Finding a home for your savings - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Finding a home for your savings A  A  A
13 APRIL 2012

A home is a place where you know you are welcome. Where you are loved, cared for, and respected. And where, conversely, you can love, care for, and respect other family members.

In the realm of the physical world, it is the place you can return to which gives you a sense of familiarity and a sense of belonging. You know your clothes are in a specific place, your toothbrush in the same spot, your favourite chair waiting for you to sit on it…

"Home", to take a line from a Simon & Garfunkel song, is "where my love lies waiting silently for me."

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But, in a fast-changing world, the concept of a "home" is losing ground for many. The double-income generation, a mobile work force, single children increasingly being pampered with rights but no responsibilities, the absence of a wiser grandparent in a home, have led to a moral decay of a "home". It is a physical place one heads to sleep, eat, and charge the electronic gadgets.

"It takes a village", states an ancient African proverb, "to raise a child".

That village is now been replaced with an array of electronic sensations and quick-fixes. The child can "connect" to others for a few rapid-eye-movements of superficial fun in a virtual world. The primitive village with family in the flesh is so old-world.

Households seek safety and traditional charm

But for all our changed views of the modern home, most of us seem to be seeking the safety of the old world charm.

The Finance Minister and the Reserve Bank of India (RBI) are perplexed why we are importing USD 50 billion worth of gold every year. They wish to discourage us from doing so by raising the import tariffs on gold.

The continued increase in bank deposits is worrying the financial intermediaries in the stock markets.

"No one", the brokers and distributors groan, "is buying shares or mutual funds anymore."

The NSE has one of the best trading and settlement systems and market structures in the world and, yet, retail investors are not investing. Speculators speculate with their trigger-happy fingers as they nervously watch global cues.The stock exchanges have become low-cost, high-tech casinos - without the alcohol and the hostesses to ignite the senses.

But the reason we have stopped investing in shares and mutual funds are obvious: investors have been cheated and robbed for over twenty years and they are fed up.

Most people I know in the field of finance have seen their salary, bonus, and wealth increase by at least 100 times since 1992.

I don't know many investors whose wealth has increased by even 10 times in that same time period. But I know of many more investors who have walked away from the capital markets because they have been cheated and let down.

That is the underlying fraud of the financial services industry, in India and globally: we have gotten rich, our clients have not. We continue to fraud and defraud.

Scam after scam, and few get punished

Rather than helping our clients become rich, we have helped our clients become poor by shovelling their savings into risky products or - at the very least - not disclosing the unintended risks they may be taking based on our commission-fuelled advice to them.

There were the leasing companies in the last 1980's that raised money via IPOs and then vanished.The merchant bankers made a killing with their fees.

There was the Harshad Mehta scam in 1992. The advice to clients:Hey, why work when money is falling from trees? Go gamble!

The Morgan Stanley Growth Fund was launched in 1994 and was sold as an IPO with the application forms being hawked at a premium to gullible investors - and no one stopped it. Why should we as distributors and brokers stop anyone - we got paid well to fill the forms!

The tech bubble led to the software and internet stocks boom and bust - more pain to investors' pockets as they watched their savings turn from 100 to 000 as if struck by a malicious software code that eradicates all the "1's"...Again, the fees the financial services industry made were so tempting, how could we tell you not to be a part of the bubble?

UTI was busy bailing out friends of government and its stock broker friends - with our money - and went bust in the process.UTI was the god of the industry and we all made money from servicing UTI.

The great mutual fund revolution in India with the launch of the private sector mutual funds in 1993 gave us not only the Morgan Stanley Growth Fund mishap but a series of hyper-marketing CEOs who drove us into useless products that mostly fulfilled their internal AuM targets. The shame is that these CEOs still collect awards today and stand proudly on your shattered NAVs just as the maharajahs stood on their recently slaughtered tigers.

This decline of the retail investor is not an emotional rant but based on hard data.

In 1992, UTI alone owned 10% of the Indian stock market.

Today, all mutual funds - including UTI - own less than 3% of the stock market.

As Indians we own fewer shares even though we have higher incomes and higher savings. Over the past 20 years, the savings pool in India has grown from about USD 60 billion per annum to USD 450 billion per annum. So, we have more money to invest as an "Indian household" but it is not heading towards the stock market and mutual funds. It is staying on in gold and bank deposits. Boring is good.

Theft on a grand scale

The policy makers in New Delhi wish to change our love for gold and bank deposits. So they announce yet another Rajiv Gandhi branded product: a senseless scheme to get us to part with Rs. 50,000 worth of investments in the stock markets. It is "senseless" because all it is doing is tempting us to stand besidethe financial maharajahs and get slaughtered again. The maharajahs will win more trophies. Our wallets will adorn their homes.

Business Standard (April 11, 2012) reported "Top Distributors make millions as fund houses bleed".

At a time when most mutual fund (MF) houses in India are struggling to break even, top distributors selling their products are earning crores of rupees in commissions.

Sample this: Foreign bank HSBC earned commissions worth Rs 118.96 crore in the financial year 2010-11 - the highest among all MF distributors - data available on the Association of Mutual Funds in India (Amfi) website showed. It was followed by HDFC Bank (Rs 115.97 crore), NJ IndiaInvest (Rs 109.9 crore), Citibank (Rs 87.8 crore), Standard Chartered Bank (Rs 76.63 crore). Collectively, 403 mutual fund distributors earned Rs 1,794.4 crore in commissions in FY11.

Commissions earned by top 10 distributors in FY11
Name Amount in Rs cr
HSBC 118.97
HDFC Bank 115.97
NJ IndiaInvest Pvt 109.9
Citibank N A 87.75
Standard Chartered Bank 76.63
JM Financial Services Private 48.89
Kotak Mahindra Bank 48.08
Axis Bank 44.02
Bajaj Capital 38.11
State Bank of India 37.65
Source: Amfi; Data compiled by BS Research Bureau

The article goes on to write, "To be fair, commissions earned by top MF distributors have nearly halved from the peak seen in 2007. "Relative to the heydays in 2007, commissions of MF distributors have come down sharply. The biggest amount in those days came from equity new fund offerings (NFOs)," said Dhruva Raj Chatterji, senior research analyst, Morningstar India.

At that time, some fund houses paid five per cent upfront commission to distributors for bringing in money for their equity NFOs. However, after 2008, the Securities and Exchange Board of India (Sebi) has been discouraging fund houses from launching look-alike NFOs.

The article has got half the story.

The story is not that the distributors make money.

Everyone has a right to earn a living.

The real story is that you were the bakra who was stuffed with products and mutual funds that should never have been bought for you. These mutual funds were sold to you because the distributors were paid fat commissions without your knowledge.

The story is not that mutual fund houses arelosing money. The real story is that the CEOs of the mutual fund industry got paid - and still get paid - a lot of money for doing the national "act of saving" a dis-service. The CEOs were party to the lack of transparency in the system. No board has fired them. In fact, they have been rewarded for showing "growth in AuM". Sadly, HDFC and Tata, two groups that I respect tremendously have not had the courage to defy the opaque distribution channels. Their mutual fund "businesses" still support the opaque structures. It took small Quantum Mutual Fund - an ant - to say we will not dance like the elephants to the tune of the distribution channels.

Till today, the focus of most conversations in the mutual fund industry is how to protect the distributor and reward them for their hard efforts as they reach out to retail clients across the depth and breadth of India.

The solution exists, now use it

Actually, the solution to reach out to most investors is there.

Investors can buy/sell mutual funds on the stock exchanges, just as they would buy a share.

Yet, this channel is hardly used and volumes are abysmal. Because no broker would be stupid enough to suggest that his client buys a mutual fund from the stock market.

If a broker asked his client to buy a mutual fund on a stock exchange, the commission earned would be displayed on the contract note. The fee would like buying a stock. Probably 0.25% of the value of the investment.

Most brokers have a wealth management division, a PMS division, or a financial distribution division. That same broking house would get up to 2.5% commission for making you buy a mutual fund through that PMS or wealth management division. 10x the commission they would get if they bought the same mutual fund for you on the stock exchange just as they buy your shares.

With a desire to maximise profit, that is their natural behaviour. You put your head in the jaws of a lion and you can bet the jaws will clamp shut.

Like any good capitalist, the broker will not tell you that you can buy a mutual fund on a stock exchange. He will shovel you into their opaque distribution channels.

The solution, in my view, is to ban mutual funds from paying any distribution fees. Upfront or trail.

The solution to bring the focus of investing back in favour of the investor is to force the broking community and wealth planners to execute their buy/sell orders for mutual funds on a stock exchange platform.

You will immediately see a sharp decline in costs to the investor. The incentive to misguide investors will vanish.

And, for giving advice, the wealth manager can charge a visible, declared fee. Not some lumped number that is difficult to decipher but a clear, one line statement: My fees for giving you advice.

Then investors can evaluate whether the advice given was worth the money paid for.

Will this happen?

Not until Securities and Exchange Board of India (SEBI) demands it. The mutual fund industry is obsessed by its AuM and its AuM is a function of keeping the distributors happy.

Of keeping their commission structures intact.

Not every distributor is a crook, not every employee in a fund house has bad intentions. But their silence makes them guilty by association.

The savings of most Indians is seeking a "home" - a place where it is respected and cared for. Not mutilated and ripped apart.

Quantum Mutual Fund is committed to working for the benefit of its investors by launching sensible, low priced products that allow investors to build a long term portfolio. And our chosen path of integrity has not hurt our performance. The means, as Gandhi said, is as important as the end.

Watch us, observe us, evaluate us over time and I hope, one day, you will consider making Quantum Mutual Fund your home.

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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11 Responses to "Finding a home for your savings"


Jul 16, 2012

moral yeh hey ki jab moragan staley nahin bacha to hmarey stock neechey gaye to kya hua ,
we can be blamed only for valuation incorrect !!baki hmara koi dosh na hey !!


Sarath Chandra Nimmagadda

Apr 19, 2012

"Watch us, observe us, evaluate us over time and I hope, one day, you will consider making Quantum Mutual Fund your home."

I have watched, observed, evaluated since Quantum MF floated NFO of LT Equity Fund. 5+ years?

Result: Quantum MF has already become my home since last two and half years. And it did, for a few that I know well about.

Thanks a ton to Quantum MF.



Apr 16, 2012

The future is also very much actively managed ETF's. So, the Quantum Long Term Equity Fund manifests itself into an ETF on the exchange.

PIMCO has done it for its biggest bond fund.

Future is actively managed ETF across the world and USA and PIMCO is showing the way.



Dr Ketan Jinwala

Apr 15, 2012

Best way to invest is directly online. I invest in quantum fund online. Just log in. Select the scheme & pay online from bank. Its over. Thank you Quantum Fund.


Dr Ketan Jinwala

Apr 15, 2012

I will not buy any mutual fund from stock exchange when I can easily get it directly from mutual fund office. I advice to find out branches of fund house from its website. Go directly & fill the form & get it. Its over. Why should I pay brokerage as well as maintainance charges on each quarter when I am going to be invested for 5-10 yrs. period?


S Gopalan

Apr 15, 2012

Why should I buy MF units from Stock Exchanges, when I can buy online from their websites? Even for buying from SEs I need Demat A/C and need an intermediary. If you talk about online trading, then investing directly online makes better sense than through SEs and that may be one the larger reason for failure of MF trading through SE



Apr 13, 2012

you wrote: The solution, in my view, is to ban mutual funds from paying any distribution fees. Upfront or trail.

my view: agree.

you wrote: The solution to bring the focus of investing back in favour of the investor is to force the broking community and wealth planners to execute their buy/sell orders for mutual funds on a stock exchange platform.

my view: disagree. why should i pay extra cost of brokerage when i can do it free buying from the fund house? or will such a fund house give me a reduced mgmt cost because i use this channel with more upfront cost? also, the brokerage as % just sucks in this case - it should be a flat fee 10/100/1000 rs (whatever that is) - there is no value added by anyone based on the value of transaction...


Abhishek Basumallick

Apr 13, 2012

Neither a very intelligent nor an original idea. Your suggestion would only make sense if ULIPs can also be similarly regulated. That is what was tried before and failed spectacularly. Else, these same distributors would force sell ULIPs and completely ignore the mutual funds, which would be more damaging to the industry as a whole.

P.S: I am an individual investor, primarily in equities and a little bit in mutual funds and have no relation to any distributor.


Shayin C K

Apr 13, 2012

Reminds of the old adage "Four walls do not a home make"...or something like that. We have Quantum as our small(by AUM standards), cozy, comfortable home.



Apr 13, 2012

Superb article and an eye-opener. Dear Quantum Team-Please keep up the good work!! Simple investors like me are grateful to you.

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