Financial freedom - Your tryst with destiny!

Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially.

Those were the words of our first Prime Minister on the eve of our independence. Cut back to an individual’s life, it will be no mean achievement if a person can say the same in the context of financial freedom at any time in his life, on or before his retirement date.

In the age of goal based financial planning, it is important to make a list of what we set out to achieve, financially speaking, when we start our careers. Every year lakhs of people join the work force. Many leave, having completed their tenure. It is important for every new worker to know and understand the future that lies ahead of a retiree.

Most people retire around the age of sixty. For those who continue to work beyond that age, inadequate savings is a common reason. In my conversations with many retired people who are facing a challenging situation, the common refrain is ‘....our jobs did not have an in-built pension or I had to draw a significant part of my forced-savings for my child’s marriage or for building a home or funding their higher education’.

These are the common goals Financial Planners talk about while helping you to plan. These are also the dreams or goals highlighted by insurance and savings companies while selling their products.

However, prioritisation of goals is completely in your hands. Retirement needs the largest corpus of funds. The bigger the target, the longer the period one needs to allow, for, the savings to accumulate. Hence it will not be extreme to state - A new worker needs to start saving for his retirement from the first day at work.

For young impressionable minds beginning a career, unfortunately, this line of thinking is rare. The need for financial literacy is the need of the hour so that you may keep your tryst. 

Here’s raising a toast to your Independence & Freedom, for all times!

Is it time to bury the 'Maai Baap'?

The Govt. or better Sarkar, is the Maai Baap – or loosely translated, the all-important decider, the Parent of our fate or destinies.

Extend the logic to the financial markets – you have the concept of The Sovereign with its mandate to issue and print currency and hence The God of zero default risk!

Expectedly, the popularity of Govt. administered savings schemes such as EPF, PPF, LIC, PO savings etc. is very high. However, the recent experience (last seven years) in terms of high overall inflation, riding on a particularly high component of food prices inflation – a rare occurrence in recent memory makes it imperative to ask some pointed questions -

Population statistics indicate the increase in average life expectancy. What does the common saver do to protect himself from exhausting his retirement corpus?

Since the Govt. happens to be one of the most inefficient users of capital, if the common saver continues to park a significant portion of his life-savings with the Govt., should he not take some of the blame for the prevailing high inflation?

When you park your savings in Banks and Insurance companies, a significant part of your money finds its way to the Govt. by way of investments in Govt. securities. The quantum is mostly way above the stipulated norm. The return on these Govt. securities, in the recent past has more often been lesser than the rate of inflation. Does this bother you?

At home, will a parent give more pocket money to an errant child known to squander his money on idle pursuits? If your answer is a firm no, why will you be indulging an errant Govt.? Is it time, instead of letting the Sarkar be the Maai Baap, the citizens or the common saver assumes the role of the strict parent and put its savings in instruments based on merit?

Now, let us see what could be some of the possible consequences if the common person’s savings allocation is merit-based –

Govt. is forced to cut down on non-essential expenditure

Govt. is forced to sell off assets it is not able to operate profitably – may include PSUs and land and real estate

Govt. is forced to pay market linked returns on borrowings

Capital availability to businesses and industry increases

Lending by Bankers and Investments by Insurers is forced to seek the best risk-reward equation

Now let us take stock of what happened recently after a change in the Finance Ministry. A Minister known to be ‘market-friendly’ was back in his old office in the North block. True to market expectations, he kicked off in spectacular style, making a slew of announcements.

Quiz time again –

Did the FM make any announcements signalling measures to arrest the decline in GDP growth?

Did the FM say anything about tackling the possibility of drought and hence the threat to further spiralling of food prices?

Did he say anything about introducing inflation-indexed Govt. bonds for the savers to improve the real returns on investments?

If you know the answers, you will also know that the FM is playing to the galleries by making announcements to improve investor-sentiment. This is to attract more FII investment and hence may lead to a strong rally in markets.

Is this the primary role of the Finance Minister?

Don’t we know the risks that lie behind such moves from the past? The FM might be doing this to help his party win the next general elections. However, what will be the consequences of these moves on the economy and our personal finances beyond the short-term?

We believe that the time has now come for the common saver to become more aware of the long term risks to his financial safety and security and make well-advised moves vis-a-vis his savings, because the road to ‘zero risk’ may be fraught with danger!

In our next post, we will talk about what could be some of the options that an investor may consider to improve his portfolio’s overall risk-reward equation.

Faffing is injurious!

The Macmillan dictionary describes “faffing” as – to waste time doing things that are not important or necessary, an act, which is a complete waste of time.

The repetitive bombardment of news & views – a lot of which is gas (reminds you of a recent TVC of a deodorant brand); through multiple media, takes a heavy toll on our sensory mechanisms. This may lead to confusion in the mind and subsequently, wrong decision-making or no decision-making.

The consequence of the latter, sometimes, is better than that of the former, but, continued for too long, can lead to long-term damages.

If I am sounding too technical, you will have to forgive me. Without a basic understanding of the relationship of cause and effect, we will never come to grips about why we make common mistakes.

As part of my vocation, I work on how to use debt to create assets while avoiding common mistakes that may lead to a failed stress test or an eventual debt trap.

The test of a ‘good debt’ should include whether the repayment period is less, equal to or greater than the period of benefit accruals from the ‘purchase’ or ‘investment’. Simply, is it a case of deferred gratification versus incidence of costs ‘upfront’, relatively speaking?

E.g. taking a 20-year loan for a home, which will be, used for a lifetime. An exact opposite could be, going on an overseas holiday now (immediate gratification), financed by a loan, with a loan repayment over the next 3-years (deferred cost).

Likewise, there can be other tests – is the recurring ‘debt service obligation’ plus recurring expenses, within a reasonable percentage of the monthly income or cash inflow, of the person/family? What is the ‘margin of safety’? So on.

I came across an article on the subject in a popular website, by a respected professional. The article makes some observations, which are highly questionable, if not confusing, for a lay reader. Capitalism ensures spending is easier than earning, it says – Are not spending and earning two sides of the same coin. Is the aggregate spending, not equal, to the aggregate earning. Somebody’s spends results in somebody’s earnings, simple, is it not? Probably, what he meant was – it drives consumerism at the cost of saving and consequently asset building? I am not sure, I am guessing.

The author signs off, saying, it will be a good idea to consult a Financial Planner before taking any loan. It is not my intention to question the competence, capability and the intention(s) of the Planner community. However, let me ask you, Dear Reader – Do you know how to choose your Financial Planner? Do you know how to assess the qualities of the Planner? Do you want guidance or do you want to create ‘dependencies’ for decision-making?

The gap in your ability to make these judgement calls is precisely what should be the focus area of the media – How to choose a Financial Planner? What are the tests of good debt versus bad? Etc.

The long-term consequences of a wayward media are damaging both for the individual and for a society, with no formal social security structures. Of course, I am not making a case for state allocations funding individual financial imprudence!

The ultimate test of a media byte will be in whether it is worth ‘saving’, for future reference like an asset, or whether, it is immediately (or, within 24 hrs.) marked to the trash folder like an ‘instant’ consumable!

The monster lurking behind the devil!

The battle between the Goliath of inflation and the fearless David (read The RBI Governor) continues – the recent tenure extension of David does indicate the collective faith of our leaders in the monster-slayer! But all tenure extensions are not equally welcome, as we shall soon see.

The number of rate hikes by the RBI in the last 18 months, have been too many and is nowadays looked upon with a sense of fear by all hapless souls including yours truly.

The wheels seem to be coming off at a rate much faster than Basanti could whip Dhanno to take her to safety! Am I getting too filmy here? I dare not.

Let’s get real. Even as late as 2009 and 2010, banks were luring customers with teaser loans. Calculations reveal the following - If a borrower takes a loan at the rate of 8%, for a 20year tenure and if after 1 year the rate of interest increases to 9% then his loan repayment tenure would have ballooned to 292 months and his total repayments would go up by 22%. If this is followed by another rate hike of 1% another year later then the corresponding figures will be 418 months and 75% respectively!

Shocked? Don’t be – because that is what has exactly happened to many customers. With every rate hike, the EMI should go up. In reality, this does not happen! Banks are ‘friendly’ enough to allow you to continue paying the same EMI. Their response – it is logistically impossible to inform all customers immediately and start collecting higher EMIs. The Devil advocates – The Banks do not mind that extra income by way of interest, after all that is the objective of their business!

The remedy is actually quite simple – keep a track of your loan by noting down the price of your loan. The reference rate (called by any name – PLR, BPLR, Base rate, whatever!) plus the spread (for HFCs and NBFCs it is negative as they are not subject to the latest RBI guidelines on lending rates which stipulates that the Base rate is the lowest rate that a Bank can offer a borrower – more of this trickery in another post). Every month visit the homepage (website) of your lender and confirm if there are any changes (usually hike in today’s scenario) in the reference rate. If yes, immediately get in touch with the customer helpline and find out how you can get the EMI enhanced to reflect the rise in rates.

Alternately, keep a copy of the loan amortization chart at the time of taking the loan and ensure that your projected loan outstanding amount at the beginning of every financial or calendar year is met (or bettered) by pre-payment of the difference. This may be due to hike in interest rates and/or under recoveries due to continuation in payment of same amount as EMIs.

If you are a borrower with a loan taken before the Base Rate was introduced, chances are high that your existing home loan could be at a rate of interest of 14% or more. You must certainly explore the option of getting your loan re-priced by the same lender. If that does not work, seek a transfer of your loan to a new lender. Chances are high that you will not only bring down the outstanding tenure of your loan but also the EMI that you are paying currently.

A little pro-active behavior on your part can save you from substantial financial damages later!

Creating a world of smarter investors

Do you remember the Indiabulls TVC? When the speaker at a company AGM is about to conclude, Mr. Kulwant Bhatia raises a query on the impact of raising long term debt in a potentially inflationary economy!

The TVC is funny. No one can be blamed for failing to notice the significance of the question. The contrasting visage of the speaker and the person asking the query with his ‘gotcha’ expression and accompanying glee, perhaps over rules all other thoughts.

This column is not a TVC aimed at making you laugh and help brand recall. This column is to make you think, so we will dissect the query highlighted in the opening para.

We live in times of high inflation. The impact of high inflation is felt when the value of a unit of currency goes down and leaves the owner of the currency ‘poorer’.

Let’s turn around this scenario a little. What happens if you own negative currency? In other words, if you are a net borrower, do you become ‘richer’ if inflation is high?

No one borrows to leave money idle in the bank. You put it in a business or in an investment where you can earn a rate of return which is better than the cost of your borrowing. Without this, you are worse-off borrowing money.

The return that you generate in the business or on your investment (an asset), if it is not fixed (which is likely to be the case) or if the market value of the asset is fluctuating, then there is a risk. The risk is of losing money. Either, the returns may fall below the cost of borrowing or the asset value may fall below the cost of the investment.

If you have an asset that has less chances of either risk coming true, and which is not difficult to sell (demand outstripping supply), then, it is safe to assume that an injection of borrowed capital for financing will enhance the return on own capital.

This is a simple principle of ‘leverage’ at work. The term is derived from physics where a lever is the simplest form of a machine at work, the output is magnified or multi-fold that of the input.

To further control the risk, try coupling the target asset with an asset that historically has a weak or negative correlation. Do you have a winner in your hands?

This does not mean you have a perpetual winner in your hand as any of the following things may happen - Rate of interest shoots up, inflation falls, return on asset and/or asset price falls.

The trick lies in balancing the risks and getting a return which is an adequate compensation for the risk. Timing the ‘exit’ from the strategy also becomes important. Reducing the leverage, if not wiping it completely is easier than exiting the asset. Do not wait for peak price, peak returns, and lowest rates of interest or highest rate of inflation.

Are you wondering what that dream asset could be? Well, how about your own business!

Ask not how the market is doing

By Vivek Reddy

"How's the market doing" or "what's happening in the market"! People ask these questions all the time, and expect short answers. The problem is whatever the answer, it usually leads to faulty understanding and wrong conclusions.

Let's take all three market scenarios — it has been rising, it has been flat or it has fallen. If the market has gone up, one has to answer, "the market is doing well". However, once these words register, the person hearing it usually becomes emboldened to put money into stocks. If the market has been flat or falling, the answer of the market not doing well is instantly interpreted as a signal to avoid investing. Clearly, such conclusions may be wrong and may not even have been intended by the person answering the question. If one were to analyze the causes of such miscommunications, they would be, one, an undue focus on the recent past and, two, a short attention span.

The way out is to communicate clearly that the past behavior of the stock market has little bearing on its future, and that a more reflective and studied approach should replace relying on sound bytes and one-liners on the market.

The more appropriate question, of course, would have been to ask, "what factors will influence the market" over whatever timeframe the investor is considering an investment/exit decision. And a sensible discussion will focus on the future and include:

expected future growth in corporate profits in relation to price-earnings multiples;

trends in liquidity and capital flows; and

impact of various economic and political events on corporate profitability. Thereafter, there has to be a view on how India's market compare on these factors to other developed and emerging markets. This analysis should give investors a basic idea on how much of their financial assets can be allocated to India's market.

It must be remembered that this broad understanding of the market will serve only those investors looking for a diversified equity portfolio or mutual fund. Those seeking to invest in individual stocks will need to study that company in depth before taking an exposure.

While deciding on an investment plan, there is always a multitude of expert opinions available in various forms. A sound approach is to ignore those analyses which dwell on the past and give a rear-mirror perspective on why the market behaved in a particular way. Also, distrust brokers who motivate you to transact often as they may be looking to profit at your expense.

So next time you feel like asking or have just been asked how the market is doing... pause, rephrase the question and take time to engage in a meaningful discussion. If there is a shortage of time, the best response is "only God knows".

(The author is former CEO, Kothari Pioneer Mutual Fund, which is now part of Franklin Templeton, this article appeared in 2006, however its relevance is timeless!)

Separating the (Rich)Men from the boys

Meeting an entrepreneur who believes in exclusivity without charging a bomb!

The other day I visited the factory and sales outlet of a good friend of mine who specializes in customizing formal wear for ‘men with an eye for detail’. True to the spirit of Mumbai’s entrepreneurial class, he believes in creating and retaining a niche for himself in every sense of the word.

The location of his set-up is in a high security zone which also houses India’s most valuable prisoner (or should I say costliest?)!

What astounded me about his entire business, I will capture as briefly as possible – value for money without losing out on the quality of fabric (he showed me some real exclusive stuff from France & Italy too, in addition to the best of Indian fabrics), customizing the most minute detail (bespoke is the trade name for it I learnt) and guess what, choosing his clients exclusively by referrals!

Now, ask any successful entrepreneur about the exclusivity of his services and he will highlight the same without failing to mention the premium his services command. Yet, here was somebody for whom the premium came from the select list of clientele that he caters to.

If you are wondering about the logic of his approach – take a step aside and think.

• Does it make sense for someone to base his business on referrals only?
• Does it make sense for someone to choose his clients to ensure the referrals are also of a similar quality and bracket?

Aren’t you asking yourself, if he is so good then why is he pricing himself low? Let it suffice to say, he understands that if he can keep a tight control on his overheads and his inventory, his pricing will never be a ‘deal-breaker’ – excuses like it’s too far off from where I stay you know, will simply not work!

Lastly, can’t help resist making the statement – Even Mr. Buffet would not say ‘I buy expensive suits. They just look cheap on me!’

Power to Richman’s Clothing!

On value-investing - There are plenty of similar good businesses around us. Instead of chasing over-valued stocks in the market, ever thought of investing your money with such entrepreneurs? I don’t know if such deals are easy to source and structure, but what I know is the growth and returns potential which such (low-risk) investments offer can put many ‘blue-chips’ to shame.

Investing & the fine art of Wealth Creation

Caveat – Read this only if you are not averse to exercising your mind.

What does the word investing mean to you? - Purpose

• Parking your surpluses for a deferred consumption/purchase of asset?
• Buying a ‘return-generating’ asset?
• Buying a ‘cash-flow’ generating asset?
• Buying something where the demand is expected to exceed supply for a longtime and hence drive up prices?

How do you go about making an investment? - Process

• You refer to your Financial Plan from time to time for a review in light of any developments on the personal front and/or the opportunities available, irrespective of whether you have a surplus available on hand or otherwise?
• You have a clear set of investment criteria which you ‘check’ before any decision?
• You have your list of reliable information providers – Advisor, friend, colleague – seek specific information about the opportunity under consideration from at least 2 reliable sources, before making up your mind?
• While evaluating the possible upsides do you also try and evaluate the possible downsides (in detail)?
• You clearly evaluate all costs (including taxes)?
• You pay your advisor a fee for consulting to ensure that between the 2 of you the expectations are clear at the out-set – Advisor to give unbiased opinion knowing that he is being compensated for his efforts irrespective of whether you buy or not?
• The decision to buy (or not) is yours and entirely yours?

When do you choose to make an investment? - Trigger

• Whenever you have a surplus and you can’t rest easy till it is put away?
• When you see an asset available at price lower than its fair value?
• When you are convinced (or is it impressed) by your advisor?
• When everyone you know is investing or sharing their stories of impressive gains?
• When your agent says the last date is not far off?
• After you have kept aside sufficient money for foreseeable & unforeseeable needs (and, opportunities)?

Consistently successful investors are usually well-read, do their homework, and are never afraid to invest their time in finding the next opportunity even if it results in rejecting the offer ultimately.

Lastly, can’t resist recalling a Akbar-Birbal folklore which goes thus –

Akbar – Birbal, do you think all married men are subservient to wishes of their wives?

Birbal (as diplomatic as ever) – Can’t say about all, but most men seem to abide by the wishes of their better halves!

Akbar – Can you prove it?

Birbal – If your Excellency permits, certainly!

So one day in the court of the emperor, all in attendance are asked the question with the instruction that if they abide by the wishes of their wives, they should stand to the right and others to the left.

As Birbal had mentioned, all except one came and stood on the right side - there was one old, scrawny man who stood to the left, much to the delight of the emperor.

Akbar – Birbal, there you are, here is one person and he proves you are wrong!

Birbal – Your majesty, if you will allow me just once, to question this man, please!

The emperor nods and Birbal proceeds to the old odd-ball and asks him whether he does not abide by his wife’s wishes?

The old man replies – Sir, of course I do! I do abide by my wife’s directions and she says wherever there is a crowd, I must stay away.

Akbar as usual was impressed by the old man’s answer and even more so by the wisdom of his favorite minister and best friend Birbal!

….and, successful investors are never scared to stick to the set of rules they set themselves, irrespective of the compulsions at hand!

Wealth management for the wealthy vs. Wealth creation for the smart-set

Every time I meet a new prospect for Financial Planning services, beyond the initial routine queries, the question that is inevitable is “Well, Aniruddha, what is the minimum portfolio size that you manage?”

Well nearly, almost all the time, I reply with a bemused look saying “it doesn’t matter!”

Well, if this raises your curiosity, let me clarify.

A Financial Planner helps secure the financial future of his clients. However, if you are wondering if people with insignificant savings are also welcome, then how would one sustain the cost of servicing the relationship?

For a better understanding, let me highlight the following from the purely commercial perspective of the business of Financial Planning. What is more desirable?

1. Clients who will rely/depend on you for your advice? Or, clients who can live without you (not because you are not sufficiently skilled, but because they have enough resources that it just doesn’t matter who manages their finances)?
2. Clients who will swear by the value-add that you offer after experiencing your services for a couple of years and then help generate referrals? Or, clients who are the who’s-who of society (good to boast at a party!). But, you alone know how tough it is to deal with someone who throws their weight around.

Actually some advisors who exclusively cater to this segment are perpetually pitching for new clients because in this segment both the advisor and the client are only loyal to their monetary interest!

3. Clients who will have a disciplined approach to an agreed plan? Or clients who are perpetually willing to try the current flavor in the market? As the HNI database is a marketable commodity and cold-calls and sms-intrusions are still in vogue, DNC registrations not withstanding!
4. Lastly, is there a correlation between the current net worth and future growth potential of a person? If, ever there was, it cannot ignore - the quality of the person, his education, professionalism, clarity of thought etc. – these are factors which decide the correct fit between an advisor and the customer. Did we ever mention net worth while debating this?

Give me a low net worth level headed 30 year old any day over a well heeled senior professional who is ‘too busy to spare an hour every quarter to review his portfolio!’ After all you can judge the maturity of your advisor by the way he manages his client-portfolio, right?

Professor C.K. Prahlad – God bless his soul, there is indeed a fortune to be made at the bottom of the pyramid!

Don't have answers? Ask the right questions!

The last few weeks have resulted in lots of ruminations, yet, little by way of analytical expressions. For starters, read a fellow professional & friend’s blog-post extolling the virtues of celibacy (well, avoidance of debt) to which I only managed to pen my thoughts in the ‘comments’ page thus -

“….Debt is a financing option, which if one may say so is commonly mis-understood by both users and non-users alike. To explain further, first focus on the word option – did the borrower use debt as a means over an alternate option or was it the only option? When using a credit card, is the use, an option (with the presence of other alternatives) or a pure leverage to increase buying power? Can debt be used to accelerate wealth creation without increasing risks? Like atomic energy it all depends on the end-use which is needless to mention dependent on the level of understanding of the user or his advisor.”

Again, in another of the same columns, a discussion on whether you really need an advisor to plan your finances or you can do it yourself was discussed with a conclusion nudging you towards a - you can do your own thing. Now the problem with these guidance(s), are, that they are subjective and one really needs to understand the nuances of the game to be on-the-ball. I will make this easier to understand, shortly.

Let me recall another very personal discussion with a client & friend (in that order, strictly). Since I am responsible for the outcomes of his financial plan and how it benefits him, I also as an extension take a friendly interest in his non-financial decisions which may have some impact on his financials going forward. This gent is a professional engaged with a reputed organization but has recently decided to foray into financial advisory himself born out of an acute interest in helping friends & colleagues with their personal finances. He thinks (until the end of our meeting) that if this new activity starts paying-off (financially worth his while) he might think of making it a full time career.

He was open to my questioning him with a straight-face – Is financial advisory a core-competence for you? And, Do you see yourself earning decently in this dog-eat-dog competitive environment? His answers to both the questions were a resounding ‘No’! We did not have to debate this further.

Let me explain this line of thinking further – students of the make or buy decision-making theory will find this familiar territory. In any professional’s life-cycle, there is a period of steep learning growth, a period of steep earning growth, a period of consolidation, eventually leading to a plateau-ing of first the learning, then the earning and eventually the decline of both. Somewhere along this life-cycle you will find a ‘transition point’ where returns on your intellectual balance sheet will be overtaken by the returns on your financial balance sheet. It is till this point in time (if not always) at least, that you should outsource the advisory for a fee. If you have a doubt consult me, I will remove your doubts.

VC or PE (venture capital or private equity for the uninitiated) funding is fast catching the imagination of the entrepreneurial class in India. The VC or PE investor picks up a stake in the company of the entrepreneur and this injection of capital (which the entrepreneur could not have done on his own) is expected to provide a boost to the growth plans of the business the successful implementations of which is aimed at creating win-win solutions for both the promoter and the investor.

While this may be becoming popular, entrepreneurs need to ask themselves some basic questions – Is the cost of the external equity investment affordable? If bank funding were available which is more preferable? If bank funding is not available what are the reasons for the same?

In most cases of dilemma in decision-making asking the right questions is all the difference that is there to a right decision. The panacea lies in a patient and structured approach.

What hurts more Health risks or Insurance?

In an earlier post, we had touched upon health insurance and how it has created a doubt in the minds of consumers. Here, we re-visit this topic for a better understanding.

Let me quote verbatim from a few websites, a couple of relevant but contradictory perspectives. 1^st, from the point of view of a consumer in the US -

“… My ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors…. and require evidence-based medicine… companies which fail at these pursuits go bankrupt or exile their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded.”

Another consumer responds. “The insurance industry may be the only private-sector institution that I trust less than government. In auto insurance, I find that unless I change providers every few years, my premiums just get ratcheted up for no reason. I think that life insurance is a huge rip-off, particularly considering that it starts out with a tremendous tax advantage.

I do not trust my fellow consumers to understand the concept of insurance well enough to make (force) insurance companies offer products that make sense. Too many consumers think that good insurance is something that provides payouts for small problems rather than protection against rare catastrophes.

In fact, as I have pointed out before, most people do not want insurance of any sort. They get homeowners' insurance to satisfy the mortgage lender. They get car insurance to satisfy the state. They get health insurance only when they think their employers are "giving" it to them. The insurance industry is heavily regulated, and it has gotten quite cozy with that arrangement.

My wife recently sought information on long-term care insurance. What I concluded is that we would be trading one risk for another. Now, we face the risk that long-term care would eat up our savings. If we had insurance, we would face the risk that the insurance company would not pay a claim, because of how it reads the fine print in the contract. I'd rather take the risk I understand …….than the risk I do not understand…….

I think that meaningful innovation in health care is more likely to come from Wal-Mart than from Aetna. …Wal-Mart is likely to be thwarted by the credentials lobbies. If practice regulations and licensing were not a factor, Wal-Mart could rely less on formal schooling and more on internal training for its medical workers. Then you would see real improvements in quality and reductions in cost.”

Counter perspective from a CEO of a new Indian Health Insurance company

“1. What are the major hurdles in the Industry in India in terms of customer perceptions and attitudes? Consumers are increasingly concerned about their health and rising healthcare costs…. this is an opportunity…. Awareness and knowledge levels of health insurance or products remain low…..Customers may not understand the benefits and the value proposition of the policy they are purchasing….not sold or serviced responsibly…..companies need to be more simple and transparent in their processes.

2. How can companies overcome these hurdles? Health insurance requires detailed explanation compared to other financial products….. Hence, need a personalized approach to help consumers make an informed decision…..by presenting information and product options in a simplistic manner…..products in turn need to be more comprehensive, transparent with minimal fine-print……Companies need to address issues related to servicing and low product innovation to successfully tackle these hurdles.

3. What kind of innovative approaches should Insurance companies adopt for a competitive edge? Approach built around service experience.…Companies have to take cognizance of the habits and needs of the consumer and build in better service delivery for both selling & servicing.

4. What role can employees in the health insurance industry play in educating the customers about health insurance? Customer service excellence holds the key….delivered by trained and motivated people, backed by technology…….

5. What are the challenges that you foresee in the Indian Health Insurance sector? …..many challenges... lack of data availability on disease and usage patterns of different socio-economic segments….most important challenge for India is the current low levels of awareness about the category among Indian consumers.”

Our take – Nobody talks about involving the various stake-holders in the process – our experience suggests that whenever you go to a hospital for treatment, response to a harmless question “Do you have insurance?” reveals two sets of charges for the same treatment! Also, should there be a stricter screening of the insured at the outset for a better assessment of the risk, which should lead to better pricing of risk? Also, given the criticality of the exercise to all concerned, is there a case for more appropriately qualified agents, instead of the prevailing “all are welcome” policy? This last measure can be furthered by structuring incentives on the basis of evidence of better disclosures measured by the claims track evidenced over long periods of time.

The key to innovation is in creating win-win solutions for all stakeholders. BTW, have you come across an agent who specializes in health insurance or a doctor who is dedicated to health insurance services? Let us know.

A quote from a wise man

“It is of the nature of organized investment markets under the influence of purchasers largely ignorant of what they are buying and speculators who are more concerned with forecasting the next shift of the market sentiments than with a reasonable estimate of the future yields of capital asset, that, when disillusion falls upon an overoptimistic and overbought market, it should fall with sudden and even catastrophic force.”

John Maynard Keynes - Chapter 22, The General Theory

This definitely makes you ponder whether the pricking of an asset bubble or a sentiment balloon should be viewed with fear of the unknown or a welcome & refreshing cheer!

Readers, would love to have your views on this.

Wealth creation - Innovation is the key

The health insurance industry is plagued by the problem of non-viability. The claims paid are in excess of the premiums collected annually. This has led to multiple problems.

Insurers are pretty non-committal about the premiums they charge. A minor deviation in the health parameters leads to levying of ‘significant extra’ premiums. Till date many prospective clients look at health insurance with suspicion. Will my claim be settled when the need arises? Will they pay me the full amount of the actual expense incurred on treatment? Etc.

The sheer details or terms & conditions (if you please) associated with the products are nothing short of a minefield of “subject to-s”. Your claim will be paid if the illness is discovered after a period of ‘x days’ from availing the cover and if you survive for at least ‘y days’ from the date of diagnosis. This is after you have undergone a proper underwriting procedure prescribed by the insurer. You won’t be blamed for thinking that this is a business to make you pay the premiums but find reasons to deny claims.

For medical service providers, the practices are ill-defined with very little standardization across the board. This applies to costs and procedures, both. Most private medicos and hospitals charge the patient differentially depending on whether she has a medical insurance cover. If the patient is covered, the charges are usually higher. It’s the law of the jungle at work. If the payment is going to be made by the insurer, then, it is almost as if the patient doesn’t care about the charges. The service provider takes advantage being well aware of the nuances of the insurers’ practices. This is a rip-off not only affecting the insurer, but, eventually all the buyer’s of insurance – present and future.

I’d like to quote from the IRDA Annual report of 2009 (pg 34) – “the incurred claims ratio (net incurred claims to net premium) of the general insurance industry increased marginally to 86.30% in ’08-’09 for 84.88% in ’07-’08. The increase was reflected in both public and private insurers……The health segment …..stood at 105.95% in ’08-’09 as against ….141.02% in ’06-’07. However for the public insurers, this ratio increased to 116.60% in ’08-’09 from 112.36% in ’07-’08…..for private insurers this ratio …76.84% in ’08-’09…”

Public & private insurers have significantly different roles, responsibilities and business practices. This shows in their performance. Availability, affordability and sustainability of health care, a key infrastructure, is critical for an emerging economy.

Health care is a huge business opportunity which can be driven by innovation. Innovation can deliver the objectives and provide win-win solutions for insurers, insurance buyers, health care providers and investors who provide the risk capital. We will discuss some instances of innovation which are at work and those that can make a bigger difference.

Wealth creation - Of gospel truths &half-truths

I recently received a chain mail which went on to extol the virtues of long-term investing. It said - If you had invested Rs. 10,000/- in Wipro in 1980, today your investment would have been worth Rs. 200 Cr.+. Other such examples highlighted were - Cipla - Investment of Rs. 10,000 in 1979 is today worth Rs. 95 cr.+; Infosys - Investment of Rs. 10,000 in 1992 is worth Rs. 1.5 cr.+ and so on.

These are facts, however saying only this much is a half-truth, we will see how, soon.

Another mail I received from a multiple financial services provider. This mail says how the Sensex number has always been near about the price of 10 grams of gold. It adds, whenever there was a substantial disconnect, it became a clear case of over (or under)-valuation of one measure w.r.t. the other. A classic example of non-sense dished out with an objective to confuse and ‘steal’ your money!

In 1980, very few people invested in stocks. More importantly, awareness about the workings of business & industry was restricted to a miniscule set of people. Business media, of any consequence did not exist. The few who invested in stocks were ‘risk takers’ armed with better sources of information about businesses & industry or people who did the hard work to find out information which were not easily available or people who were speculators.

Of the 3, the last category is not the object of our understanding. About the other 2, it would be safe to say that they are more evolved and enterprising investors. They find out about investment avenues which are not commonly followed. They are willing to take uncommon risks and also stick to it, once they have made up their mind and invested. They know that they have made a right choice and will not exit their investments based on a panic reaction or short term profits or any emotion. This is the power of conviction in the long-term story of a business.

Sensex and the price of gold: I’ll not get into the debate of whether gold is a dud investment (that will be for some other time). For the moment, let’s assume that gold is a good hedge against inflation and its price moves accordingly. Then it will be safe to say that the price of gold does not offer any ‘real’ return since there is no economic activity linked to the ownership of it (say unlike a productive asset like property or plant & machinery or farmland or a real business).

Now contrast this with the Sensex – if the BSE Sensex stocks was all that was there to the Indian economy (assumption), it would be safe to say that the growth in the GDP (% terms) should be approximately equal to the growth in the Sensex plus the rate of inflation (since the GDP growth figure is calculated net off inflation).

Can the 2 or their growth numbers ever be identical? Oops…sorry! I am introducing arguments which will lead to demolishing a myth….A herd is meant to ‘follow’, not think!