The equity markets were up with a bang. The bulls had a party and celebrations post Diwali festival. It is considered as a remarkable recovery from the bottom. Well, it seems difficult to talk about whether this bull party will last for a long time. Global economic issues have still not been resolved and how much of that it’s going to affect other emerging markets, including India, is difficult to predict. The markets are facing many negative news and higher volatility in the day-to-day sessions. It’s getting difficult for investors to take a position in these market conditions. This is where the straddle strategy will play a vital role for the investors to hedge the position and profit from it.

This strategy is built on the concept of call and put options. Let’s understand what these mean before going in-depth to understand straddle.

Call Options - A call option gives its holder the right to buy a specified number of shares of the underlying stock at a predetermined price (strike price) between the date of purchase and the option’s expiration date.

Example: An investor who bought an ABC December 1000 call option would have the right, but not the obligation, to buy 100 shares of ABC common stock at a cost of Rs. 1000 per share at any time before the option expires in December.

The right to purchase common stock at a fixed price becomes more valuable as the price of the underlying common stock increases in the bullish trend.

Put Options - A put gives the holder the right to sell a specified number of shares of the underlying common stock at a predetermined price (strike price) on or before the expiration date of the contract.

Example: An investor who bought an ABC December 1000 put option would have the right, but not the obligation, to sell 100 shares of ABC common stock at a cost of Rs. 1000 per share at any time before the option expires in December.

The right to sell common stock at a fixed price becomes more valuable as the price of the underlying common stock decreases in the bearish trend.

Now let’s understand how the straddle strategy operates for investors. Fundamentally, a straddle is the simultaneous purchase of a call and a put on the same stock, with the identical strike price (the price at which the holder can sell or buy from the writer of the option) and expiration month. Typically, the buyer of a straddle anticipates a substantial movement in a stock but is uncertain what the direction will be. Because the investor is betting on an extraordinary stock movement in this the volatile markets. The probability of profiting is good.

A straddle buyer risks losing only the amount of premium (the price that the buyer of an option pays and the writer of the option receives). The maximum loss occurs only if the price of the stock on the expiration date of the options is exactly equal to the strike price. Although it is difficult to lose the entire premium paid for the straddle, it also can be difficult to make a profit. Either the put or the call side of a straddle is almost certain to expire worthless. As, a result, the stock has to move substantially for a profit to be made. Considering the trend of last few trading sessions there were many intense moves for investor. Therefore, it’s considered one of the best strategies to bet on these volatile markets, where the swing in stock prices to different levels in multiple/one trading session gives the opportunity for investors to fill their bag full of profits.

Example:

An investor purchases both a put and a call on a stock, paying Rs. 250 for the call and Rs. 200 for the put. Therefore, the total premium cost would be Rs. 450. Suppose the underlying stock’s price is Rs. 3000 and the strike price of the options is Rs. 3000. If the price of the stock rises above Rs. 3450 or drops below Rs. 2550, the investor will make a profit. Only if the stock expires at a strike price of Rs. 3000 will the investor lose the entire investment. The investor loses only part of the investment at any other price between Rs. 2550 and Rs. 3450.

The investor earns a profit if the stock sells at a price exceeding Rs. 3450 or drops to less than Rs. 2550. If the stock rises to Rs. 3750 per share and the investor exercises the call at Rs. 3000, the investors profit is Rs. 300 (Rs. 750 - Rs. 450 premium). Alternatively, if the stock drops to Rs. 2150 per share and the investor exercises his/her put at Rs. 3000, the profit is Rs. 400 (Rs. 850 - Rs. 450 premium). Thus, the investor is assured of a profit only if the stock moves by more than Rs. 450 in either direction.

The above strategy and example were discussed considering equity markets. This strategy is also useful to hedge a position on commodities in commodity market.

Microsoft Excel is a wonderful tool. Even a tech dummy like me recognizes this.
In the hands of a semi-educated financial planner/advisor the tool is lethal.
At the turn of the millennium, “analysts” used Excel to extol Infosys and its growth at over 100% compounded annually. I am an unabashed Infy fan, but I could not imagine Infosys being bigger than the rest of India, which it would have been at that growth rate. Logic and economics combined to tell me that that would be impossible. I now have no Infosys on my portfolio, but will surely buy when I like the price.
Planners use their financial calculators and Excel to drag columns and rows to tell you what you will earn, need at retirement, how much you can spend and the like. The parameters are extrapolated to show a fixed rate of increments, returns and inflation. This is stupid, because life and economics has little respect for the Excel drag function. Inflation and deflation can follow each other before one realizes it. One does not die as one plans, or hopes. Real life takes a break from Excel!
Magazines and papers are full of advice for government employees about to receive their increments and arrears. Of all the template material that masquerades as the best thing to do, I find the home loan pre-payment suggestion hardest to digest.

Should you pre-pay your home loan?

As I mentioned, a popular bit of advice I read on many papers and a few magazines is on handling your bonus and increments. They ask you to use most of the money to pre-pay your mortgage (home loan), considering the high and rising interest rates.
Let me use a personal and very real example - my mortgage has risen from 7.5% to 13.25% (mine is the costliest bank lender). This is terrifying. Still, if I ignored the 80C benefit on payment of the loan principal (I have nothing left of the Rs. 1 lakh after Life Insurance premia and PPF), my cost on the loan is 8.75% considering the tax at 33.99% being the top of the bracket, inclusive of surcharge and cess. The will be a lot higher for those who avail of the 80C on home loan EMIs paid and lower for those in a lower tax bracket. The principle does not change under either of these circumstances. My surplus invested in a 375-day FMP during March at 10.25% would be over 10% post-tax in the growth option, considering double indexation. The 6 month FMP I invested in last week at 11.75% will fetch me 10.08% post tax in the dividend option.
Simple commonsense, which makes up most economics, tells me that cash is a nice thing to have - I might use the FMP maturity or any surplus in more attractive investments, if I can get them, while a prepaid home loan is cash permanently with the bank. Vitally at times of turmoil and uncertainty it is good to increase the amount of liquidity one has for contingencies
I also make more money in the process; every Rs. 1 lakh not prepaid fetching me an annual surplus of at least Rs. 1,250.

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.

Here is a story about Islamic organizations terming health insurance policies as illegal and issuing a fatwa asking Muslims to keep away from them.

http://economictimes.indiatimes.com/Personal_Finance/Insurance/Health_Insuarance_illegal_Islamic_body/articleshow/2930737.cms

This has raised a doubt in my mind as to how Islam cannot allow taking health insurance. I have a valid reason. At the time of Holy Prophet (s.aw.s) whenever there was any war, soldiers used to cover themselves with armor to protect them. In my opinion the Holy Prophet (s.a.w.s) has shown that one has the right to protect one self against any uncertain event. No matter that the ultimate protection lies in God’s hands.

In the same vein, whether your health cover will help you or not is ultimately in God’s hands; but it IS your responsibility to make sure that you are adequately protected.

The point I want to make is, please provide proper daleel (proof) why it has been declared illegal so that if I am wrong I may correct myself. If possible, quote Quranic ayat and tradition or precedent supporting it.

Is the person who has overextended credit a candidate for sympathy if he means well? He wants to pay back the outstanding amounts against his multiple credit cards, but what if he has just been fired from his job and cannot make his multiple credit card payments? Do you castigate him, telling him that he made the bed, he must lie in it? If that is so, does your lack of sympathy extend beyond the fact that recovery agents came to his house when he wasn’t at home and threatened his wife and child?

If you are the sympathetic kind (especially if you also have been in a similar jam) would you:

1. Tell the man that recovery agents are not allowed use force on borrowers or speak indecently to him or his family?
2. Tell the man that if he doesn’t want to speak to the recovery agent, the agent has to respect his wishes and withdraw?
3. Point out to him the RBI stipulation that “The bank and their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors’ family members, referees, and friends, making threatening and anonymous calls or making false and misleading representations.“?
4. Point him to the Banking Ombudsman site www.bankingombudsman.rbi.org.in where he can lodge a complaint?
5. Point out to him that his best option would be pay off the entire amount. And then give him tips on how to do it - apply for a loan against property, stocks, insurance policy, or jewelry? But that he should try his best not to go for a settlement?
6. That there are credit counseling agencies, such as ICICI bank’s Disha, that exist for the very purpose of helping people like him?
7. All of the above
8. None of the above

Here are some credit counseling agencies:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.

Answers:
Correct answer - Option 7
Incorrect answer - Any other option or combination of options
So incorrect that it scares me! - Option 8

In my last article I had mentioned that there are several methods, or styles, to investing profitably in the equity markets.

Let me start with suggesting that you, the potential investor, spend some time analysing your investments. If one were to assume that your money is indeed “hard earned”, would it not be unfortunate if is easily lost?

Most professional advisors compare their performance to benchmarks, which are indices. For example, if a fund generated returns of 20%, while its benchmark’s returns were 15%, this “outperformance” of the index by 5% is called an ‘Alpha’. This is a good measure to evaluate fund performance, provided the benchmark is reliable. If reliable, it would be a good measure to evaluate even personal portfolios returns.

The BSE Sensitivity Index of 30 shares is the most popular Indian stock market index. If one were to track this over 5 year periods, starting in 1992 (this is the year of the infamous Harshad Mehta boom, which is a relevant beginning simply because this is the first time there was retail participation in the capital markets), we would find that pre-2003 (the start of the latest boom), the index returned less than bank FDs. Even if we go from 1992 to the current date, the index returns are disappointing. This should indicate that equities are a poor long term investment, but are actually among the best options!

In fact, a well diversified portfolio, built over time and given a few years, at reasonable valuations (PE of close to 10, certainly lower than the Sensex’s long term average of 14 times) will outperform the benchmark or almost any other investment. The great Warren Buffet, however, considers that “wide diversification is only required when investors do not understand what they are doing”. If you know, and you need to know, why you make an investment, you should also have guts to invest plenty in it. Again, quoting Mr. Buffet, “Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful.””

Diversification or concentration of portfolios can be achieved through investments in mutual funds. Concentration is through sectoral or thematic funds. Concentration is good only if you are an expert and can time your entry and, more importantly, your exits. Avoid being carried away by the noise. Most fund managers consider themselves to be God’s Greatest Gift to Investments (GGGI) in a bull market. However, when they crash with the markets they are quick to point to outperformance, if any, on the index, i.e. “The index has fallen 30%, but I have been brilliant and have lost only 25% of your money”. I have not met any investor who hands out money to be lost, whatever the market conditions. My advice is to ignore the froth from the fund managers, or brokers. If you are convinced the market is cheap, put in all your money. In an uncertain market do an SIP. But when the market seems overvalued sell. (By the way, have you ever heard a fund manager advice you to sell, or redeem your units in a bull market?) A crash always follows a euphoric bubble. Cash is supreme in bad times. It is a good feeling, and also very profitable to buy when the market is down 70%!!

Is this a good time to invest? Yes and no. An important lesson from Joseph Kennedy, almost a century old, is to sell when the shoe-shine boy gives stock tips. I believe this is true today. When the taxi driver is thrilled to take you to the share bazaar and asks for stock tips en route, the stranger at the party gives you sure shot stock bets and the daily newspaper has headlines of the local housewives club betting their grocery money on stocks – GET OUT. This is the best signal to sell your shares.

And buying? This would be when that party animal with best buys stops partying, the Big Bull has jumped off the 13th Floor and there is a funereal feeling at Dalal Street. Buy when the mention of a good company has people grit their teeth and give you dirty looks. And, of course, the index has a low, mouth watering PE!

One of my own gurus told me never to confuse the market with stocks. “The market is irrelevant”, he said, “buy the right stocks and you will always make money.” If you have his stock picking skills, which I do not, this article is not for you. If you are one of the simple folk, hoping to beat inflation and make a little money on your savings, the market at over 18 PE all this week (18.80 on Nifty on September 4, 2008) remains expensive. Look then for gems that might become multi-baggers.

Otherwise hang on to your precious cash. A better day to buy will dawn, when PEs are closer to 10 than 20. Get into SIP mode then. Market corrections can be both deep and long. Losing opportunity (interest cost of your money) is about as unfortunate as losing capital.

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.

Like a drunkard who is wandering alone on the street trying to find a foot hold for his slippery feet, the Indian markets are no less choppy since the first month of the New Year ended the 3 year bull run party. When the 100 year old BSE Sensex hit 21113.13 on January 9th 2008 India was been viewed from Dalal Street to Wall Street as someone who has just driven at 100mph from 17000 to 21000 ,and with 25000 in touching distance. Anticipation seldom turns into reality, come 16th July 2008 BSE Sensex was 12514 a yearly low and 40% down from the top. With IPOs claiming to be multi-billion dollar projects in next five, ten and fifteen years and garnering over Rs 700000 crores, peons, school children, taxi drivers, the what nots, and the who’s who of the Indian economy wanted to apply. The only companies who would have made money would have been paper manufacturers, while Mother Nature was at receiving end for all the paper required to make 200-page red herring prospectuses (RHP).

With equity as an asset class going for a long random walk into oblivion, foreign institutional investors (FIIs), the usual market makers, who had put in close to $17 billion for the FY07, now, in the first six months of the CY08, have pulled out close to $7 billion. Usually bad follows bad but evil follows worse; the American housing bubble woes relentlessly made lives of economists, governors of central banks and heads of states lose sleep over deepening credit crises. The U.S. of A, which prides itself as John Rambo in the Middle East and central banker to the world, has already lost $500 billion in asset write-downs. Simply put, the things that were not affordable were made affordable to people who could not afford them; in other words, the houses for which the loans were taken turned bad value as borrowers defaulted and the subsequent MBSs (mortgage-backed securities) and ABSs (asset-back securities) markets who leverage themselves over these loans also defaulted. Then, with home loan default rising, interest rates rising, and slowing consumer demand, the unfaultable investment banks of Wall Street were getting jittery over their exposure to complex derivates products. Ultimately $500 billion in assets were written down on Wall Street with repercussions felt across the globe.

The regular oil and inflation shock has started to generate fewer tremors as their pace of growth has come off recently. Oil in last couple of weeks has been hovering at sub $110 levels and domestic WPI inflation at sub 13% levels. The booming GDP growth made India hit the $1 trillion economy club, with fiscal year 2007-2008 hitting 9.1% growth. Certainly now with the equity markets off hugely, capital expenditure for India Inc has become a huge question - rising interest costs will make longer-term capital intensive projects in the infrastructure space unviable. The IPO market, also the primary market to raise equity, has also dried up as investors have lost confidence to invest in new unlisted companies.

Estimates of $350-$400 billion have been made for lessening India’s infrastructure woes, and the bill is to be footed via the PPP (public private partnership) route. What remains to be seen is whether the big boys of India Inc ready to participate and does the FDI still hold India in high regard. The nuclear deal has been signed, which comes as a good sign for an energy-hungry country which according to government estimates will require an installed capacity of over 200,000 MW by 2012 to meet its electricity demand, 60 percent more than what the country currently has. India envisages providing electricity to all households including 234 million families living below the poverty line and electrifying around 115,000 villages by 2009.

Certainly all this looks a daunting task to accomplish and only strong jolt of foreign capital flows, relaxed government policies, and wish to take India global with domestic companies a lot of dope is required to put India back on track.

Anurag Sharma is a Research Associate at Padmakshi Financials Services Limited.

While those of you who are wondering what does F.D have to do with life insurance…Beware…you could be a victim of it.

As it happened with Mr. Mangesh Pai who went to the largest private sector bank to rollover his F.D maturity into another F.D; he landed up rolling over his maturity amount into a life insurance policy instead. He was told by a bank officer that this would be like a F.D with life insurance cover and 10% interest minimum. Mr. Mangesh found it attractive and signed the papers.

Being a busy heart surgeon, he didn’t get time to go through the papers he got after few days until to his surprise he got notice from insurance company intimating payment for renewal premium after a year. He started wondering “when did he buy this company’s insurance policy, that too with such a huge premium?” (his F.D maturity was huge). While digging through all his financial papers in his file, he found that he was cheated and been sold a life insurance policy instead of F.D which he wanted. Moreover the policy has annual premium paying term of 20 years. He further found out that it was a ULIP with 35% charges and very low life cover. He has filed complaint with RBI and is fighting against the bank.

With thirst of earning huge commissions, bank hire people mostly young who have inadequate knowledge and experience on insurance. These people with tag of “Financial Advisor” or “Relationship Officer” are given targets and incentives. On the verge of achieving those targets and earning incentives, they tend to mis-sell in a big way. Same is the case with “Relationship Managers” of most broking firms. They are trained for aggressive sales and thus have only one thing in mind…sell insurance to anyone anyhow and achieve targets. The ultimate losers? Consumers. Beware…

In another case, Mrs. Priya Arora got call from a MNC bank where she holds a credit card. Despite showing no interest in an insurance product being pitched to her, she found insurance premium being debited in her credit card bill. Mr. Ahmed who went to a public sector bank for opening a savings a/c was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

While the advent of private life insurance companies have definitely increased insurance penetration in India which is still very low, it has also definitely increased mis-selling of insurance products. With increasing number of insurance companies so are increasing number is insurance agents. Companies are hiring agents very aggressively to boost sales as a result of which you will find many college students, housewives, doctors, teachers, and people with part time jobs as insurance agents who sells insurance part time merely to earn some extra buck. These people lack knowledge, skills and experience; result of which – wrong product being sold or mis-selling. Insurance agents merely push the product which is earning them higher commission irrespective of weather such product meets your needs and requirements or not. As is happened with Mr. Kamlesh the only earning member in the family who ended up paying 70000 p.a merely for 5 lakh of insurance cover, most of them are ULIPs with high charges. Being bread earner of the family he should have been given much higher life insurance coverage at a lower premium.

Most of the agents typically are trained on only two or three ULIP products and they sell only those products. If you ask such agents about an endowment or term plans most of them don’t know much about it and they will try to convince you that this or that ULIP product is better, that it has given 30% returns in last 5 years.

It is recommendable to avoid buying insurance from part time agents primarily because you may be victim of the wrong product which may not meet your needs, you would suffer from bad service from the agent and secondarily this is their part time work, they would be out of it anytime and then you would be all lost.

So shouldn’t we buy insurance at all? If we have to, where do we get it from?

While life insurance cover is one of the most important things to have for an earning member of the family, we need to determine goals, requirements and how much insurance do we need. Typically, when we think of buying insurance we ourselves don’t know how much cover we should take. Most of us decide it on the premium. We opt of whatever Insurance cover we get on lower premium. Some of us just opt for whatever cover the agent says. Most of us land up being underinsured. You need to look upon various aspects such as cost of living, expected cost of living, your income and increase in your earnings, your dependents etc. before taking a cover.

“It’s a complex process, I don’t have time, skills, and expertise to access all these factors and determine my insurance need!”

You need not - hire a Certified Financial Planner (CFP). The role of a qualified Financial Planner is to look at all aspects of your lifestyle, goals, and requirements and develop a financial strategy suitable for you. The recommended strategy should help you reach your goals effectively and efficiently. Insurance Planning is a part of it in which they would recommend you how much insurance you should have and what mix of products you should opt for viz. term plans, ULIPs etc which would make you financially secure and help you meet your requirements and goals. Once you have a plan designed by a CFP, you can buy various kind of insurance products as recommended by him/her. This will help you getting what you actually need and not what actually an insurance agent needs.

Do not fall in pit of aggressive insurance agents or bank officers who may sell you a ULIP with high charges and low cover. It would be very difficult for you to get out of it!!

Get a strategy and plan developed by a CFP and be financially secure.

Happy Financial Freedom!

Agent: Sir this is the best plan for you - it will give you good returns as well as proper risk cover. The premium is also cheap, just Rs. 35000/- p.a. The insurance cover is Rs.5 lakhs. After every five years, you will get 20% of this insurance cover back. At the end of the 20th year you get the remaining 40% of insurance cover with all accumulated bonus. As you are just 28 years old, this plan is well suited for you.

Client: OK. I know this plan very well. Another agent had explained this plan to me. When I asked him how much premium he was willing to pay on my behalf, he said he could pay 2 months’ premium. If you can pay more than that, I will purchase this plan from you.

Agent: No problem, sir! I want to complete my sales target for this year; I can pay 3 months’ premium for you. You should know that I am paying more than the commission I am receiving.

The sale is made.

…This is the Indian financial market…

Nobody is bothered about:

• Financial needs analysis
• Risk measurement and management
• Rate of return from investment
• Capital appreciation

The effect:

• Mismatched asset allocation
• Huge uncovered risk
• Poor rate of return
• Capital eradication due to inflation
• Non-achievement of financial goals

Who is responsible for this? The part-time agent, who sells the products without any financial knowledge and just wants to complete his/her sale target? Or the buyer who is just concerned about the illegal premium rebate?

The agent paying the premium amount on the buyer’s behalf is very much like a bribe received for purchasing a product. For small gains in the short term, the buyer is actually opting for huge losses in the long term - losses that are not quantifiable at the time of sale.

Why does this happen? Here are some reasons that might give you a clue:

• Competition among agents and financial organizations
• Lack of a professional approach to financial planning
• Perception of financial consultancies as a part-time profession
• Lack of innovative financial products from financial organizations
• Lack of selling and communication skills
• Lack of trust and confidence in the customer’s mind about their financial planner
• Lack of back-up for the so-called financial planners – no proper knowledge, proper office with staff, no technological assistance
• Low standard of entry into financial consultancy – HSC pass plus a few elementary examinations is all that is required to start off as a financial consultancy
• Huge market requiring huge number of financial planners, resulting in financial organizations recruiting any half-decent Johnny as a financial planner

Rebates in the Times of Nationalization
Before 2000, financial sectors like insurance and banking were nationalized. Public sector organizations never bothered about their agents’ knowledge and skills or how they were procuring the business. They didn’t need to as there was no competition. The only competition was among the agents to grab maximum business. This would result in them offering part of their own commission to the buyer as rebates. They were also known to offer some extra incentives in cash or kind to complete a sale. These practices continue to this day.

Although these offers are unethical and illegal, they nevertheless took deep roots in the insurance fraternity. As a result, the customer began to consider a premium rebate in the light of his/her right. He/she did not have any qualms in accepting a rebate or a gift.

Rebates in the Open Market
As the market was thrown open after 2000, various private companies entered the fray increasing customer awareness about maintaining their financial health.

They offered various new products and public sector players were forced to increases their product portfolio as well as services.

With this influx of new companies and products, insurers needed staff to sell them to the public. Enter fresh graduates, call centre executives and banking employees, who started selling financial products with the same elementary knowledge and wrong information as their predecessors in the public sector entities. Result? The rebating habit caught hold here too.

Rebates vs. Discounts
For selling any tangible product, sellers offer discounts. Discounting is used as marketing tool to attract the consumer. Consumers are offered some schemes or free gifts for buying particular products during particular time-periods. Sellers use stock clearance sales as a tool for moving dated products from their stores.
But, in no case do they ever sell a product below its cost. They always try to manage the pre-decided profit margin while selling such products - i.e., they reduce their profit margin to the bare minimum by reducing the sale price.

Generally, prices are first increased and then reduced by giving discounts, giving the customer the feeling that he/she is winning the bargain battle. And this feeling urges the customer to buy more, thus increasing sales.

Discounts are ultimately healthy for the customer because even with the discount, he/she receives the benefit of the product without losing the quality of the product as a result of the discount.

But the same strategy cannot applicable to intangible financial products or services.

Benefits in the case of financial products come in the future and they depends on external factors such as the world economy and market conditions. Regular reviews and proper follow-ups are necessary for a financial product to achieve the desired benefits or goals. The impact of wrong financial decisions can be verified only in the future, by which time they are irreversible.

Purchasing financial products is like cultivating a farm. Timely water, fertilizers, pesticides, and insecticides are necessary for the farm to thrive. It requires years of such care to bear fruit, literally.

Ditto with financial products. They are not one-time affairs. It requires nurturing and caring for decades, regular review of your financial position, changing plans according to changing needs, and regular follow-up to ensure the product’s success.

When a customer demands a rebate he/she is risking not getting future follow-ups, regular reviews, and proper attention to maintaining his/her financial health. In other words, discounted service always leads to discounted quality. If any financial consultant agrees to provide service on rebate, the customers must think twice before taking the consultant’s advice and doing business with him/her. Why is the consultant doing this? Is he/she a proper knowledgeable person in the finance field? What is his/her experience? Will he/she be available for providing follow-ups and after-sales service? Does he/she just want to complete his/her sales target? Ultimately, is this sale transaction going to be a one-time affair or an instance of life-time parenting?

Demand for Rebates – Call for Losses
Customers demand for rebates due to two reasons:

• They are totally ignorant about their financial requirements and do not know about the financial consultant’s ability to change their financial health by proper service and advice. Customers then buy into the regular short-sighted practice of demanding rebates.
• Customers might think that they are fully knowledgeable in the field of the finance and thus do not require any advice or service any time in future. Their main concern at the moment might be that they do not have the right channel to buy financial products without interference from intermediaries such as brokers. Buying financial products from financial consultants is an easy way out, especially with the promise of rebates.

I would like to ask just one question to both of the above-mentioned types of customers: Would you dare to ask a rebate from your doctor for his services? How reassured would you then be that he/she is giving you the absolutely best quality attention to your medical problems?

To maintain good financial health, take the best of the best services from professional financial planners and avoid all agents or so-called financial planners whose interest in this profession is at best half-hearted.

Quality always comes with a price, even if the quality is not visible to the naked eye. Remember, brass and gold don’t have same price.

Key Qualities of a Financial Planner - Knowledge and Integrity
A financial planner needs to assess customers’ present positions, prioritize their needs and goals as per their risk appetites, and then suggest the proper financial product (s) that will fulfill those goals.

This requires proper knowledge of various faculties of finance like insurance planning, risk management, retirement planning, investment planning, portfolio management, estate planning, plus various laws such as the Income Tax Act, Gratuity Act, Companies Act etc., and so on. Armed with this knowledge, the planner now needs to compare the various products on the market, weigh the pros and cons of each, and then suggest the suitable product to the customers.

Another quality is integrity. Integrity to the customer as well as to the organization that he/she represents. This quality is the basic need to develop the finance industry in India today.

When financial planners are ready to offer rebates, it means that they are ready to adjust their integrity. It also means that they have no qualms in suppressing or misrepresenting valuable information to earn extra commission. You have the right to always expect the highest level of integrity from your financial planner - he or she is, after all, the trustee and caretaker of your finances and your guru in all matters financial.

This is a strange notion for most of us who think of “trust” only in the context of institutions or people (banks and other companies) with whom you deposit your hard earned money. After all what do you care whether the bank from whom you borrow is trustworthy or not. After all it is they who have to recover money from you and it is they who should be worried whether you are trustworthy and not the other way around. I was very much a part of this school of thought till a few months ago. But some recent events that affected me personally have forced me to rethink.

Incident Number 1

I had signed as a guarantor for the education loan taken by my brother from a leading housing finance company (they also have a relatively lesser known education loan program) to fund his MBA program at the prestigious Indian School of Business (ISB), Hyderabad. This education loan did not require any repayment (either of interest or principal) during the first 15 months. Now comes the twist. Towards the end of his one year program my brother informed me of a problem with the education loan. He informed me that a lot of his fellow students had taken a loan from the same institution. It seems that the “systems” of that institution could not handle the repayment holiday built into the structure of this education loan (probably since the “system” had been built for “home loan” and not “education loan”) and hence the system continued to generate bills for the interest month after month for the interest accrued on the loan amount (even though it was not payable but was only to be accumulated). Since the bills were generated they showed up as overdue as they were not paid (obviously since the education loan agreement clearly provided for the payment holiday). This then got reported as a default to the credit bureau (see this article titled Do you want to get married? Pay your bills on time for what is a credit bureau and its vital effect on our lives). It seems that a loan request of another student’s guarantor had been turned down due to this “default”. I have always understood the vital importance of a good credit record and have taken great care to maintain a spotless repayment record. Hence I was shocked by this. Fortunately my brother and his fellow affected students (with a lot of help from ISB) took up the matter strongly with the lender. Given the clout of ISB the lender took these complaints seriously. They promised to officially inform the credit bureau of the “system” error and ensure that the so called “default” was wiped off the credit bureau records for both the student as well their guarantor. In practice however they just got the credit report of my brother. They dismissed the requirement for my credit report by saying that their “systems” showed that they had not reported the “default” in my account to the credit bureau and hence there was no requirement to get a copy of my credit record. Given that my faith in their so called “system” was zero, we insisted that they get the credit report to prove their point. They were very reluctant and only after some heavy duty follow up we at last managed to get the credit report. My impression was that they were reluctant to get the report because of the cost of Rs. 50/- or so involved in getting the report from CIBIL. Given the fact that the entire mess was created due to the fault in their systems the casual manner in which they treated their own promise was scary and disgusting at the same time. Fortunately the credit report itself was clean of any issues but I had spent a good four weeks being tense.

Incident Number 2

This happened just around the same time as the first incident above was unfolding and I was yet to receive a copy of my credit report. To test out if any adverse record had been included in my credit report, I decided to apply for a credit card online with a leading foreign bank in India which offers a completely online process for credit cards with no requirements to submit any documentation or any verification calls. Imagine my horror when for the first time in my life my credit request was turned down. I was now sure that my credit report had been tarnished beyond repair. However very soon I did get a copy of my credit report (see first incident above) and it was clean as a whistle. So now I was left staring at another mystery. Why was my credit card request turned down? I got the answer soon enough after a few follow ups with the concerned bank. It seems that as per their records the bank had already issued the credit card I had requested a few years ago and as per their records I continued to hold that credit card. So naturally they could not issue me the same credit card again. They helpfully suggested that I could apply for any other credit card from their stable. What left me scared was that the bank showed a credit card as being owned by me whereas I never had that credit card. I wrote to them disclaiming any responsibility for any dues on that so called credit card held by me. I am still running scared if somebody will misuse this so called credit card and I will be saddled with the resultant impact on my credit report.

Incident No. 3

A bulky open envelope of my home loan lender (one of India’s leading private sector bank) with my name and address on it was handed over to the watchman of my building by a passerby who claimed to have found it on the road near my house. The watchman promptly delivered the envelope to my home. When I examined it in the night I was horrified to find the complete loan papers of my loan against property account (fortunately only Xeroxes and not originals). It included all my income tax returns and bank statements as well. What’s more there were similar papers for 7 other borrowers of the same bank. What were they doing in a envelope with my name on it? Who in the bank had access to these papers and what were they doing on the roadside? Did anyone in the bank miss those papers at all? What would have happened if the papers would have fallen in the wrong hands? Clearly the bank’s operational processes were treating our confidential documents in a completely cavalier fashion.

The common factor among all the 3 incidents above is operational failure. So what makes the lenders across sectors (the above 3 incidents involved an housing finance company, private sector bank and a foreign bank – and I have no reason to believe that the other kind of lenders are better at operations than these 3 are) so sloppy in operational matters. The biggest reason of course is that operations preparedness has lagged the appetite of lenders for making loans. The second reason is that they know they can get away with it with the worse that can happen to them being a rap on the knuckles. There are no laws governing the bank’s obligations to its consumers. At most we have RBI regulations and guidelines. None of them lay down the compensation payable to consumers by the lenders if they violate these guidelines. As these are not laws passed by parliament only the regulator can take action against the lenders for violation of such regulations/guidelines. The consumer can only complain to the regulator and wait for them to take action. Approaching consumer courts is time consuming (though not expensive) and most consumers are loath to use this route. In any case even where the courts hold that there is a deficiency of service on the part of the lender, the compensation provided is peanuts and has no punitive impact on the concerned lender. In more developed countries if the court rules in favour of the consumer on a similar issue it will perhaps award substantial damages to make sure that the lender will take all the necessary corrective steps to avoid a similar incident happening in the future.

So is there no hope for Indian loan consumers. That is not really true. A small beginning has already been made with the appointment of the banking ombudsman (which unfortunately does not cover housing finance companies and NBFCs) which is already having a positive impact. The Credit Information companies regulation act (which governs credit bureaus) with the rules made under it provide that banks will exercise due caution in reporting the correct figures to the Credit bureau. Unfortunately even this act does not lay down any remedy that the consumers can pursue directly against the lenders for wrong reporting of information (an example being incident 1). However the regulatory environment is now far more sensitive to these concerns and we should see more gradual progress in ensuring that lenders adopt the required operational procedures that will minimise the chances of the kind of incidents that Ii have narrated above. Off course if a smart politician gets hold of this issue (and has the patience to understand its wide ranging impact) it will not be long before we see parliament enacting laws on this. After all everybody loves to hate the lenders (though they serve a most useful function) and they will be a soft target for politicians to score brownie points with their middle class voters in an election year.

Harsh Vardhan Roongta is CEO, Apnaloan.com Services Pvt. Ltd.

Inflation is the rate of increase in prices. Simple.

In times of low inflation people grumble that prices still go up. They will, but at a low rate. Deflation is prices going down!

We have recently seen prices galloping. This has rightly been blamed on crude petroleum oil prices that have been accelerating, seemingly without the hint of a brake.

How is oil the spoke in our own wheel? Why does it cost so much more to fill the kitchen shelves? Oil. Crude oil provides petrol and diesel - fuel for our transport. A hike in its price makes it costlier to produce the fertilizer (an oil product), run the tractor, pump the water (a lot of electricity is also produced from oil products) and bring it to your neighbourhood mandi.

Some inflation is a good thing. Just like a bit of temperature is good for the body (98.6˚F is normal temperature), a bit of inflation makes the economy grow, justifying salary increases and interest on our deposits!

Inflation is dangerous when it is out of control. This can happen when plenty of money is printed. Foreign money entering our economy produces local money; the Government running deficit budgets also creates money supply. When a lot of excess money tries to buy the normal production of goods and services prices go up – INFLATION!! Your salary increases and bonuses also cause inflation, as also the higher interest you get on your deposit. Inflation is a dragon eating up the value of your money, as you need more money to buy the same product.

In the interest of the ecology and driven by higher petro prices, a lot of sugarcane and corn produced is being used to produce ethanol (ethanol is being used as a substitute for oil in cars, trucks), instead of being directly consumed. With agricultural land being limited, there has been a decrease in food production, taking food prices up. We have a new term for this, Agflation.

The Reserve Bank of India (RBI) has been increasing interest rates and reducing the money in the economy to curtail inflation. Will it work, and if it will, how?

Less money available will buy less. Higher interest rates will reduce the feasibility of borrowing to consume – most homes and a lot of vehicles are bought on credit. This will surely impact inflation. But is it enough? What is the cost of the rate hikes?

I believe it was in the year 2000 that our then RBI Governor, Mr. Bimal Jalan, said that the Central Governments of the world do not react to supply side inflation. In the current situation of the RBI’s monetary tightening, would the price of oil drop in response to the Indian rate hikes? Not likely, is my bet.

What then, could this tightening do? For one, this will hurt banks. As money becomes scarce, they need to raise deposit rates. They will also have to maintain a higher Cash Reserve Ratio (CRR, now at 8.75% of their deposits), earning no interest on amounts above 3.5% (and getting only 3.5% interest on that portion). At higher interest more loans will default, ouch! Projects being set up become costlier at higher interest rates. Ongoing housing projects may get delayed as rising interest costs will impact the borrowing of builders. There will be less industrial investment, which will hurt us with lower production in the years to come, meaning a lower GDP, less jobs and a lot more pain. This could just be a return to the old Indian “Hindu rate of growth”, or worse, recession. Oil for the moment, is likely to remain expensive, leading to ‘Stagflation’, which is prices rising in a stagnant economy.

Do you say a prayer, or are we left without a hope or prayer?

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.