Safer, Faster, Cheaper

Small investors like Sanjay Bajaj were powerless. The open outcry system prevented him from knowing how prices moved during the day. He paid 5 per cent of the transaction as cost. It took him a month to receive delivery or payment. At least another three to have the shares transferred in his name. Bajaj cursed the system, the cabal of brokers swore by it. And so it went on till 1994.

Today, from his PC somewhere in semi-urban Maharashtra, Bajaj uses the Internet to buy and sell shares. He pays just 0.5 per cent, his transaction is completed instantly. With shares being held as electronic entries in demat form, there is no risk of default or fraud.

The changed scenario dates to the early nineties. When Harshad Mehta was busted manipulating the market in 1991-92, the government seized the opportunity to set up a market regulator (Sebi), and push through wide-ranging capital market reforms. The birth in 1994 of the National Stock Exchange forever changed the way shares were traded. The NSE was at the forefront of a string of systemic changes, each intended to simplify market transactions: electronic trading, dematerialisation of shares, derivatives, were introduced in quick succession over a few years.

Our empowerment lies in being able to access the capital market safely—and at low cost—and profit from the wealth that Indian companies create as they grow in the world’s second-fastest growing economy. Bonds and fixed deposits give, at best, returns that barely beat inflation. Equities have unmatched power to create wealth. For instance, an investment of Rs 10,000 in the BSE Sensex on 1 April 1979 is worth Rs 7.4 lakh today—a compounded annual return of about 18 per cent.

The journey hasn’t been easy. Till the early seventies, share trading was dominated by brokers. The small investor had his first chance in the early seventies when multinationals were forced by the government, under Fera (Foreign Exchange Regulation Act), to sell part of their equity to the Indian public. By the eighties, the number of companies listed on Indian exchanges had virtually trebled, from 2,265 to 6,229. But then came the Harshad Mehta crisis, and then the Ketan Parekh scam, and then the US-64 crisis…

All these crises catalysed change. Today, the market is better, cleaner, friendlier. And by owning a small share of successful businesses like Infosys, Wipro, Hero Honda and Ranbaxy, smart investors have done very well with their portfolios. And in the liberating scenario of Internet trading, many of them have done it ‘all by themselves’.

BANKING
So, Who’s on Top?
They’re coming after you, but you have the power.

You want to withdraw cash and have been waiting at the branch for over an hour now. Just two more people to go, and then it’s your turn. Another 15 minutes, you calculate, and ‘I’m out of this hell’. The cashier behind the counter has other ideas, of course. It’s 12.30, and when she finally looks up from her knitting, it is to declare “lench time”.

That wasn’t so long ago; today you could be out of an ATM in two minutes flat.

You want a house of your own. Who wouldn’t, after slogging away at the same job, ten-to-five, six days a week, for 30 years? But you just don’t have enough in the bank; you still need a loan. And even if you know a bank manager who will look at you kindly and ease the paperwork, you still have to pay usurious rates of interest.

That wasn’t so long ago either, and today they chase you, stalk you, spam you for your custom.

The metamorphosis of banks into entities that are ready to take over all your financial worries, their evolution into powerhouses that are at your beck and call 365 days a year, seven days a week has been nothing less than dramatic. There have been equally dramatic changes in other financial markets—the stock markets, and the mutual funds and insurance industries, for example—but these changes seem to pale into relative insignificance, if simply because banks feature most prominently in the lives of large swathes of the Indian population. Much much more prominently than do mutual funds, or insurers, or the stock markets, which remain instruments that touch only a few million.

There are two distinct phases of banking sector reforms. In the first phase, banks were nationalised in 1969, with the objective of taking them to the masses. But that approach bred inefficiencies, which the second round of reforms, initiated in the nineties, sought to correct. Carried out at several levels, the second lot of changes have focused on removing unnecessary and outdated controls, ushering in competition, and raising business consciousness and service standards.

In 1992, 22 years after banks were nationalised, private players made a return. So did the customer. Banks were now free to set most of their deposit and lending rates. PSU banks, till then lumbering giants, were given autonomy to run their operations like a business, and were forced by market realities to get moving. “Lench time” was over. For the common man, the bank changed from being a safe-keeper of money to being a one-stop financial services provider that also keeps his money safe.

ATMs, credit cards, and the Internet have redefined convenience by making the bank branch and its staff almost redundant. The new bank will not only give you credit cards and debit cards, it will give you loans to buy just about anything you can lay your eyes on, it will manage your assets, it will pay your utilities bills, it will offer you mutual funds and insurance policies. In short, it will do anything but walk your dog for you.

Probably, the single most empowering tool that banks have handed you is cheap credit. Interest rates on loans have crashed, and suddenly large houses, big cars and fancy modcons are no longer the preserve of the super-rich. Don’t just envy your neighbour’s latest acquisition—go get it.

MUTUAL FUNDS
Bring in the Expert
If you can’t make yourself rich, somebody else can—and will.

It didn’t matter if the only kind of bond you knew was James Bond. It didn’t matter if you had all of Rs 5,000 to invest. It didn’t matter whether you lived in Mumbai or Moradabad. Mutual funds made barriers like knowledge, money and geography irrelevant: a professional fund manager, for an annual fee of 1-2.5 per cent, freed you of the burden of investing your money ‘sensibly’ while simultaneously giving yourself a chance to earn the best returns possible.

Scores of investors now use this investment vehicle to buy expertise and convenience for their portfolio. While the nineties did hit some investors badly, there were more who are considerably the richer for using mutual funds. Anyone who invested Rs 10,000 in the country’s first private sector fund, Franklin Templeton Prima Fund (then known as Kothari Pioneer) in November 1993 will be sitting pretty on Rs 1.45 lakh today—a compounded annual return of 28 per cent. Those who chose their schemes judiciously have created wealth for themselves.

As they evolved, mutual funds became worthy of the trust of the uninitiated investor. Today, schemes are tailored to meet a spectrum of financial goals and investment needs; virtually every kind of direct exposure is possible with a mutual fund. From replicating the market index (index funds) to arbitraging between the cash and futures markets (derivative funds), from growing wealth while taking minimal risks (income and gilt funds) to stretching returns from short-term surpluses (cash funds). Soon, Indians will also be able to invest in gold and real estate without actually buying those two physical assets.

The genesis of the current state of the mutual fund industry can be traced back to 1993, when private players were allowed in the business. In 12 years, they have revolutionised this investment vehicle, and even forced a monopoly government player like UTI (Unit Trust of India) to get its act together. Private players gave investors respect and attention. Service standards soared across the industry. UTI’s uncaring monopoly practices became a thing of the past: not telling investors where their money was invested or how much it was worth; asking them to wait in queue to redeem their units; behaving as if transparency was something one needed a projector for.

Today, almost all funds disclose net asset values (NAVs) daily, and complete scheme portfolios every month. Loads and costs are well within regulatory limits. Systemic checks and balances mean that scams like US-64 won’t happen again. Investment options include growth, dividend and dividend reinvestment. Redemption is quick and efficient, with high-value cash redemptions coming the same day, debt taking one day and equity three.

The changed mutual fund marketplace means you have a low-cost, efficient way to access a range of asset classes. The operational and regulatory framework is in place. It is up to you to make informed choices.

INSURANCE
Cover Your Bases
Risks that you always ran, and covers that never existed.

Moments after Ravi Sachdev decided to take a home loan to buy that 18th floor house overlooking the golf course, another worry gripped him: in case he died, Subha, his wife, and Sohini, their two-year-old daughter, might have to give up the house. He called up the bank executive he was dealing with, who smiled knowingly and introduced him to an insurance policy called ‘declining term insurance cover’. The beauty of the product, Sachdev found, was that the amount of cover would always approximately equal his loan outstanding—as his loan liability decreased, so would the life cover. And if, god forbid, he were to die, this cover would repay the loan.

A decade ago, even if he could afford a home loan, Sachdev would have no hope of finding an insurance product such as this; there wasn’t one. What LIC, the only life insurer then, and its army of agents, were interested in selling were endowment plans and money-back plans. These plans have a built-in savings component, which appealed to the buyer in an investing landscape where choices were scarce. Sure these plans helped a whole generation fund their children’s education and weddings, and their own retirement, but their hardsell prompted inefficient financial decisions, and closed minds to other, sometimes superior, options.

The no-frills ‘term plans’, which offer life cover at the lowest cost, were downplayed. In 2003, just 18 per cent of all LIC policies in force were term plans. The monopoly insurer and its agents weren’t interested in selling them, because premiums—and, therefore, agent commissions—on these policies were lower. The financial press didn’t talk about their benefits either. And so it is that endowment and money-back plans became the investment staple.

Today, all life insurers have term plans, and their averseness to selling these has reduced considerably, though ‘investment plans’ are still hyped as superior alternatives. With 14 life insurers fighting for a slice of the insurance pie, new products, and variants thereof, are being launched every other day. It’s been barely five years since insurance was thrown open to private players, and they have already shaken up the market by improving transparency levels and service standards. Today, agents go by the more pretentious name of ‘advisors’, though it will be a while before they can lay a serious claim to that definition. Having said that, insurers are today trying to put in place systems for training their sales force, and impart the necessary soft skills to tune into customers. By and large, advisors do have greater knowledge of insurance products, and a greater willingness to sell insurance solutions, rather than products.

Instead of endowment plans, private players have promoted unit-linked insurance and retirement plans, which gives policyholders optional portfolios with different debt-equity mixes—thereby giving them greater control over their investments and a chance to earn better returns. Once upon a time, choice equalled another LIC agent, now it means 14 life insurers.

In general insurance too, choices have opened up, with again 14 insurers slugging it out. Since many kinds of covers are still governed by tariffs, product differentiation is marginal. But once tariffs go, which is expected soon, expect more value for money. Meanwhile, there has been a dramatic improvement in service standards. Players are more responsive to customer needs. Cashless settlement has become the norm in auto and medical insurance, thus doing away with the need to maintain a large emergency fund.

Despite all these encouraging developments, barely 2 per cent of the population is insured. Similar levels of under-insurance are seen in the essential asset covers. The companies are there, the products are there; what’s lacking still is awareness of insurance as a risk-protection tool, and not merely a tax-saver that people have seen it as for years.

with Avinash Singh