|»5 Minute Wrap Up by Equitymaster|
On This Day - 16 NOVEMBER 2010
Another 'UTI' type blow for investors?
In this issue:
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The latest testimony to this is the fate of the assured return schemes offered by India's largest insurance company LIC back in the 1980s and 90s. As per reports the extent of losses in three schemes offered by LIC has the potential to bring back memories of the UTI scam of 2001. Promising fixed returns of around 11 to 12%, these plans are currently running a deficit of a sterling Rs 140 bn! The invested money is from 1.3 m investors. Hence, there is little doubt that the insurer's inability to deliver returns could dislodge investor confidence once again.
Agreed that the notional losses could be attributed to trends in economy, interest rates, inflation and the like. Further, the outcome may not be as detrimental. This is because LIC seems to have enough liquidity at its disposal to tide over the crisis. But the economic factors are bound to have an impact on investments. And in no way can issuers of the instruments or investors undermine them. Hence it is most imperative for investors to recognize and be warned of the risks to the promised returns.
Investments in stocks at attractive valuations or in mutual funds through the SIP route can offer you some degree of safety. It could also enhance the likelihood of generating supernormal returns in the long run. However, there can never be any 'certainty' to the returns. And thus the promises to deliver assured returns need to be taken with a pinch of salt.
It isn't that the policymakers have chosen not to spend the 3G windfall. Just recently, the government sought the approval of the parliament for an additional expenditure to the tune of Rs 450 bn, involving a cash outlay of Rs 198 bn. What is worrying is not that the Government has chosen to spend more. It is the fact that it has again decided to do all the wrong expenditure. As per reports, the higher expenditure will go towards subsidies for fuel, food and fertilisers. We believe that in view of the 3G windfall, the Government had an excellent opportunity to do something about the long term productivity of the economy. Instead, it has chosen to spend a significant chunk towards wasteful expenditure. Looks like another opportunity has gone down the drain.
However, we are not too sure of the fallout of such large recruitment on the IT companies. Such recruiting plans would lead to a huge workforce. Managing this workforce is not without challenges. Maintaining high utilization levels is just one of them. Another is the problem of high attrition rates, which is only going to get further intensified with rising numbers. Moreover, a larger workforce would also mean a larger wage bill. While expansion for growth is necessary, we just hope that these companies are not expanding their employee numbers just for the sake of expansion and are keeping in mind the consequences of the same.
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