|»5 Minute Wrap Up by Equitymaster|
On This Day - 28 MAY 2010
Why should investors pay for sales tricks?
In this issue:
--------------------- Indian Stocks Warren Buffett Would Buy... ---------------------
As per a leading business daily, SEBI wants mutual fund houses to not include promotional expenses, such as those on foreign trips and gifts to distributors, in the expense ratio. This ratio should normally include fees paid to fund managers, advertising, legal, record-keeping and accounting costs, custodial charges and taxes. The regulator believes many costs are disguised as advertising and promotional expenses when actually they are paid to distributors for pushing sales.
In our view, SEBI is justified in taking this step. The money that investors put in mutual funds should go towards actual investments. True, there are administrative costs that fund houses cannot wish away. But when fund houses actually use the investors' money to get more investors, the least they can do is be honest about it. Yes, even the money you pay for a cold drink in the hot summer goes mostly towards pushing you to buy some more (advertising). But at least you get to see your favourite movie star or cricketer in the television commercial!
Hardly anyone would contest the fact that infrastructure is the Indian economy's biggest stumbling block. Indeed, India must show a greater sense of urgency in building power plants, transmission and distribution networks, road, ports etc. A great deal of engineering and project management talent is required. What is also required is money. Thankfully, that does not seem to be a problem. As the chart of the day shows, the flow of bank credit to infrastructure has risen steadily over the years. In fact, the amount of credit flow in the 9 months of FY10 matched that of the full year FY09. This is particularly important considering that there has been a steep decline in total industrial credit during the same period.
It should be noted that for fear of government crackdown, many Indians had opted to pull out their illegal wealth from Swiss banks and put them in places like Dubai and Singapore. However, the lure of Swiss banking is proving to be too hard to resist. And thus, some of the account holders have moved back money to Swiss banks. But there is one catch here. The money may not have come into a secretive account. But instead, it could be a corporate deposit. After all, the fear of government crackdown still looms large. Having said that, given the lax income tax laws, we don't think anything worthwhile can be achieved by the government on this front. What do you think? Let us know your views.
The ants have been producing enticing goods that grasshoppers want to buy. What the ants have been getting in return for selling their wares has been mostly been grasshopper debt. Promises that the grasshoppers will pay back in future their debts to the ants. But as the ants have realised, a consumption binge based on leverage can go on for a while. But not forever. The day of reckoning has now arrived. And the grasshoppers have nothing to pay the ants. So some of them print more money (Americans), and some try to convert to ants by slashing their fiscal deficits (Greeks). The former then end up paying back the ants with a currency of lower value. The latter leads to huge write offs as some grasshoppers die in the process. Either ways, the ants have turned out to be the losers. The new moral of the story? Do not lend to grasshoppers!
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