The Small Savings Schemes Conundrum

After the December monetary policy review, the focus is on small savings schemes yet again. In what has become an increasingly familiar trend, the Reserve Bank of India (RBI) faulted banks for not passing on benefits of rate cuts to consumers (read cheaper loans). On their part, banks continue to maintain that rates offered by small savings schemes are rather high. Broadly speaking, banks compete with such schemes while raising monies (fixed deposits et al); hence, the cost of borrowing become high, which in turn translates into a higher cost of lending (read expensive loans).

There seems to be consensus on the need to ‘rationalise’ small savings schemes; simply put, small savings schemes need to be made less attractive (typically a lower rate) thereby enabling banks to borrow at an inexpensive rate, and so on. But then, rationalising small savings schemes is easier said than done.

To begin with, there are political implications. Small savings schemes are perceived as (and to a degree rightly so) the layman’s investment avenues. Any attempt to make them less attractive could politically hurt the government. While on one hand, they run the risk of losing favour with citizens, on the other, it is easy to visualize the opposition hurling more ‘suit-boot’ jibes at the government :)  

Furthermore, there is some truth in the theory that small savings schemes are like the proverbial ‘silver bullet’ for a bulk of the population. The combination of low minimum investment amounts, safety (assured returns and protection thanks to a sovereign guarantee) and availability (sold through a vast network of post-offices and branches of select banks), truly make small savings schemes the layman’s investment avenue. Hence, tampering too much won't be a prudent choice. 

Clearly, authorities will have to adopt a middle-of-the-road approach. Here are some thoughts on what could be done:

To begin with, schemes that are targeted at specific investor segments such as Senior Citizens Savings Scheme and Sukanya Samriddhi Accounts will be left unchanged.

There is a school of thought which maintains that Public Provident Fund (PPF) scheme must be suitably modified. The popular scheme received a boost in 2014-15 when the maximum investment limit was increased to Rs 150,000 per annum (versus Rs 100,000 earlier). But I will be surprised if the authorities decide to tinker with PPF. Let’s not forget that retirement planning is yet to find its due acceptance in the country, and PPF features among a handful of genuine long-term investment products available to investors.         

To my mind, the Post Office Monthly Income Scheme (POMIS) and Post Office Time Deposits (POTD) will be put under the scanner. As per data from the RBI, as of Feb 2015, Rs 2,010 billion was invested in POMIS. This amounts to roughly one-third of the total corpus in all small savings schemes. Admittedly, there is a need for investment avenues that yield regular assured returns. Then again, both private and public sector banks offer products comparable to POMIS.  What sets the two apart is the rate of return; while POMIS offers 8.4% per annum, similar products from banks offer annual returns ranging from 7.25%-7.75%. It’s quite likely that the authorities will want to address the disparity.

Another aspect which is no less important pertains to the investor segment benefiting from the POMIS. It is an open secret that several affluent individuals have utilised the upper limit of Rs 900,000 available under joint POMIS accounts. Additionally, the monthly returns are invested in a Post Office Recurring Deposit account to further augment returns. Authorities will be inclined to correct this lacuna as well, thereby enhancing the prospects of POMIS being rationalised.

Then there’s POTD, the fixed deposit equivalents from small savings schemes. These deposits are offered in tenures of 1-year, 2-years, 3-years and 5-years. There’s a stark disparity between POTD rates (ranging from 8.4% per annum to 8.5% per annum) and those offered by bank fixed deposits. The popularity of POTD can be gauged by the fact that as of Feb 2015, monies parked therein (Rs 508 billion) accounted for roughly 8% of total assets held under small savings schemes.

It can be safely stated that by modifying two schemes (POMIS and POTD) which attract a bulk of monies, and leaving others unchanged, the much-desired balance can be struck.

There’s a thinking in some quarters that the way to rationalise small savings schemes is by virtually dismantling the structure, thereby ensuring that monies flow into banking channels. Such thinking is flawed to say the least. The small savings schemes framework serves an important function of offering investment options to the lay investor in the farthest corner of the country. The need of the hour is to create a level playing field between small savings schemes and bank products.

When The Portfolio Manager Quits…

Just when one thought that the debate on debt funds taking credit risk would be the mutual fund industry’s final major event for the year, comes the news of Anoop Bhaskar’s exit from UTI Mutual Fund. Apart from acting as the Head of Equity, Bhaskar also shouldered portfolio management responsibilities. Bhaskar contributed significantly to the equity research and portfolio management functions at the fund company. It came as no surprise that his stint coincided with the performance of several equity funds looking up. 

Investors in funds which Bhaskar ran, are faced with a familiar dilemma—what should be done, now that the portfolio manager has quit. Should they stay invested, is it prudent put fresh investments on hold, or should they liquidate their investments? 

When a prominent portfolio manager quits, fund companies react on expected lines—‘we have strong investment processes’, ‘the exit will not affect the performance of our funds’ and so on. To be fair, what else can they say? On their part however, investors need to be more circumspect. 

One size doesn’t fit all

At the outset, let me bust the myth that there is a standard course of action to be followed when the portfolio manager quits. Each case is different, and investors need to act accordingly. 

For instance in early 2014, when K.N. Sivasubramanian (CIO-Franklin Equity and portfolio manager) exited Franklin Templeton Mutual Fund, it wasn’t as sharp a break as it might have seemed. For those tracking the fund company, it was evident that Anand Radhakrishnan was being groomed to take over from Sivasubramanian. Furthermore, the presence of a skilled and stable team of managers and analysts meant that investors’ interests were safeguarded. Expectedly, the transition was smooth and on that count, investors had no reason to review their investments.

UTI Mutual Fund’s case is rather different. The fund company has in its ranks skilled and experienced managers such as Swati Kulkarni. However, to my mind, no one stands out as the heir apparent to Anoop Bhaskar. The replacement will have big shoes to fill. 

That said, at present, there is no cause for investors to hit the panic button. But there is certainly a case for closely monitoring developments. It will be interesting to find out who is chosen to head up the equity management function, and if that alters the working of the function.

Change can be multifaceted  

When a new manager takes over, fund companies are known to go the extra mile to convince stakeholders (investors, distributors and advisers) that the fund’s character will remain unchanged. That’s an area which must be scrutinised on an ongoing basis.    

For instance, a large-cap fund which under the erstwhile manager was a benchmark-hugger, could turn into a benchmark-agnostic fund under the new manager. Likewise, a mid-cap fund wherein the erstwhile manager deployed a value-styled approach could mutate into a high-growth styled fund under the new manager. 

In both cases, while the funds’ market-cap profile didn’t change, their intrinsic character underwent a makeover. From an investor’s perspective, there is a need to evaluate if the fund in its new avatar can continue to play its predesignated role in the portfolio. 

In conclusion, the portfolio manager’s exit is an event that merits investor attention. Investors would do well to neither panic, nor be indifferent. Finally, they must seek assistance from their adviser to help gauge the impact of the exit, and decide on the future course of action.

A Layman’s Guide To Successful Investing

A rather widespread misconception suggests that investing is a complex activity meant only for experts. Admittedly, certain investment products and strategies are complex, but investing per se need not be complex. More importantly, one doesn’t have to be an expert, to become a successful investor. Indeed, even a layman who is willing to be disciplined and diligent can become a successful investor. Here’s a layman’s guide to successful investing.

Start early

Let me confess: When it comes to investment advice, this is a cliché, but it is spot-on, nonetheless. It is never too early to start investing. Whether you are an intern surviving on a measly stipend, a rookie in his first job or a senior executive, you must save and invest.

An often-heard excuse for not investing is—“I don’t have sufficient monies now. I’ll invest when I have accumulated enough”. This is a cardinal mistake. Start investing with what you have, and then keep adding to it. For those who claim that they can’t save at all, scan through your expenses and you will come up with ways and means to save money. Starting early means you have time on hand, which in turn will help you capitalise on the power of compounding, and grow your wealth.

Educate yourself

Sure, there are investment advisers and financial planners who are equipped to manage your investments. But it will help in no small measure, if you equip yourself with investment-related information. The intention is not to become an expert, or step into the shoes of your adviser; rather it is to enable you to make informed decisions.

For instance, when your adviser/financial planner lays out choices, being informed will enable you to deliberate and make a choice that is apt for you. Moreover, as an informed investor, you will be better equipped to manage your investments and finances. There are several investment-related websites and publications. Identify your areas of interest, and read up as much as you can.

Be resilient

While investing, the importance of having a sound temperament cannot be overstated. This is especially true for investors in market-linked instruments such as equities and mutual funds. Market fluctuations can and will test your resolve as an investor.

For instance, when equity markets are on a downward spiral, one might be tempted to cut losses by selling-off investments. However, a resilient long-term investor will typically use a downturn to add to his investments. Likewise when markets enter frothy territory, he will be disciplined and not go overboard. The ability to block the noise, and maintain a sharp focus on the basics of investing at all times, is worth its weight in gold.

Develop your investment style

Investing is a personalised activity. Your investment decisions must be guided by what is right for you. For instance, simply because a friend dabbles in derivatives, or your colleague invests in small-cap stocks, there is no cause for you to follow suit. Admittedly, it takes a while to develop one’s investment style, but it is a doable task. This is where being informed about various investment avenues and aspects of investing helps.

A major upside of developing an investment style is that it makes investing a stress-free experience (as it should be). If you are at home with your investment style, you will be able to identify situations when it will not succeed, and navigate such periods without panicking.

Avoid unnecessary comparisons

The purpose of investing is to achieve investment goals. For instance, you might invest to accumulate wealth, set up a retirement corpus, or provide for your children’s education. If your investments help you to provide for those goals, you have succeeded. Do not complicate matters by comparing how your investments have panned out versus say those of your friends and acquaintances.

You will do yourself a big disservice by making such comparisons. For instance, if someone else’s investments have fared better, it is likely that they were invested in different avenues suited for them. As long as you have met your goals, you are no worse-off.

Happy investing!