Get Yourself a Financial Guardian - The 5 Minute WrapUp by Equitymaster
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Get Yourself a Financial Guardian

Jun 10, 2016

In this issue:
» Will Indian companies sustain high dividend payouts?
» Is LIC the lender of last resort?
» Round up on markets
» ....and more!
Tanushree Banerjee, Co-Head of Research

Mr Kanan (name changed), an NRI, was actively investing in Indian stock markets. His friendly bank manager was his most trusted advisor on all money matters. He'd promised Kanan he'd double the returns on the money lying idle in his premium bank account.

Little did Mr Kanan know that his hard-earned money would be risked in fancy new fund offers! There were also 'structured' products in his portfolio that fetched the bank manager steep commissions. Additionally, the banker kept churning Mr Kanan's portfolio.

In other words, he milked Kanan's portfolio for as much commission as he could get. Meanwhile, Kanan failed to get anywhere close to the returns he desired. Only when he fell short of the savings he needed for his daughter's education did he realise his folly.

Relying on the false promises of the bank manager had cost him a fortune. His own ignorance had landed him in a financial mess.

Of course, Mr Kanan is not alone. Investors all across India have a similar same story. Hordes of them enter the stock market at its peak and lose money during the subsequent crash. Never to return.

Bad advice and vested interests force them out. The bankers, brokers, mutual fund distributors, insurance agents, and financial planners ruin their client's financial status. And what could have been a long and rewarding wealth-building journey turns into an instant nightmare.

Do you remember the 'domino formula' Rahul told you about yesterday? The same formula applies to stocks, funds, and almost all asset classes. Not losing money and growing capital gradually creates real wealth. But to execute, you need to empower yourself with knowledge on all aspects of personal finance. Or alternatively, you could seek an honest, independent, and unbiased advisor.

Equitymaster's sister concern, PersonalFN, was founded in 1999 to empower Indians with superior financial planning. They exist to guide investors - transparently and without bias - on their journey to financial freedom.

But even after all these years, the gap between the demand for genuinely good financial planning and the supply of capable advisors remains vast.

Therefore, PersonalFN's latest initiative roused our interest.

It just launched, an exclusive platform of financial advisors. It's for those of you who want to become a financial 'guardian' for lakhs of investors. And it's for those of you who've known the pain of misleading and unethical advisors.

My colleague Rishabh at PersonalFN put it this way...

  • A Certified Financial Guardian will be a symbol of honesty and commitment towards the interests of investors and help build a long-lasting and trustworthy relationship between those who have the savings and need investment advice - and those who can offer it.

    In an ocean of rampant disappointment and extreme distrust, a Certified Financial Guardian will be among the chosen FEW whom you can meet and place your faith in with a high level of confidence.

So here's your chance to hire your Certified Financial Guardian.

Or qualify yourself as a Certified Financial Guardian and work towards giving your clients honest, unbiased and competent advice.

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03:35 Chart of the day

Though the onset of monsoon is awaited, it has been raining dividends in 2016. As reported by Mint, the steepest increase in the dividend payout ratio, was seen in fiscal 2016. As seen in chart, the ratio moved to 50% from 34% in a year's time.

Indian cos. Becoming More Generous with Dividend Payouts?

Further, if one looks into payouts of public sector units, they have been more liberal with the pay outs. The dividend payout ratio of 21 PSUs in BSE 100 has moved from 25% in FY11 to 81% in FY16.

One reason for large surge in the dividend payouts during FY16 was a change in the dividend taxation policy. Nearly 70% of the payments were announced within a month after the Union Budget. And in many cases the promoters of the companies benefitted the most. Plus there were companies with not-so-good fundamentals.

Hence, investors should not blindly buy stocks of high dividend paying companies. Companies with growing dividends might not necessarily be offering equally good promise when it comes to earnings growth. Consequently, such companies sooner or later may reduce high payouts. Hence one should carefully assess the sustainability of high dividend payments.

But there are group of stocks which can do wonders for your portfolio.

As, Madhu Gupta wrote in one of the recent edition of 5 Minute Wrapup, dividends can be a meaningful way to reward shareholders. And FMCG companies are the best examples of that.

Here's what she wrote -

  • Apart from the rise in the stock price, investors can easily fetch mouth-watering returns by way of dividend yields year after year. In fact, there is a way to ensure that Hindustan Unilever-like stocks become your consistent income generators for decades...!

Indeed, we have worked on strategy of picking strong dividend paying stocks, which we have outlined in a special report. Do check our report - How to Pocket 10-30% Returns Without Selling Your Stock to know the best way to select dividend multibaggers.


On various occasions we have reminded about how LIC acts like the government's ATM. The insurance behemoth has a huge investible corpus built by insurance premiums and Unit linked insurance products or ULIP funds. The government has been dipping into these funds at its discretion to make its asset sales. The success of government's stake sales (IPOs, FPOs and bond sales) have been because of LIC's investments.

But despite the criticism, LIC continues to act as the 'lender of the last resort' for the government. For instance, as reported in Mint, LIC has bought part of the UDAY bonds issued by state governments as part of the bailout package for debt-ridden state power utilities. The bonds amounted to Rs 42 bn crore last fiscal, as per government data. Further, during 2015, LIC also committed to invest upto Rs.1.5 trillion in the railways over a period of five years, till 2020, by subscribing to bonds issued by the railways.

All these instances certainly raise the question - Is LIC actually an independent body?

My colleague Vivek Kaul, has often expressed his opinions about LIC involvement in government's funding in his Diary. Here is what Vivek writes...

  • The government treats LIC as a sovereign wealth fund, which keeps coming to its rescue whenever required. But the money LIC has and manages is not the government's money. The LIC manages the hard earned savings of the people of India and given that these savings need to be treated with a little more respect.

    LIC is taking over from the government. One arm of the government is being replaced by another government. This is nothing but a farce.

Indian indices are witnessing volatile trades today. After opening on a flattish note, the stock markets registered gains. However, they have again lost momentum and are trading below the dotted line. At the time of writing, the BSE Sensex is trading lower by 133 (down 0.5%) and the NSE Nifty is trading down by 34 points (down 0.4%). The BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index is trading flat.

04:50 Investing mantra

"If a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result" -

Charlie Munger

Today's Premium Edition.

Bankruptcy Code 2016: A Much-Needed Reform Finally Arrives

India's Parliament has passed the Insolvency and Bankruptcy Code that promises to make it easier to wind up a failing business and recover debts. Why was this code needed? What are the key features? What are the challenges? Read more to find out...
Read On...Get Access

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