Thursday, May 1, 2014

Financial Noise

After having a good look at financial porn, we are now headed towards financial noise. Let us see what is financial noise.
Since last few months, I am reading blogs of most famous people on personal finance. There are many things that are contradictory between them. However, one point on which they all agree is not listening to market experts on TV. Although, I never watch any business channel as such, I thought what is so wrong in these news channel that they all advice staying away from them. My curiosity increased. Thrice, I decided to watch most famous market news channel. On all three occasions my decision was shot down by two women staying along with me at our house. Their argument was simple: I cannot interfere in their TV serials. The TV serials are more important than news channels. We all know that a man cannot win an argument with his own mother and wife. So I decided to find out some other option. Like a typical married man, I talked with my friends about my problem (no, not on women; this time about my curiosity on news channel). My close friend promised to help me in this case.
He came to my place within 2 days and said few sentences on his experience on watching business news channel. Each sentence were comprised of 95% ‘manly’ words (don’t ask me how did I calculate percentage). I asked him what exactly he found on those channels. To this he replied: he was never more confused about markets than while watching those business news channels.
1 person came on TV and right away started to tell how great he was. Then he told that current market is showing the right trend and it would be doubled in 4 months. Half an hour later, another guy came and boasted his credentials. Then he said that currently market is overvalued and it would come down in 4 weeks!!!
So irrespective of market behaviour, the TV channel would claim that they had predicted the right thing. Simply superb game.
Just about the same time, a company published their monthly magazine. Being April, they dedicated that issue towards personal finance. We bought the magazine and read it in an hour. Believe me, every single word printed was completely useless. Some people refer that as non sense printing. I would like to call that as financial noise. This in analogy with noise mixed with sound waves in telecommunication. In telecommunication field, the speakers are designed to minimize the external noise and pass only the required sound waves. Unfortunately, in personal finance space, we do not have such filters.
Let us look what was the suggestions and how good (rather useless) they are:
One should not hold money in any instrument for long term:
How stupid. I think, the author copy-pasted above line from somewhere without proper context. For long term goals, you have to keep money in an instrument and hold it there for long term for compounding to work.
Example: money held in TCS shares for 15 long years. Along with capital appreciation, we get bonus, dividend, splits, etc… Only, if we hold money in long term instruments for long term, we can expect our money to grow.
You can redeem money immediately after 3 year locking:
Ideally, equity MFs (or ELSS) should be held for minimum 10 years. Now, redeeming money after 3 years would neither attract any tax penalties nor any exit loads. However, risk involved is very high. Time and chances of good returns are directly proportional. More the time spent, more are the chances. Simple.
The above mentioned strategy of redeeming money after 3 years is a typical strategy adopted by planners who are distributers as well. So this churning of MFs i.e. buy-sell frequently helps them generate good commissions. So this ensures that you get sub-optimal returns and they get handsome commissions (Ever wondered why distributes suggest MF with high expense ratio? Bingo: commission). However, the just concluded line can be very well challenged and proved wrong by same advisors by showing some data and how this strategy earned 20% returns. But as they say, data can be tortured to reveal or show anything you want.
Equity MF are most tax effective. Hence, avoid FDs and RDs and go for MFs:
Again, a copy-paste line without context. Instrument cannot be suggested without considering the tenure of goals of that person. This advise is again from a distributer cum planner. They may even show you how other fund is giving 22% returns and ask you to book profit of 6% and invest the just redeemed money in that 22% wala MF.
In short, they would tell you that X fund gave 18% this year and next year it could give 38%. Next year, they would tell you the same story with different figures. After 8-10% years of such investment, you can conclude that FDs were much better than MFs!!!
Lastly, taxation part. When you invest in equity MF, your point should be of wealth accumulation and not taxation. Tax rebate should be like a cherry on the pastry. Remember, it can never be the pastry itself. In short, the instrument first must find a place in your portfolio. If it suits you, then check if it has tax rebate. Do not got in reverse order.
Invest in PPF for current financial year. After 5 years, withdraw X amount and use it or invest in equity MF:
Again, very ignorant and irresponsible advice. If a person invests in PPF with 5 year goal, why not go for RD? In PPF, the amount withdrawn would be tax free (unlike RD). however, that amount would be only 50% of accumulated value. Moreover, PPF is originally a long term investment product. Please run away from person telling this.
We invest in PPF to get debt exposure for long term investment. This approach would be typical suggested by either completely ignorant person about PPF/MFs or are driven by traditional methods.
Our parents did a RD to pay for our tuition fees. This was perfectly sensible as RD ensures capital protection. For goal like education, capital protection is of prime importance. But you cannot simply copy-paste this approach for PPF-MF.  This is not suitable to anybody. Just draw a equity to debt ratio and continue the same.
Get loan on your insurance policy and invest in equity:
A person was sold endowment insurance plan. When he wanted to get rid of his insurance plan, his agent came up with a gem of a advice. The agent accepted that the endowment plan gives 5-6% interest rate. So he said, get a loan on endowment plan and invest in equity (direct, off-course) and get 32% CAGR (God knows how). Hence, average return could be minimum 25% (again, God knows how). Taking loan on endowment plan would be like paying interest for your own money.
No chocolates for the person who guessed that this agent was broker too. However, can we blame the agent? Nopes. He just ensured his retirement and other goals are taken care off. It’s for you to think and act in your own interest.
Mutual Funds are not for women:
Yes, can you actually believe such advice? The article had below conclusion: since women are known to be very patient and foresighted species, it is best they invest in direct equities.
Amazing parameters to be eligible for direct equity investment. I do not blame the writer. Nowadays, all politicians are singing tune of women empowerment (and doing very little). So this writer must have thought of cashing on this euphoria. In reality, although patience is required in direct equity, it is not the only criteria. It is like saying, if you have pen, you can become author of world’s best seller book.
To become author, you would at-least need knowledge on the subject and willingness to learn more on the subject (apart from the pen off-course). All money making instruments are for men as well as women. They are independent of sex (well, I meant gender).
Invest in endowment plans because they are not ULIPs:
Wonderful (repeat it 3 times). Can we say, a suicide is better than a murder? Can we say dying with revolver is better than dying with a .9mm pistol? Can we say that diabetes is better than high blood pressure? Can we say…. Okay, you got the crux. ULIP and endowment plans are different like chalk and cheese. However, they are common in below context:
  • Both are completely opaque with respect to returns.
  • Both are generally mis-sold by showing some random % CAGR.
  • People generally suffer losses in both products.
I do not know, for whom endowment plan and ULIPs are good. However, I know for sure that the reason is plain stupid.
Invest in global markets for diversification:
Diversification is good. But somehow, I am not sure if international market would provide us the exact reason for which we diversify. The reason behind diversification is to contain volatility. However, we cannot see what is going on in international market at retail investor level. Moreover, ever if we do, we must keep in mind that our rupee is fluctuating with respect to international market.
So returns from such diversification is subject to international markets as well as currency fluctuation. An average investor has little idea on both these things. So to KISS, keep diversification within Indian markets.


  1. Dear Viren, I'm impressed the way you put the things. Also I'm happy that in the whole post my name has not appeared. A refreshing change it was to see. :)



    1. Thank you Ashal.
      By now, all my readers know that I have learnt everything from you guys... so I just avoided giving the same information again :)