casino. It was a financial conquest beyond their wildest dreams. They even called themselves, “Master of the Universe”. Creating massive debts was the new game, and the big boys could even leverage more than 40 times capital! Asset values soared with so much liquidity chasing so few good assets.
However, the financial wizards failed to appreciate and or underestimate the amount of financial products that were needed to keep the game in play. They resorted to financial engineering – the securitization of assets. And when real assets were insufficient for securitization, synthetic assets were created. Soon enough, toxic waste was even considered as legitimate instruments for the game so long as it could be unloaded to greedy suckers with no recourse to the originators of these so-called investments.
For a time, it looked as if the financial wizards have solved the problem of how to feed the global casino monster.
Unfortunately, the music stopped and the bubble burst! And as they say the rest is history.
The Goldman Sachs Remedy
When losses are in the US$ trillions and whatever assets / capital remaining are in the US$ billions, we have a huge problem – a financial black-hole.
The preferred remedy by the financial masterminds at Goldman Sachs was to create another hoax – that if the big global banks were to fail triggering a systemic collapse, there would be Armageddon. These “too big to fail” banks must be injected with massive amount of virtual monies to recapitalize and get rid of the toxic assets on their balance sheet. The major central banks in the developed countries in cahoots with Goldman Sachs sang the same tune. All sorts of schemes were conjured to legitimize this bailout.
In essence, what transpired was the mere transfer of monies from the left pocket to the right pocket, with the twist that the banks were in fact helping the Government to overcome the financial crisis.
The Fed and key central banks agreed to lend “virtual monies” to the “too big to fail” global banks at zero or near zero interest rate and these banks in turn would “deposit” these monies with the Fed and other central banks at agreed interest rates. These transactions are all mere book entries. Other “loans” from the Fed and central banks (again at zero or near zero interest rates) are used to purchase government debts, these debts being the stimulus monies needed to revive the real economy and create jobs for the growing unemployed. So in essence, these banks are given “free money” to lend to the government at prior agreed interest rates with no risks at all. It is a hoax!
These “monies” are not even the dollar bills, but mere book entries created out of thin air.
So when the Fed injects US$ trillions into the banking system, it merely credits the amount in the accounts of the “too big to fail” banks at the Fed.
When the system is applied to international trade, the same modus operandi is used to pay for the goods imported from China, Japan etc.
For the rest of world, when buying goods denominated in US$, these countries must produce goods and services, sell them for dollars in order to purchase goods needed in their country. Simply put, they have to earn an income to purchase whatever goods and services needed. In contrast, all that the US needs to do is to create monies out of thin air and use them to pay for their imports!
The US can get away with this scam because it has the military muscle to compel and enforce this hoax. As stated earlier, this status quo was accepted especially during the Cold War and with some reluctance post the collapse of the Soviet Union, but with a proviso – that the US agrees to be the consumer of last resort. This arrangement provided some comfort because countries which have sold their goods to the US, can now use the dollars to buy goods from other countries as more than 80 per cent of world trade is denominated in dollars especially crude oil, the lifeline of the global economy.
But with the US in full bankruptcy and its citizens (the largest consumers in the world) being unable to borrow further monies to buy fancy goods from China, Japan and the rest of the world, the demand for dollar has evaporated. The dollar status as a reserve currency and its usefulness is being questioned more vocally.
The End Game
The present fallout can be summarized in simple terms:
Should a bankrupt country (the US) be allowed to use money created out of thin air to pay for goods produced with the sweat and tears of hardworking citizens of exporting countries? Adding insult to injury, the same dollars are now purchasing a lot less than before. So what is the use of being paid in a currency that is losing rapidly its value?
On the other hand, the US is telling the whole world, especially the Chinese that if they are not happy with the status quo, there is nothing to stop them from selling to the other countries and accepting their currencies. But if they want to sell to the mighty USA, they must accept US toilet paper reserve currency and its right to create monies out of thin air!
This is the ultimate poker game and whosoever blinks first loses and will suffer irreparable financial consequences. But who has the winning hand?
The US does not have the winning hand. Neither has China the winning hand.
This state of affairs cannot continue for long, for whatever cards the US or China may be contemplating to throw at the table to gain strategic advantage, any short term gains will be pyrrhic, for it will not be able to address the underlying antagonistic contradictions.
When the survival of the system is dependent on the availability of credit (i.e. accumulating more debts) it is only a matter of time before both the debtor and creditor come to the inevitable conclusion that the debt will never be paid. And unless the creditor is willing to write off the debt, resorting to drastic means to collect the outstanding debt is inevitable.
It would be naïve to think that the US would quietly allow itself to be foreclosed! When we reach that stage, war will be inevitable. It will be the US-UK-Israel Axis against the rest of the world.
The Prelude to the End Game
The US economy will be spiraling out of control in the coming months and will reach critical point by the end of the 1st quarter 2010 and implode by the 2nd quarter.
The massive US$ trillions of dollars stimulus has failed to turn the economy around. The massive blood transfusion may have kept the patient alive, but there are numerous signs of multi-organ failure.
There will be another wave of foreclosures of residential and more importantly commercial properties by end December and early 2010. And the foreclosed properties in 2009 will lead to depressed prices once they come through the pipeline. Home and commercial property values will plunge. Banks’ balance sheets will turn ugly and whatever “record profits” in the last two quarters of 2009 will not cover the additional red ink.
Given the above situation, will the Fed continue to buy mortgage-backed securities to prop up the markets? The Fed has already spent trillions buying Fannie Mae and Freddie Mac mortgages with no potential substitute buyer in sight. Therefore, the Fed’s balance sheet is as toxic as the “too big to fail” banks that it rescued.
In the circumstances, it makes no sense for anyone to assert that the worst is over and that the global economy is on the road to recovery.
And the surest sign that all is not well with the big banks is the recent speech by the President of the Federal Reserve Bank of New York, William Dudley at Princeton, New Jersey when he said that the Fed would curtail the risk of future liquidity crisis by providing a “backstop” to solvent firms with sufficient collateral.
This warning and assurance deserves further consideration. Firstly, it is a contradiction to state that a solvent firm with sufficient collateral would in fact encounter a liquidity crisis to warrant the need for a fall back on the Fed. It is in fact an admission that banks are not sufficiently capitalized and when the second wave of the tsunami hits them again, confidence will be sorely lacking.
Dudley actually said that, “the central bank could commit to being the lender of last resort... [and this would reduce] the risk of panics sparked by uncertainty among lenders about what other creditors think”.
To put it bluntly what he is saying is that the Fed will endeavour to avoid the repeat of the collapse of Bear Stearns, Lehman Bros and AIG. It is also an indication that the remaining big banks are in trouble.
It is interesting to note that a Bloomberg report in early November revealed that Citigroup Inc and JP Morgan Chase have been hoarding cash. The former has almost doubled its cash holdings to US$244.2 billion. In the case of the latter, the cash hoard amounted to US$453.6 billion. Yet, given this hoarding by the leading banks, the New York Federal Reserve Bank had to reassure the financial community that it is ready to inject massive liquidity to prop up the system.
It should come as no surprise that the value of the dollar is heading south.
When currencies are being debased, volatility in the stock market increases. But the gains are not worth the risks and if anyone is still in the market, they will be wiped out by the 1st quarter of 2010. The S&P may have shot up since the beginning of the year by over 25 per cent but it has been out-performed by gold. The gains have also lagged behind the official US inflation rate. It has in fact delivered a total return after inflation of approximately minus 25 per cent. When Meredith Whitney remarked that, “I don’t know what’s going on in the market right now, because it makes no sense to me”, it is time to get out of the market fast.
In a report to its clients, Société Générale warned that public debt would be massive in the next two years – 105 per cent of GDP in the UK, 125 per cent in the US and in Europe and 270 per cent in Japan. Global debt would reach US$45 trillion.
At some point in time, all these debts must be repaid. How will these debts be repaid?
If we go by what Bernanke has been preaching and practising, it means more toilet paper currency will be created to repay the debts.
As a result, debasement of currencies will continue and this will further aggravate existing tensions between the competing economies. And when creditors have enough of this toilet paper scam, expect violent reactions!
Sunday 15 November 2009
Price Earnings Ratio: The Cyclically Adjusted P/E Ratio
Today, we’re presenting a technical discussion on an interesting investment concept, care of Manshu Verma from One Mint, an investment blog that covers topics ranging from Indian IPOs to U.S. ETFs, and everything in between.
Cyclically Adjusted P/E Ratio (CAPE) is an enhanced way of calculating the P/E ratio which considers the average inflation adjusted earnings of a company over the last 10 years. This smoothens out the fluctuations in earnings that occur from one year to the next, while still giving a sense of how high or low the price of a particular stock is.
To understand how CAPE is calculated, we need to take a look at how P/E Ratio is calculated first.
Price to Earnings Ratio considers two things:
* Market price of the stock.
* Earnings Per Share or EPS of the company.
P/E Ratio is calculated by dividing the market price by the earnings per share of the company.
P/E = Market Price / Earnings Per Share
EPS can be last year’s earnings or even the projected earnings for the next year. CAPE takes the average earnings of the last ten years and adjusts it for inflation: this smoothens out the fluctuations in earnings due to booms and busts, which occur from one year to another.
CAPE was originally developed by Benjamin Graham, and has been used by various analysts since then; the most notable proponent has been Professor Robert Shiller of Yale University. You can find data on CAPE on Professor Shiller’s website.
In this interview, Prof. Shiller states that the highest CAPE ratio in the US market has been 46 during the boom of 2000, and the average CAPE has been 15. Also in the interview, Prof. Shiller makes two very interesting points.
1. Mean Reversion: The first is about mean reversion: if CAPE is higher than the average of 15, and certainly, when it is as high as 46, it is quite likely to revert to the mean — and come back to 15. The same is true in reverse also; when the market is trading below the average CAPE, it is likely to move higher. So, that means it is a fairly good indicator to know which direction the market is headed.
2. No one knows when it will turn around: If you want to time the market or predict market direction, knowing that the CAPE is below or above the mean is not good enough. You really need to know when it will turn. If it is at 10, mean reversion indicates that it should go back to 15 — but that doesn’t mean that it can’t go to 6 first. So, there is no way to know the exact bottom of the market, and trying to predict that is like catching a falling knife.
I personally think that this measure is pretty useful for helping us gauge extremes. While there is no way to predict the top or the bottom of a stock’s (or market’s) price — you certainly don’t want to be buying a stock when its CAPE is at 46, and you don’t want to be selling a stock when the P/E ratio is at 6!
(Thanks to Smart Wallet)
Cyclically Adjusted P/E Ratio (CAPE) is an enhanced way of calculating the P/E ratio which considers the average inflation adjusted earnings of a company over the last 10 years. This smoothens out the fluctuations in earnings that occur from one year to the next, while still giving a sense of how high or low the price of a particular stock is.
To understand how CAPE is calculated, we need to take a look at how P/E Ratio is calculated first.
Price to Earnings Ratio considers two things:
* Market price of the stock.
* Earnings Per Share or EPS of the company.
P/E Ratio is calculated by dividing the market price by the earnings per share of the company.
P/E = Market Price / Earnings Per Share
EPS can be last year’s earnings or even the projected earnings for the next year. CAPE takes the average earnings of the last ten years and adjusts it for inflation: this smoothens out the fluctuations in earnings due to booms and busts, which occur from one year to another.
CAPE was originally developed by Benjamin Graham, and has been used by various analysts since then; the most notable proponent has been Professor Robert Shiller of Yale University. You can find data on CAPE on Professor Shiller’s website.
In this interview, Prof. Shiller states that the highest CAPE ratio in the US market has been 46 during the boom of 2000, and the average CAPE has been 15. Also in the interview, Prof. Shiller makes two very interesting points.
1. Mean Reversion: The first is about mean reversion: if CAPE is higher than the average of 15, and certainly, when it is as high as 46, it is quite likely to revert to the mean — and come back to 15. The same is true in reverse also; when the market is trading below the average CAPE, it is likely to move higher. So, that means it is a fairly good indicator to know which direction the market is headed.
2. No one knows when it will turn around: If you want to time the market or predict market direction, knowing that the CAPE is below or above the mean is not good enough. You really need to know when it will turn. If it is at 10, mean reversion indicates that it should go back to 15 — but that doesn’t mean that it can’t go to 6 first. So, there is no way to know the exact bottom of the market, and trying to predict that is like catching a falling knife.
I personally think that this measure is pretty useful for helping us gauge extremes. While there is no way to predict the top or the bottom of a stock’s (or market’s) price — you certainly don’t want to be buying a stock when its CAPE is at 46, and you don’t want to be selling a stock when the P/E ratio is at 6!
(Thanks to Smart Wallet)
LEARN LEADERSHIP SACHIN TENDULKAR WAY
What are the things that set the great man apart from mere mortals? The ability to read the game acutely, pick the ball early, dedication, discipline and more
Virender Sehwag on Sachin Tendulkar As told to Nagraj Gollapudi
The first time Virender Sehwag met Sachin Tendulkar was in March 2001, at a practice session ahead of the first ODI of the home series against Australia. For Sehwag, Tendulkar was the man who had inspired him to skip exams in school and allowed him to dream of cricket as a career. Sehwag was shy then, and didn't speak to his hero. He got 58 off 51 balls and picked up three wickets. Tendulkar later walked up to him and said, "You've got talent. Continue playing the same way and I'm sure you will make your name." That ability to motivate youngsters is one of the traits, Sehwag says, that makes Tendulkar special. Here he tells Cricinfo about 10 things that make Tendulkar stand out.
Discipline
He never comes late to any practice session, never comes late to the team bus, never comes late to any meeting - he is always five minutes ahead of time. If you are disciplined, it shows you are organised. And then he is ready for anything on the cricket field.
Mental strength
I've learned a lot of things from him as far as mental strength goes - on how to tacke a situation, how to tackle a ball or bowler. If you are not tough mentally, you can't score the number of runs and centuries he has in the last two decades. He is a very good self-motivator.
He always said to me: whatever the situation or whichever the bowler you face, always believe in yourself. There was this occasion in South Africa, early in my career, when I was not scoring runs fluently, so he suggested I try a few mental techniques that had worked for him. One of the things he said was: Always tell yourself you are better than others. You have some talent and that is why you are playing for India, so believe in yourself.
Picking the ball early
He can pick the ball earlier than other batsmen and that is a mark of a great batsman. He is virtually ready for the ball before it is bowled. Only great players can have two shots for one ball, like Tendulkar does, and a big reason is that he picks the ball very early.
Soft hands
I've never seen him play strokes with hard hands. He always tries to play with soft hands, always tries to meet the ball with the centre of the bat. That is timing. I have never been able to play consistently with soft hands.
Planning
One reason he can convert his fifties into hundreds is planning: which bowler he should go after, which bowler he should respect, in which situation he should play aggressively, in which situation he should defend. It is because he has spent hours thinking about all of it, planning what to do. He knows what a bowler will do in different situations and he is ready for it.
In my debut Test he scored 155 and he knew exactly what to do every ball. We had already lost four wickets (68 for 4) when I walked in, and he warned me about the short ball. He told me that the South African fast bowlers would bowl short-of-length balls regularly, but he knew how to counter that. If they bowled short of a length, he cut them over slips; when they bowled outside off stump, he cut them; and when they tried to bowl short into his body, he pulled with ease. Luckily his advice had its effect on me, and I made my maiden hundred!
Adaptability
This is one area where he is really fast. And that is because he is such a good reader of the game. After playing just one or two overs he can tell you how the pitch will behave, what kind of bounce it has, which length is a good one for the batsman, what shots to play and what not to.
A good example was in the Centurion ODI of the 2006-07 series. India were batting first. Shaun Pollock bowled the first over and fired in a few short-of-length balls, against which I tried to play the back-foot punch. Tendulkar cautioned me immediately and said that shot was not a good option. A couple of overs later I went for it again and was caught behind, against Pollock.
Making bowlers bowl to his strengths
He will leave a lot of balls and give the bowler a false sense of security, but the moment it is pitched up to the stumps or closer to them, Tendulkar will easily score runs.
If the bowler is bowling outside off stump Tendulkar can disturb his line by going across outside off stump and playing to midwicket. He puts doubts in the bowler's mind, so that he begins to wonder if he has bowled the wrong line and tries to bowl a little outside off stump - which Tendulkar can comfortably play through covers.
In Sydney in 2004, in the first innings he didn't play a single cover drive, and remained undefeated on 241. He decided to play the straight drive and flicks, so he made the bowlers pitch to his strengths. It is not easy. In the Test before that, in Melbourne, he had got out trying to flick. After that when we had a chat he said he was getting out playing the cover drive and the next game he would avoid the cover drive. I thought he was joking because nobody cannot not play the cover drive - doesn't matter if you are connecting or not. I realised he was serious in Sydney when he was on about 180-odd and he had missed plenty of opportunities to play a cover drive. I was stunned.
Ability to bat in different gears
This is one aspect of batting I have always discussed with Tendulkar: how he controls his game; the way he can change gears after scoring a half-century. Suddenly he scores 10-12 runs an over, or maybe a quick 30 runs in five overs, and then again slows down and paces his innings.
He has maintained that it all depends on the team's position. If you are in a good position you tend to play faster. He also pointed out that the batsman must always think about what can happen if he gets out and the consequences for the team. The best example is the knock of 175. I was confident he would pull it off for India and he almost did.
Building on an innings
I learned from Tendulkar how to get big hundreds. He told me early on that once you get a hundred you are satisfied for yourself. But it is also the best time to convert that into a bigger score for the team because then the team will be in a good position.
If you look at my centuries they have always been big. A good instance of this was in Multan in 2004, when he told me I had given away a good position in Melbourne (195) the previous year and the team lost, and I needed to keep that in mind against Pakistan. In Multan, in the first hundred of the triple century I had hit a few sixes. He walked up to me after I reached the century and said he would slap me if I hit any further sixes. I said why. He said that if I tried hitting a six and got out the team would lose the control over the game, and I needed to bat through the day. So I didn't hit a single six till I reached 295. By then India were 500-plus and I told him I was going to hit a six!
Dedication
This is the most important aspect of his success. In his life cricket comes first. When he is on tour he is thinking about nothing but cricket, and when he is not on tour he dedicates quality time to his family. That shows his dedication to the game and to his family. He has found the right balance.
Virender Sehwag on Sachin Tendulkar As told to Nagraj Gollapudi
The first time Virender Sehwag met Sachin Tendulkar was in March 2001, at a practice session ahead of the first ODI of the home series against Australia. For Sehwag, Tendulkar was the man who had inspired him to skip exams in school and allowed him to dream of cricket as a career. Sehwag was shy then, and didn't speak to his hero. He got 58 off 51 balls and picked up three wickets. Tendulkar later walked up to him and said, "You've got talent. Continue playing the same way and I'm sure you will make your name." That ability to motivate youngsters is one of the traits, Sehwag says, that makes Tendulkar special. Here he tells Cricinfo about 10 things that make Tendulkar stand out.
Discipline
He never comes late to any practice session, never comes late to the team bus, never comes late to any meeting - he is always five minutes ahead of time. If you are disciplined, it shows you are organised. And then he is ready for anything on the cricket field.
Mental strength
I've learned a lot of things from him as far as mental strength goes - on how to tacke a situation, how to tackle a ball or bowler. If you are not tough mentally, you can't score the number of runs and centuries he has in the last two decades. He is a very good self-motivator.
He always said to me: whatever the situation or whichever the bowler you face, always believe in yourself. There was this occasion in South Africa, early in my career, when I was not scoring runs fluently, so he suggested I try a few mental techniques that had worked for him. One of the things he said was: Always tell yourself you are better than others. You have some talent and that is why you are playing for India, so believe in yourself.
Picking the ball early
He can pick the ball earlier than other batsmen and that is a mark of a great batsman. He is virtually ready for the ball before it is bowled. Only great players can have two shots for one ball, like Tendulkar does, and a big reason is that he picks the ball very early.
Soft hands
I've never seen him play strokes with hard hands. He always tries to play with soft hands, always tries to meet the ball with the centre of the bat. That is timing. I have never been able to play consistently with soft hands.
Planning
One reason he can convert his fifties into hundreds is planning: which bowler he should go after, which bowler he should respect, in which situation he should play aggressively, in which situation he should defend. It is because he has spent hours thinking about all of it, planning what to do. He knows what a bowler will do in different situations and he is ready for it.
In my debut Test he scored 155 and he knew exactly what to do every ball. We had already lost four wickets (68 for 4) when I walked in, and he warned me about the short ball. He told me that the South African fast bowlers would bowl short-of-length balls regularly, but he knew how to counter that. If they bowled short of a length, he cut them over slips; when they bowled outside off stump, he cut them; and when they tried to bowl short into his body, he pulled with ease. Luckily his advice had its effect on me, and I made my maiden hundred!
Adaptability
This is one area where he is really fast. And that is because he is such a good reader of the game. After playing just one or two overs he can tell you how the pitch will behave, what kind of bounce it has, which length is a good one for the batsman, what shots to play and what not to.
A good example was in the Centurion ODI of the 2006-07 series. India were batting first. Shaun Pollock bowled the first over and fired in a few short-of-length balls, against which I tried to play the back-foot punch. Tendulkar cautioned me immediately and said that shot was not a good option. A couple of overs later I went for it again and was caught behind, against Pollock.
Making bowlers bowl to his strengths
He will leave a lot of balls and give the bowler a false sense of security, but the moment it is pitched up to the stumps or closer to them, Tendulkar will easily score runs.
If the bowler is bowling outside off stump Tendulkar can disturb his line by going across outside off stump and playing to midwicket. He puts doubts in the bowler's mind, so that he begins to wonder if he has bowled the wrong line and tries to bowl a little outside off stump - which Tendulkar can comfortably play through covers.
In Sydney in 2004, in the first innings he didn't play a single cover drive, and remained undefeated on 241. He decided to play the straight drive and flicks, so he made the bowlers pitch to his strengths. It is not easy. In the Test before that, in Melbourne, he had got out trying to flick. After that when we had a chat he said he was getting out playing the cover drive and the next game he would avoid the cover drive. I thought he was joking because nobody cannot not play the cover drive - doesn't matter if you are connecting or not. I realised he was serious in Sydney when he was on about 180-odd and he had missed plenty of opportunities to play a cover drive. I was stunned.
Ability to bat in different gears
This is one aspect of batting I have always discussed with Tendulkar: how he controls his game; the way he can change gears after scoring a half-century. Suddenly he scores 10-12 runs an over, or maybe a quick 30 runs in five overs, and then again slows down and paces his innings.
He has maintained that it all depends on the team's position. If you are in a good position you tend to play faster. He also pointed out that the batsman must always think about what can happen if he gets out and the consequences for the team. The best example is the knock of 175. I was confident he would pull it off for India and he almost did.
Building on an innings
I learned from Tendulkar how to get big hundreds. He told me early on that once you get a hundred you are satisfied for yourself. But it is also the best time to convert that into a bigger score for the team because then the team will be in a good position.
If you look at my centuries they have always been big. A good instance of this was in Multan in 2004, when he told me I had given away a good position in Melbourne (195) the previous year and the team lost, and I needed to keep that in mind against Pakistan. In Multan, in the first hundred of the triple century I had hit a few sixes. He walked up to me after I reached the century and said he would slap me if I hit any further sixes. I said why. He said that if I tried hitting a six and got out the team would lose the control over the game, and I needed to bat through the day. So I didn't hit a single six till I reached 295. By then India were 500-plus and I told him I was going to hit a six!
Dedication
This is the most important aspect of his success. In his life cricket comes first. When he is on tour he is thinking about nothing but cricket, and when he is not on tour he dedicates quality time to his family. That shows his dedication to the game and to his family. He has found the right balance.
14 Management Principles from Henri Fayol
The 14 Management Principles from Henri Fayol (1841-1925) are:
1. Division of Work. Specialization allows the individual to build up experience, and to continuously improve his skills. Thereby he can be more productive.
2. Authority. The right to issue commands, along with which must go the balanced responsibility for its function.
3. Discipline. Employees must obey, but this is two-sided: employees will only obey orders if management play their part by providing good leadership.
4. Unity of Command. Each worker should have only one boss with no other conflicting lines of command.
5. Unity of Direction. People engaged in the same kind of activities must have the same objectives in a single plan. This is essential to ensure unity and coordination in the enterprise. Unity of command does not exist without unity of direction but does not necessarily flows from it.
6. Subordination of individual interest (to the general interest). Management must see that the goals of the firms are always paramount.
7. Remuneration. Payment is an important motivator although by analyzing a number of possibilities, Fayol points out that there is no such thing as a perfect system.
8. Centralization (or Decentralization). This is a matter of degree depending on the condition of the business and the quality of its personnel.
9. Scalar chain (Line of Authority). A hierarchy is necessary for unity of direction. But lateral communication is also fundamental, as long as superiors know that such communication is taking place. Scalar chain refers to the number of levels in the hierarchy from the ultimate authority to the lowest level in the organization. It should not be over-stretched and consist of too-many levels.
10. Order. Both material order and social order are necessary. The former minimizes lost time and useless handling of materials. The latter is achieved through organization and selection.
11. Equity. In running a business a ‘combination of kindliness and justice’ is needed. Treating employees well is important to achieve equity.
12. Stability of Tenure of Personnel. Employees work better if job security and career progress are assured to them. An insecure tenure and a high rate of employee turnover will affect the organization adversely.
13. Initiative. Allowing all personnel to show their initiative in some way is a source of strength for the organization. Even though it may well involve a sacrifice of ‘personal vanity’ on the part of many managers.
14. Esprit de Corps. Management must foster the morale of its employees. He further suggests that: “real talent is needed to coordinate effort, encourage keenness, use each person’s abilities, and reward each one’s merit without arousing possible jealousies and disturbing harmonious relations.”
What is Management? Five elements
Fayol's definition of management roles and actions distinguishes between Five Elements:
1. Prevoyance. (Forecast & Plan). Examining the future and drawing up a plan of action. The elements of strategy.
2. To organize. Build up the structure, both material and human, of the undertaking.
3. To command. Maintain the activity among the personnel.
4. To coordinate. Binding together, unifying and harmonizing all activity and effort.
5. To control. Seeing that everything occurs in conformity with established rule and expressed command.
1. Division of Work. Specialization allows the individual to build up experience, and to continuously improve his skills. Thereby he can be more productive.
2. Authority. The right to issue commands, along with which must go the balanced responsibility for its function.
3. Discipline. Employees must obey, but this is two-sided: employees will only obey orders if management play their part by providing good leadership.
4. Unity of Command. Each worker should have only one boss with no other conflicting lines of command.
5. Unity of Direction. People engaged in the same kind of activities must have the same objectives in a single plan. This is essential to ensure unity and coordination in the enterprise. Unity of command does not exist without unity of direction but does not necessarily flows from it.
6. Subordination of individual interest (to the general interest). Management must see that the goals of the firms are always paramount.
7. Remuneration. Payment is an important motivator although by analyzing a number of possibilities, Fayol points out that there is no such thing as a perfect system.
8. Centralization (or Decentralization). This is a matter of degree depending on the condition of the business and the quality of its personnel.
9. Scalar chain (Line of Authority). A hierarchy is necessary for unity of direction. But lateral communication is also fundamental, as long as superiors know that such communication is taking place. Scalar chain refers to the number of levels in the hierarchy from the ultimate authority to the lowest level in the organization. It should not be over-stretched and consist of too-many levels.
10. Order. Both material order and social order are necessary. The former minimizes lost time and useless handling of materials. The latter is achieved through organization and selection.
11. Equity. In running a business a ‘combination of kindliness and justice’ is needed. Treating employees well is important to achieve equity.
12. Stability of Tenure of Personnel. Employees work better if job security and career progress are assured to them. An insecure tenure and a high rate of employee turnover will affect the organization adversely.
13. Initiative. Allowing all personnel to show their initiative in some way is a source of strength for the organization. Even though it may well involve a sacrifice of ‘personal vanity’ on the part of many managers.
14. Esprit de Corps. Management must foster the morale of its employees. He further suggests that: “real talent is needed to coordinate effort, encourage keenness, use each person’s abilities, and reward each one’s merit without arousing possible jealousies and disturbing harmonious relations.”
What is Management? Five elements
Fayol's definition of management roles and actions distinguishes between Five Elements:
1. Prevoyance. (Forecast & Plan). Examining the future and drawing up a plan of action. The elements of strategy.
2. To organize. Build up the structure, both material and human, of the undertaking.
3. To command. Maintain the activity among the personnel.
4. To coordinate. Binding together, unifying and harmonizing all activity and effort.
5. To control. Seeing that everything occurs in conformity with established rule and expressed command.
Saturday 14 November 2009
Diversity Management
To some extent demographic changes and globalization are rendering moot the motives that drove equal employment legislation. Employers, in other words, now have little choice but to willingly push for more diversity. White males no longer dominate the labour force, and women and minorities represent the lion’s share of labour force growth over the foreseeable future. Furthermore, globalization increasingly requires employers to hire minority members with the cultural and language skills to deal with customers abroad. (Thus America’s Central Intelligence Agency is aggressively recruiting applicants with Middle Eastern language skills). As the Wall street Journal recently put it: companies do more and more business around the world, diversity isn’t simply a matter of doing what is fair or good public relations. It’s business imperative. So, employers are increasingly striving for racial, ethnic, and sexual workforce balance and harmony as a matter of self interest. In this context, diversity greatly refers to the variety or multiplicity of demographic features that characterize a company’s workforce, particularly in terms of race, sex, culture, national origin, handicap, age, and religion.
However, diversity is potentially a double edged sword. Managing diversity means maximizing diversity’s potential benefits (greater cultural awareness and broader language skills, for distance) while minimizing the potential barriers (such as prejudices and bias) that can undermine the company’s performance.
In practice, diversity management involves both compulsory and voluntary management actions. For example, we’ve just seen that there many legally compulsory actions employers must take minimize employment discrimination. But while such compulsory actions can reduce the more blatant diversity barriers, blending a diverse workforce into a close knit and productive community also requires other steps. Any such diversity management program usually mans starting at the top, as follows:
Provide strong leadership: companies with exemplary reputations in managing diversity typically have CEOs who champion diversity’s benefits. For example, they take strong stands on advocating the need for and advantages of a diverse workforce, and act as role models for exemplifying pro-diversify behaviours, such as by promoting employees even handedly.
Assess the situation: The diversity management program itself typically starts with the company assessing the current state of affairs with respect to diversity. In particular, how diverse are we, and are there any diversity-related issues we need to address? Common tools here include equal employment hiring and retention metrics, employee attitude surveys, management and employee evaluations and focus groups.
Provide diversity training and education: Assuming the assessment reveals issues the firm needs to address to address, some type of change program is in order. This frequently involves some type of employee training and education program, for instance having employee discuss with expert trainers the values of diversity and the types of behaviours and prejudices that may undermine it. Diversity training often aims at sensitizing all employees to the need to value differences and build esteem and at generally creating a more smoothly functioning and hospitable environment for the firm’s diverse workforce.
Change culture and management systems: To reinforce the training, management also needs to reinforce the words of the training with deeds. Ideally, combine the training with other concrete steps aimed at changing the organization’s values, culture, and management systems. Change the bonus plan to incentive plan for managers; to improve their departments’ inter group conflict and employee attitude survey scores.
Evaluate the directly management program: For example, do employee attitude surveys now indicate any improvements in employees’ attitudes towards diversity?
In creating diversity management programs, don’t ignore obvious issues. For example, training immigrants in their native languages can facilitate learning and ensure compliance with matters such as safety rules and harassment policies, and thus ease their entry into your workforce. Supervisor resistance is another issue. One study, in a large British retailer, found that typical diversity prescriptions like “recognize and respond to individual differences” conflicted with the supervisor’s inclinations to treat everyone even handedly.
However, diversity is potentially a double edged sword. Managing diversity means maximizing diversity’s potential benefits (greater cultural awareness and broader language skills, for distance) while minimizing the potential barriers (such as prejudices and bias) that can undermine the company’s performance.
In practice, diversity management involves both compulsory and voluntary management actions. For example, we’ve just seen that there many legally compulsory actions employers must take minimize employment discrimination. But while such compulsory actions can reduce the more blatant diversity barriers, blending a diverse workforce into a close knit and productive community also requires other steps. Any such diversity management program usually mans starting at the top, as follows:
Provide strong leadership: companies with exemplary reputations in managing diversity typically have CEOs who champion diversity’s benefits. For example, they take strong stands on advocating the need for and advantages of a diverse workforce, and act as role models for exemplifying pro-diversify behaviours, such as by promoting employees even handedly.
Assess the situation: The diversity management program itself typically starts with the company assessing the current state of affairs with respect to diversity. In particular, how diverse are we, and are there any diversity-related issues we need to address? Common tools here include equal employment hiring and retention metrics, employee attitude surveys, management and employee evaluations and focus groups.
Provide diversity training and education: Assuming the assessment reveals issues the firm needs to address to address, some type of change program is in order. This frequently involves some type of employee training and education program, for instance having employee discuss with expert trainers the values of diversity and the types of behaviours and prejudices that may undermine it. Diversity training often aims at sensitizing all employees to the need to value differences and build esteem and at generally creating a more smoothly functioning and hospitable environment for the firm’s diverse workforce.
Change culture and management systems: To reinforce the training, management also needs to reinforce the words of the training with deeds. Ideally, combine the training with other concrete steps aimed at changing the organization’s values, culture, and management systems. Change the bonus plan to incentive plan for managers; to improve their departments’ inter group conflict and employee attitude survey scores.
Evaluate the directly management program: For example, do employee attitude surveys now indicate any improvements in employees’ attitudes towards diversity?
In creating diversity management programs, don’t ignore obvious issues. For example, training immigrants in their native languages can facilitate learning and ensure compliance with matters such as safety rules and harassment policies, and thus ease their entry into your workforce. Supervisor resistance is another issue. One study, in a large British retailer, found that typical diversity prescriptions like “recognize and respond to individual differences” conflicted with the supervisor’s inclinations to treat everyone even handedly.
Social Responsibilty of a Firm
Social responsibility: A firm’s obligation, beyond that required by the law and economics to pursue long term goals that are beneficial to society.
What do we mean when we talk about social, responsibility? It’s a business firm’s obligation, beyond that required by the law and economies, to pursue long term goals that are good for society. Note that this definition assumes that business obeys the law and pursues economic interests. We take as a given that all business firms those that are socially responsible and those that are not will obey all laws that society imposes. Also note that this definition views business as a moral agent. In its effort to do good for society, it must differentiate between right and wrong.
Social obligation: The obligation of a business to meet its economic and legal responsibilities and no more
We can understand social responsibility better if we compare it with two similar concepts: social obligation and social responsiveness. Social obligation is the foundation of a business’ social involvement. A business has fulfilled its social obligation when it meets its economic and legal responsibilities and no more. It does the minimum that the law requires. A firm pursues social goals only to the extent that they contribute to its economic goals. In contrast obligation, both social responsibility and social responsiveness go beyond merely meeting basic economic and legal standards. For example, both might mean respecting the community in which the company operates, treating all employees fairly, respecting the environment supporting career goals and special works needs of women and minorities, or not doing business in countries where human rights violations occur.
Social responsiveness: The ability of a firm to adapt to changing societal conditions.
Social responsibility also adds an ethical imperative to do those things that make society better and not to do those that could make it worse. Social responsiveness refers to the capacity of a firm to adapt to changing societal conditions. Social responsibility requires business to determine what is right or wrong and, thus, seek fundamental ethical truths. Social responsiveness is guided by social norms that can provide managers with a meaningful guide for decision making.
For example, many multinationals and large Indian companies are now making a move towards including differently enabled people on their payrolls. Companies such as HSBC, Sony TV, Essar, Hiranandani Group, Bharti, Prudential and Zenta even attempt to design their infrastructure and facilities to be as user friendly as possible for differently enabled employees, and are making a committed move towards integrating them with the mainstream workforce.
However, as responsible citizens, and future industry leaders, we need to examine whether this is a case of too little, too late. India has an estimated 6 percent of its population as possessing some disability. This figure is a highly conservative estimate, given the narrow definition of “disability” as well as the obvious problems of relying on the census figures in a country like India. Moreover, even going by conservative estimates, this means a population of 6 crores in India finds it a challenge to get through mainstream education, to travel, and to find employment. Corporate India needs to examine whether it is doing enough for this very significant part of our population.
Regardless of one’s own view, whether a manager acts ethically or unethically will depend on several factors. These factors include the individual’s morality, values, personality, and experience; the organization’s culture; and the issue in question. A recent survey, for example, indicated that 82 percent of corporate executives surveyed admitted that they cheat at golf – and 72 percent of them believe that golf and business behaviours are parallel.
What do we mean when we talk about social, responsibility? It’s a business firm’s obligation, beyond that required by the law and economies, to pursue long term goals that are good for society. Note that this definition assumes that business obeys the law and pursues economic interests. We take as a given that all business firms those that are socially responsible and those that are not will obey all laws that society imposes. Also note that this definition views business as a moral agent. In its effort to do good for society, it must differentiate between right and wrong.
Social obligation: The obligation of a business to meet its economic and legal responsibilities and no more
We can understand social responsibility better if we compare it with two similar concepts: social obligation and social responsiveness. Social obligation is the foundation of a business’ social involvement. A business has fulfilled its social obligation when it meets its economic and legal responsibilities and no more. It does the minimum that the law requires. A firm pursues social goals only to the extent that they contribute to its economic goals. In contrast obligation, both social responsibility and social responsiveness go beyond merely meeting basic economic and legal standards. For example, both might mean respecting the community in which the company operates, treating all employees fairly, respecting the environment supporting career goals and special works needs of women and minorities, or not doing business in countries where human rights violations occur.
Social responsiveness: The ability of a firm to adapt to changing societal conditions.
Social responsibility also adds an ethical imperative to do those things that make society better and not to do those that could make it worse. Social responsiveness refers to the capacity of a firm to adapt to changing societal conditions. Social responsibility requires business to determine what is right or wrong and, thus, seek fundamental ethical truths. Social responsiveness is guided by social norms that can provide managers with a meaningful guide for decision making.
For example, many multinationals and large Indian companies are now making a move towards including differently enabled people on their payrolls. Companies such as HSBC, Sony TV, Essar, Hiranandani Group, Bharti, Prudential and Zenta even attempt to design their infrastructure and facilities to be as user friendly as possible for differently enabled employees, and are making a committed move towards integrating them with the mainstream workforce.
However, as responsible citizens, and future industry leaders, we need to examine whether this is a case of too little, too late. India has an estimated 6 percent of its population as possessing some disability. This figure is a highly conservative estimate, given the narrow definition of “disability” as well as the obvious problems of relying on the census figures in a country like India. Moreover, even going by conservative estimates, this means a population of 6 crores in India finds it a challenge to get through mainstream education, to travel, and to find employment. Corporate India needs to examine whether it is doing enough for this very significant part of our population.
Regardless of one’s own view, whether a manager acts ethically or unethically will depend on several factors. These factors include the individual’s morality, values, personality, and experience; the organization’s culture; and the issue in question. A recent survey, for example, indicated that 82 percent of corporate executives surveyed admitted that they cheat at golf – and 72 percent of them believe that golf and business behaviours are parallel.
Wednesday 11 November 2009
Investing in Indian Shares for NRIs - A Guide
Portfolio Investment Scheme
Portfolio Investment Scheme (PIS) allows NRIs to invest in shares of Indian companies in the secondary market on a repatriation or non-repatriation basis. These must be either shares or convertible debentures sold or purchased through a registered stock broker on a recognized stock exchange.
Investments by NRIs
NRIs can invest on either a repatriation or non-repatriation basis using the PIS route for up to 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. This must fall within overall permissible limits and is subject to compliance with RBI (Reserve Bank of India) guidelines, which may change from time to time. Therefore it is wise to be familiar with the overall guidelines and keep up to date on the changes. You may require professional assistance to make sure you comply with the rules.
The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. He cannot trade intra day (i.e. buy and sell on the same day).
On Repatriation basis
Investments on a repatriation basis must be made using funds sourced from foreign exchange through normal banking channels, or from funds held in NRE*/FCNR* accounts maintained in India.
On Non-repatriation basis
Investment in shares purchased on a non-repatriation basis can additionally be made by utilizing funds from NRO* accounts.
Restrictions on Sale/Transfer
Shares purchased by NRIs on the stock exchange under the PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI.
An NRI/OCB (Overseas Corporate Body) can appoint only one designated bank for the purpose of routing the transactions under PINS (Portfolio Investment Scheme is the permission that a NRI requires to trade in the Indian stock market. An NRI can have only one PINS account)
As per recent RBI guidelines, NRI/OCB should have a separate bank account exclusively for PINS purposes. Transactions relating to their personal banking as well as on account of transactions relating to shares acquired other then under PINS, including IPOs, should be routed in a separate bank account not linked to PINS.
The orders need not be placed through the designated bank. However, the reporting of the transaction must be made to the designated bank on the same day of transaction along with the original contract note. The payment and receipt of funds in settlement of such a trade has to be routed through the designated bank account.
Notes on Procedures for opening of PIS Account/ Demat/ Trading
Basic KYC (Know Your Customer) requirements are:
- PAN Card (mandatory)
- Overseas Address Proof (DL, Utility Bill and the latest bank statement)
- Indian Address Proof (this would include one or more of: Indian Passport, Driving License, Latest Bank Statement, Ration Card, Utility Bill)
- Passport/ Visa (copy of all the relevant pages)
- Non Citizens require a PIO/OCI** Card
- NRI must provide copy of Power of Attorney given to the Registered Broker for undertaking sale/purchase of shares on his behalf to the designated branch.
Regulations regarding NRI Trading:
• Intra-day trading is not allowed for NRI clients.
• The client must settle his transactions on Delivery Basis, hence has to take delivery of shares & give delivery of shares (
• Every sale transaction will be credited to client account net of tax. Hence for every sale transaction capital gains will be calculated. Long term capital gains are nil & for short-term a 15% capital gains tax will be charged (For FY08-09).
• TDS (Tax deducted at source) certificates will be issued by the bank and certificate charges will be levied for each sale transaction.
• No set off will be allowed but while filing returns the client can claim set off against the TDS deducted.
• NRI’s have restrictions on buying certain scrips (ie shares) which are daily updated on www.rbi.org.in
• If the client has bought restricted scrip then same will be reversed in the books of the broker & if loss occurred it will be debited to client’s account. Please note that profit will not be passed to client.
Portfolio Investment Scheme (PIS) allows NRIs to invest in shares of Indian companies in the secondary market on a repatriation or non-repatriation basis. These must be either shares or convertible debentures sold or purchased through a registered stock broker on a recognized stock exchange.
Investments by NRIs
NRIs can invest on either a repatriation or non-repatriation basis using the PIS route for up to 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. This must fall within overall permissible limits and is subject to compliance with RBI (Reserve Bank of India) guidelines, which may change from time to time. Therefore it is wise to be familiar with the overall guidelines and keep up to date on the changes. You may require professional assistance to make sure you comply with the rules.
The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. He cannot trade intra day (i.e. buy and sell on the same day).
On Repatriation basis
Investments on a repatriation basis must be made using funds sourced from foreign exchange through normal banking channels, or from funds held in NRE*/FCNR* accounts maintained in India.
On Non-repatriation basis
Investment in shares purchased on a non-repatriation basis can additionally be made by utilizing funds from NRO* accounts.
Restrictions on Sale/Transfer
Shares purchased by NRIs on the stock exchange under the PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI.
An NRI/OCB (Overseas Corporate Body) can appoint only one designated bank for the purpose of routing the transactions under PINS (Portfolio Investment Scheme is the permission that a NRI requires to trade in the Indian stock market. An NRI can have only one PINS account)
As per recent RBI guidelines, NRI/OCB should have a separate bank account exclusively for PINS purposes. Transactions relating to their personal banking as well as on account of transactions relating to shares acquired other then under PINS, including IPOs, should be routed in a separate bank account not linked to PINS.
The orders need not be placed through the designated bank. However, the reporting of the transaction must be made to the designated bank on the same day of transaction along with the original contract note. The payment and receipt of funds in settlement of such a trade has to be routed through the designated bank account.
Notes on Procedures for opening of PIS Account/ Demat/ Trading
Basic KYC (Know Your Customer) requirements are:
- PAN Card (mandatory)
- Overseas Address Proof (DL, Utility Bill and the latest bank statement)
- Indian Address Proof (this would include one or more of: Indian Passport, Driving License, Latest Bank Statement, Ration Card, Utility Bill)
- Passport/ Visa (copy of all the relevant pages)
- Non Citizens require a PIO/OCI** Card
- NRI must provide copy of Power of Attorney given to the Registered Broker for undertaking sale/purchase of shares on his behalf to the designated branch.
Regulations regarding NRI Trading:
• Intra-day trading is not allowed for NRI clients.
• The client must settle his transactions on Delivery Basis, hence has to take delivery of shares & give delivery of shares (
• Every sale transaction will be credited to client account net of tax. Hence for every sale transaction capital gains will be calculated. Long term capital gains are nil & for short-term a 15% capital gains tax will be charged (For FY08-09).
• TDS (Tax deducted at source) certificates will be issued by the bank and certificate charges will be levied for each sale transaction.
• No set off will be allowed but while filing returns the client can claim set off against the TDS deducted.
• NRI’s have restrictions on buying certain scrips (ie shares) which are daily updated on www.rbi.org.in
• If the client has bought restricted scrip then same will be reversed in the books of the broker & if loss occurred it will be debited to client’s account. Please note that profit will not be passed to client.
Thursday 5 November 2009
DEPRECIATION – A SOURCE OF FUND OR NOT?
Arguments in favour of considering it as a source of fund
1. Depreciation is considered as an expired cost. It is included within cost of goods sold. It is an allocated cost which is realised when goods / assets are sold. If sale of an asset is considered as a source of fund, depreciation should also be treated as a source of fund.
2. When fund from operations is found out, depreciation is added back with that.
3. Depreciation does not cause any outflow of cash. Naturally, current assets increase; the working capital also increases. If working capital is considered as a fund, depreciation causes its addition. So, it is a source of fund.
Arguments in favour of not considering depreciation as a source of fund
1. Depreciation is an expense. No other expense is considered as a source of fund. So, it cannot be the solitary exception.
2. Depreciation may be considered as a recovery of capital cost allocated over years. If depreciation is deemed to flow back into the business that cannot cause any inflow of cash. As such, it is never a source of fund.
3. It is added back with fund from operations because the profits taken there are calculated after deducting depreciation. The subsequent addition compensates for the deduction already made. It is an internal adjustment which does not enhance ‘fund’.
4. A concern suffering from paucity of fund cannot solve that by charging more depreciation. It cannot establish itself as a source of fund.
5. There may be no sale or no profit in a year. Still depreciation has to be matched. In that year it cannot be said that fund has been generated through depreciation.
6. Even if there is a sale of any depreciable asset, that cannot be technically considered as a source of fund. It is the amount recovered against capital outlay. So, depreciation is a tool in the process of recovery of capital.
Conclusion: Depreciation is a process of allocation of cost. It cannot be a source of fund. At best by charging adequate depreciation, the taxable profit may be legally reduced. The tax burden may be reduced. It may help to conserve working capital. It may indirectly regulate the fund position but cannot increase funds.
1. Depreciation is considered as an expired cost. It is included within cost of goods sold. It is an allocated cost which is realised when goods / assets are sold. If sale of an asset is considered as a source of fund, depreciation should also be treated as a source of fund.
2. When fund from operations is found out, depreciation is added back with that.
3. Depreciation does not cause any outflow of cash. Naturally, current assets increase; the working capital also increases. If working capital is considered as a fund, depreciation causes its addition. So, it is a source of fund.
Arguments in favour of not considering depreciation as a source of fund
1. Depreciation is an expense. No other expense is considered as a source of fund. So, it cannot be the solitary exception.
2. Depreciation may be considered as a recovery of capital cost allocated over years. If depreciation is deemed to flow back into the business that cannot cause any inflow of cash. As such, it is never a source of fund.
3. It is added back with fund from operations because the profits taken there are calculated after deducting depreciation. The subsequent addition compensates for the deduction already made. It is an internal adjustment which does not enhance ‘fund’.
4. A concern suffering from paucity of fund cannot solve that by charging more depreciation. It cannot establish itself as a source of fund.
5. There may be no sale or no profit in a year. Still depreciation has to be matched. In that year it cannot be said that fund has been generated through depreciation.
6. Even if there is a sale of any depreciable asset, that cannot be technically considered as a source of fund. It is the amount recovered against capital outlay. So, depreciation is a tool in the process of recovery of capital.
Conclusion: Depreciation is a process of allocation of cost. It cannot be a source of fund. At best by charging adequate depreciation, the taxable profit may be legally reduced. The tax burden may be reduced. It may help to conserve working capital. It may indirectly regulate the fund position but cannot increase funds.
Wednesday 4 November 2009
Experiences and You
If you will call your troubles experiences, and remember that every experience develops some latent force within you, you will grow vigorous and happy, however adverse your circumstances may seem to be.
- James Russell Miller
- James Russell Miller
Fire Walk for employees.- New HR technique
With many out of the box initiatives undertaken by organizations to help their employee address issues arising out of stress at the workplace, the latest stress busting measure that HR is resorting to boost morale, say experts, will help ‘ignite’ employees’ true potential quite literally. Walking on fire as an HR initiative, is gaining immense prominence at the workplace.
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions.
Enough has been said and discussed about the ongoing situation and its impact on productivity of employees worldwide. Also, it’s known fact that the current economic situation has thrown a lot of challenges at employers and employees alike. This has led to increased stress levels and added immense pressure on employees for they are expected to deliver more in the presence of less resources. Hence, in an endeavour to address issues arising out of increased stress levels among employees, organizations are leaving no stone unturned to ensure that their employees are able to keep stress at bay and productivity levels high. Amongst the many initiatives undertaken by HR departments across organizations, one very unique and new initiative gaining grounds, is the concepts of making employees ‘walk on fire’ a concept propagated by PS Rathore, a behavioural trainer and philanthropist. Is this for real? Well, it is, say experts and the advantages derived out of this practice promises to have a positive impact on the productivity and efficiency of employees. And hence, in a quest to achieve just that, many companies are encouraging their employees to experience this out of the box concept and derive maximum benefit out of it.
So, what does this entail an employee to do? As the name suggests, it expects the employee to do just that – walk on fire. Fire – walking is the act of walking barefoot over a bed of hot embers or stones. It has a long history in many cultures as a test or proof of faith and is also used in modern motivational seminars and fund-raising events as a self empowering, motivational activity. There is a lot of fear in our minds. The kind of result we obtain depends on the way we think and how we behave. We are empowered with lots of energy and power within ourselves and once we realize that power, every fear fades away and success becomes achievable. Talking about how his organization came up with the idea of getting their employees experience this unique exercise. HR Head saint Gobain says, ‘We had started our new business vertical in India with new product lines. At that time, employees were subjected to a lot of pressure due to added responsibilities they had to shoulder, in a quest to attain superior delivery. It was important to make, employees acquaint with this concept and imbibe in them the need to understand that success, under stressful times, can be achieved through self confidence and persistence’.
This concept is entirely different as opposed to the other forms of stress busting techniques that exist. It is fun filled, interactive and interesting and gives you a sense of tranquillity. Towards the end of the day, one feels more rejuvenated and self-reliant about one’s skills and self. So, how has this initiative helped people fight stress and made them feel more confident about themselves? A few endeavours may seem difficult at the workplace, but when you actually attempt it, you may find them easy. The fire walk too seems to be impossible at the start, but then the misconception gets shattered eventually. Our employees are more confident of themselves now. They have grown more competent and are more interested to work with the best of their efforts to get the best of their output. Individual and company goals seem to run hand in hand in the minds all employees.
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions. We can certainly challenge ourselves and break our limits. We need to find out our real potential and the power hidden inside. Once we do it, we can perform well in ways more than one. We make the participants focus and concentrate on the mission are targeting. This requires patience and concentration. On completion of the seminar, the participants gain confidence, patience and become more goal oriented.
The increasing popularity of this concept and says, people keep harbouring guilt about relationships, financial problems, health issues etc. But the fact is that all guilt must be eliminated if we want to realize our true potential. Strong conviction and guilt make uneasy companions. We work for the complete transformation of individuals that includes the acceptance of accountability and responsibility.
So if you feel that stress at work or home is taking is toll on you, go ahead and experience this mind boggling exercise of walking on fire and unleash the power within you.
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions.
Enough has been said and discussed about the ongoing situation and its impact on productivity of employees worldwide. Also, it’s known fact that the current economic situation has thrown a lot of challenges at employers and employees alike. This has led to increased stress levels and added immense pressure on employees for they are expected to deliver more in the presence of less resources. Hence, in an endeavour to address issues arising out of increased stress levels among employees, organizations are leaving no stone unturned to ensure that their employees are able to keep stress at bay and productivity levels high. Amongst the many initiatives undertaken by HR departments across organizations, one very unique and new initiative gaining grounds, is the concepts of making employees ‘walk on fire’ a concept propagated by PS Rathore, a behavioural trainer and philanthropist. Is this for real? Well, it is, say experts and the advantages derived out of this practice promises to have a positive impact on the productivity and efficiency of employees. And hence, in a quest to achieve just that, many companies are encouraging their employees to experience this out of the box concept and derive maximum benefit out of it.
So, what does this entail an employee to do? As the name suggests, it expects the employee to do just that – walk on fire. Fire – walking is the act of walking barefoot over a bed of hot embers or stones. It has a long history in many cultures as a test or proof of faith and is also used in modern motivational seminars and fund-raising events as a self empowering, motivational activity. There is a lot of fear in our minds. The kind of result we obtain depends on the way we think and how we behave. We are empowered with lots of energy and power within ourselves and once we realize that power, every fear fades away and success becomes achievable. Talking about how his organization came up with the idea of getting their employees experience this unique exercise. HR Head saint Gobain says, ‘We had started our new business vertical in India with new product lines. At that time, employees were subjected to a lot of pressure due to added responsibilities they had to shoulder, in a quest to attain superior delivery. It was important to make, employees acquaint with this concept and imbibe in them the need to understand that success, under stressful times, can be achieved through self confidence and persistence’.
This concept is entirely different as opposed to the other forms of stress busting techniques that exist. It is fun filled, interactive and interesting and gives you a sense of tranquillity. Towards the end of the day, one feels more rejuvenated and self-reliant about one’s skills and self. So, how has this initiative helped people fight stress and made them feel more confident about themselves? A few endeavours may seem difficult at the workplace, but when you actually attempt it, you may find them easy. The fire walk too seems to be impossible at the start, but then the misconception gets shattered eventually. Our employees are more confident of themselves now. They have grown more competent and are more interested to work with the best of their efforts to get the best of their output. Individual and company goals seem to run hand in hand in the minds all employees.
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions. We can certainly challenge ourselves and break our limits. We need to find out our real potential and the power hidden inside. Once we do it, we can perform well in ways more than one. We make the participants focus and concentrate on the mission are targeting. This requires patience and concentration. On completion of the seminar, the participants gain confidence, patience and become more goal oriented.
The increasing popularity of this concept and says, people keep harbouring guilt about relationships, financial problems, health issues etc. But the fact is that all guilt must be eliminated if we want to realize our true potential. Strong conviction and guilt make uneasy companions. We work for the complete transformation of individuals that includes the acceptance of accountability and responsibility.
So if you feel that stress at work or home is taking is toll on you, go ahead and experience this mind boggling exercise of walking on fire and unleash the power within you.
Leaders in a Crisis
Generally when a crisis looms, a leader needs to quickly understand the situation, risks or problems and reassure key stakeholders that the organizations is taking the right steps to address them. He / she also need to ensure that the organization is prepared for any fallout continues to remain viable and relevant to its key stakeholders and can emerge stronger to take advantage of post crisis opportunities.
In a crisis, many leaders experience fear like everyone else. A focus on short term results is often the way for leaders to ensure their own survival. Such behaviours are also fed and reinforced by the growing demand for quarterly and monthly results and the short three to five year tenures of chief executives. This is where real leaders stand out from the flock who are focused on short term gains and fattening individual payouts.
For a long time; the world has looked to the west for leadership. However, as the US and Europe face a period of economic weakness, the world is looking towards Asia to drive expansion to be sources of consumption, investment, confidence and leadership in the global economy Asia will account for about one third of the world’s trade and money quartered of the world’s gross domestic product by 2020. By 2040, three of the world’s largest countries will be Asia, with the largest being China and India and Japan in the top four.
During a recession, leaders tend to go into protective mode, hunker down and hope over time that the crisis will abate and the situation will go back to normal. Leaders should be prepared to face the crisis and take advantage of uncertainties that are thrown up. Many a times, the best opportunities arise in times of crisis.
Leaders should adapt their strategies to the new reality and not rely solely on what worked in the past. This may mean reinventing themselves and promoting growth and new business in a weak economic climate. This recession is very much a crisis of capitalism and failed leadership especially those of Wall Street leadership seduced by money and recognition. The post-recession business environment needs transformational leaders who can create value over the long term for shareholders, employees and customers.
Organizations have to adapt to the changing business environment in order to excel. Fresh talent hired into the organization is a good source of new ideas and energy. Firms need to have structured ways to imbibe best practices to hone their skills. At the same time, one should not deviate too much from the core policies and practices that are integral to the organization striking a balance is of utmost importance.
In a competitive world, the concept of a futuristic organization cannot be achieved if the foundation itself is built on historic policies and processes that are redundant today. The changing environment and the competitive scenario make it mandatory to continually re-look at policies and processes to achieve desired results from its employees.
Robust policies and practices are recognized as essential components of internal control. It should be made according to the nature or line of business and should be adhered to religiously. Policies and practices are macro terminologies and should be formulated once, for all, but if the dynamics or compositions of businesses keep changing, there is no harm in amending the same to keep pace with the evolving times.
Organizations have to continuously re-look at their processes and policies and bring in innovative policies to retain talent. It becomes all the more important in case of dealing with a generation that wants to grow in their careers at a rapid pace.
In a crisis, many leaders experience fear like everyone else. A focus on short term results is often the way for leaders to ensure their own survival. Such behaviours are also fed and reinforced by the growing demand for quarterly and monthly results and the short three to five year tenures of chief executives. This is where real leaders stand out from the flock who are focused on short term gains and fattening individual payouts.
For a long time; the world has looked to the west for leadership. However, as the US and Europe face a period of economic weakness, the world is looking towards Asia to drive expansion to be sources of consumption, investment, confidence and leadership in the global economy Asia will account for about one third of the world’s trade and money quartered of the world’s gross domestic product by 2020. By 2040, three of the world’s largest countries will be Asia, with the largest being China and India and Japan in the top four.
During a recession, leaders tend to go into protective mode, hunker down and hope over time that the crisis will abate and the situation will go back to normal. Leaders should be prepared to face the crisis and take advantage of uncertainties that are thrown up. Many a times, the best opportunities arise in times of crisis.
Leaders should adapt their strategies to the new reality and not rely solely on what worked in the past. This may mean reinventing themselves and promoting growth and new business in a weak economic climate. This recession is very much a crisis of capitalism and failed leadership especially those of Wall Street leadership seduced by money and recognition. The post-recession business environment needs transformational leaders who can create value over the long term for shareholders, employees and customers.
Organizations have to adapt to the changing business environment in order to excel. Fresh talent hired into the organization is a good source of new ideas and energy. Firms need to have structured ways to imbibe best practices to hone their skills. At the same time, one should not deviate too much from the core policies and practices that are integral to the organization striking a balance is of utmost importance.
In a competitive world, the concept of a futuristic organization cannot be achieved if the foundation itself is built on historic policies and processes that are redundant today. The changing environment and the competitive scenario make it mandatory to continually re-look at policies and processes to achieve desired results from its employees.
Robust policies and practices are recognized as essential components of internal control. It should be made according to the nature or line of business and should be adhered to religiously. Policies and practices are macro terminologies and should be formulated once, for all, but if the dynamics or compositions of businesses keep changing, there is no harm in amending the same to keep pace with the evolving times.
Organizations have to continuously re-look at their processes and policies and bring in innovative policies to retain talent. It becomes all the more important in case of dealing with a generation that wants to grow in their careers at a rapid pace.
Monday 26 October 2009
FAQ on Mutual Funds
Introduction
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.
With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.
What is a Mutual Fund?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
What is Net Asset Value (NAV) of a scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.
What are the different types of mutual fund schemes?
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
What is a Fund of Funds (FoF) scheme?
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.
Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.
What is a sales or repurchase/redemption price?
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.
Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.
Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.
How to invest in a scheme of a mutual fund?
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.
Can non-resident Indians (NRIs) invest in mutual funds?
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.
How much should one invest in debt or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.
How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.
What should an investor look into an offer document?
An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
When will the investor get certificate or statement of account after investing in a mutual fund?
Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.
How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.
As a unitholder, how much time will it take to receive dividends/repurchase proceeds?
A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.
In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).
Can a mutual fund change the nature of the scheme from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.
How will an investor come to know about the changes, if any, which may occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.
At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.
How to know the performance of a mutual fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.
How to know where the mutual fund scheme has invested money mobilised from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.
The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.
Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.
How to choose a scheme for investment from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.
Are the companies having names like mutual benefit the same as mutual funds schemes?
Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.
Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.
Where can an investor look out for information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.
Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.
There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.
Can an investor appoint a nominee for his investment in units of a mutual fund?
Yes. The nomination can be made by individuals applying for / holding units on their own behalf singly or jointly. Non-individuals including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot nominate.
If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.
How can the investors redress their complaints?
Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors should approach the concerned Mutual Fund / Investor Service Centre of the Mutual Fund with their complaints,
If the complaints remain unresolved, the investors may approach SEBI for facilitating redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with it regularly. Investors may send their complaints to:
Securities and Exchange Board of India
Office of Investor Assistance and Education (OIAE)
Exchange Plaza, “G” Block, 4th Floor,
Bandra-Kurla Complex,
Bandra (E), Mumbai – 400 051.
Phone: 26598510-13
What is the procedure for registering a mutual fund with SEBI ?
An applicant proposing to sponsor a mutual fund in India must submit an application in Form A along with a fee of Rs.25,000. The application is examined and once the sponsor satisfies certain conditions such as being in the financial services business and possessing positive net worth for the last five years, having net profit in three out of the last five years and possessing the general reputation of fairness and integrity in all business transactions, it is required to complete the remaining formalities for setting up a mutual fund. These include inter alia, executing the trust deed and investment management agreement, setting up a trustee company/board of trustees comprising two- thirds independent trustees, incorporating the asset management company (AMC), contributing to at least 40% of the net worth of the AMC and appointing a custodian. Upon satisfying these conditions, the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacs For details, see the SEBI (Mutual Funds) Regulations, 1996.
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.
With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.
What is a Mutual Fund?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
What is Net Asset Value (NAV) of a scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.
What are the different types of mutual fund schemes?
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
What is a Fund of Funds (FoF) scheme?
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.
Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.
What is a sales or repurchase/redemption price?
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.
Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.
Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.
How to invest in a scheme of a mutual fund?
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.
Can non-resident Indians (NRIs) invest in mutual funds?
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.
How much should one invest in debt or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.
How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.
What should an investor look into an offer document?
An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
When will the investor get certificate or statement of account after investing in a mutual fund?
Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.
How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.
As a unitholder, how much time will it take to receive dividends/repurchase proceeds?
A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.
In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).
Can a mutual fund change the nature of the scheme from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.
How will an investor come to know about the changes, if any, which may occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.
At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.
How to know the performance of a mutual fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.
How to know where the mutual fund scheme has invested money mobilised from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.
The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.
Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.
How to choose a scheme for investment from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.
Are the companies having names like mutual benefit the same as mutual funds schemes?
Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.
Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.
Where can an investor look out for information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.
Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.
There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.
Can an investor appoint a nominee for his investment in units of a mutual fund?
Yes. The nomination can be made by individuals applying for / holding units on their own behalf singly or jointly. Non-individuals including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot nominate.
If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.
How can the investors redress their complaints?
Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors should approach the concerned Mutual Fund / Investor Service Centre of the Mutual Fund with their complaints,
If the complaints remain unresolved, the investors may approach SEBI for facilitating redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with it regularly. Investors may send their complaints to:
Securities and Exchange Board of India
Office of Investor Assistance and Education (OIAE)
Exchange Plaza, “G” Block, 4th Floor,
Bandra-Kurla Complex,
Bandra (E), Mumbai – 400 051.
Phone: 26598510-13
What is the procedure for registering a mutual fund with SEBI ?
An applicant proposing to sponsor a mutual fund in India must submit an application in Form A along with a fee of Rs.25,000. The application is examined and once the sponsor satisfies certain conditions such as being in the financial services business and possessing positive net worth for the last five years, having net profit in three out of the last five years and possessing the general reputation of fairness and integrity in all business transactions, it is required to complete the remaining formalities for setting up a mutual fund. These include inter alia, executing the trust deed and investment management agreement, setting up a trustee company/board of trustees comprising two- thirds independent trustees, incorporating the asset management company (AMC), contributing to at least 40% of the net worth of the AMC and appointing a custodian. Upon satisfying these conditions, the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacs For details, see the SEBI (Mutual Funds) Regulations, 1996.
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