The importance of retirement plan

P.V. Subramanyam’s maiden book on retirement is not about understanding how the financial market functions or how to time the market. Instead, it deals with the most unexplored issue of retirement planning. Clearly, the book seems to have hit the right chord as it is a bestseller having sold over 45,000 copies.

A trainer, columnist, blogger and now an author Subramanyam spends a few moments with Cafemutual to talk about retirement planning and how IFAs could incorporate this theme as groundwork for advising clients. Edited excerpts….

How did you get the idea of writing this book on Retirement Planning?

I was surprised to find many US based books on retirement planning, but nothing in the Indian context, hence the plunge. I was asked by my friends in Moneycontrol to write the way I speak. Around 70 per cent of the book was already written and stored electronically. So I just had to collate it.

Given the total absence of social security in India, is the vast majority aware of the importance of retirement planning?

Talking about Indians is wrong because there is a huge section of the population that leads a hand-to-mouth existence. But the educated and the upper middle class have earned more than what they would have expected, thanks to the booming economy. But most of their money is parked here and there. They never sat down to plan their retirement. In our culture, we are conditioned to think of life with our children forever, accepting the joint family, and pretending that everything is fine. It suits the government because people invest their money in products that offer around 8 per cent returns. There is no public debate happening on retirement planning.

While the rich and upper middle class are earning and saving enough for retirement, are the middle and lower middle classes prepared?

No. Many of them are not prepared but they will not accept it because they are happy with the feeling that they have much more wealth than their father. They are content saying 'My father had only Rs 20 lakh while I already have Rs 75 lakh. How much more will I need?'

What are the risks for the people who are 'under-prepared for retirement'?
Life expectancy has gone up compared to what it was in earlier days. So people live longer and are dependent on children. Medical expenses have gone through the roof. So, not being able to buy adequate medical cover and not having enough money to pay for medical expenses are a cause of concern. Children not having enough money to look after the parents can put the entire family in a tight spot.

What about the people in the unorganised and self-employed categories?

I do not really deal with this category and hence, not the right person to comment. It is very rare that such people can understand a NAV based product. The most important requirement is financial inclusion and financial education before they can be asked to do a long term SIP.

What are the key challenges according to you in retirement planning?

There are four key challenges. First is managing your money. People who claim that they can manage their money actually may muck it up. Second is asset allocation. Too much money is in debt and too little in equity, if there is something at all. The third challenge is rising life expectancy. There is a possibility that a person will outlive his or her savings. And the fourth challenge arises from the absence of long term care insurance in India. This could result in increase in medical expenses.

In helping their clients prepare for retirement, should advisors look at the so-called retirement products (Pension plans by life insurance companies, mutual funds)?

They should look at normal investment products and depending on the age of the customer, park a chunk of the money into equity plans. If a person is retiring in 2-3 years, there is an inherent risk in the aggressive portfolio. They should not consider pension plans from life insurance companies. The plans from mutual fund are slightly better. But the charge structure of the insurance plans offered by mutual funds might hurt.

What investment products in your opinion are best suited for retirement planning?

For any goal which is more than 10 years away, it is equity, equity and always equity. For a lesser duration goal, one can have a mix of equity and debt.

How can IFAs grow their business by helping clients save for retirement?

Almost all clients will want to save for their retirement. Younger clients should be asked to start with smaller amounts in SIPs and as they grow older, increase savings through SIPs in more number of funds. Even for older clients, the shift out of equity should happen only at an age of say 70 years! For the advisor, long term SIPs and long term SWPs will ensure a great trail commission and good leads.

Are IFAs using retirement planning as a theme to talk about retirement and investment products?

IFAs don’t have a product to sell other than the Templeton India Pension Plan which has a withdrawal lock-in. Even IFAs who are doing big ticket SIPs are not much focused. I don’t think earmarking for a goal based investment is happening.

As in the US, retirement planning is nowhere close to becoming a big business in India?

The growth in the mutual fund industry in the US happened because of 401k plus schemes (retirement schemes). There is no such plan in India. No mutual fund company in India ever went to the ministry of finance to demand a product which is 80C deductible and a pension plan. The only two firms who did it were Kothari Pioneer and UTI. There is no choice of how to get your money back in pension products of insurance companies. They decide how much money you will get back and you have to buy an annuity. I got an annuity of five per cent from an insurance company. Now that’s miniscule when I can get nine per cent return on a bond issued by leading banks! Buying a good equity fund from a mutual fund company is better than buying a pension plan from an insurance company.

What room do you think could be there for products that are sold as retirement solutions by mutual funds? How good are products offered by mutual funds which rebalance the portfolio after you reach a certain age?

I don’t know whether the market has the ability to sell such a product. There are very few people selling Templeton’s Pension Plan. The distribution system is still chasing AUM. Not many people are happy to doing an auto pilot mode for 20 years. People think that they can time the market in spite of empirical evidence to the contrary.

National Pension Scheme – how suitable is it?

It’s too complicated as of now. I am not sure about the fund management expertise. The rates are too fine but I guess it will surely change. If that is not done then good fund managers will not be willing to come in. I am willing to talk about it only after I see its performance for 4-5 years. Also I am not very sure how the annuity will be priced.

Your next book?

It is telling doctors about money - Wealth Prescription for Doctors.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=29&MainType=Ana&NewsType=Interviews&id=43

Private sector has 80% share

In the 17 years since Kothari Pioneer launched the first private sector mutual fund in the country, the power of balance has shifted completely in favour of the private sector. What has happened?

In fact, in the last 10 years, the private sector has gained a market share 80% from a mere 20% in year 2000. This in spite of the fact that public sector has increased its assets by over 50% from Rs.90404 crore to Rs. 143090 crore as on September 2010. The reason for this is clear – while the overall industry grew annually at 19.40 %, the public sector grew at a relatively modest 4.31 % compared to the vertigo inducing growth of 37.03% by their private sector peers. This is in contrast to the relatively strong performance of the public sector players in life insurance and banking.

The reasons for the decline in public sectors hold on market share is the immense growth of the private players like Reliance MF, HDFC MF, ICICI MF and Birla Sun life MF. If we take Reliance MF it grew from 3492 crore in May 2003 to more than a 1 lakh crore now - that’s a whopping increase of 27 times. This growth was mainly due to their aggressive marketing strategy and their performance.

In spite of being a relatively new entrant, HDFC MF has become the second largest fund house in India in a span of 10 years. It has grown many folds because of their steady performance of its schemes like HDFC Top 200, HDFC Equity etc.

One more reason for the declining market share is that the number of public sector players is shrinking. Today, there are only 6 players in a market with 40 players. On the other hand, public sector accounted for 10 out of a total of 31 players in March, 2000. Going ahead too, the representation of public sector players could shrink if the applications pending with SEBI are any indication – there is only one name from the public sector among the 24 aspiring players!

According to AMFI data, UTI, LIC and SBI are the main PSU players and together account for 19% of the industry AUM. UTI has reengineered itself and has shown great resilience in spite of going through a lot of turmoil. SBI too has kept pace and held its place in the rapidly growing market.

Another interesting feature is that most of the existing public sector players have taken (or are in the process of taking) on new partners. IDBI however has launched afresh after separating from Principal some years back. Such marriages seem to have had a positive impact on Canara-Robeco and Pioneer Baroda which seem to show more purposive ness and determination. Canara - Robeco grew from Rs.2200 cr in February 2007 to Rs. 7,718cr in September 2010 and it ranks 17 now out of 40 AMCs in AUM - up from 24 out of 30 AMCs in Feb 2007.

Best of both worlds

Distribution is the key to a mutual fund’s success. Public sector funds, which are primarily owned by banks with huge distribution channels, failed to capitalize on this strength, while private entrants were more aggressive and concentrated on increasing their reach by tying up with third-party distributors.

Public sector benefits from being seen as more stable and reliable. Also, most have the advantage of being associated with a parent with a well established network and a strong brand. On the other hand private sector funds are seen to be more professional and delivering better on customer service experience.

However, with most public sector funds having partnerships with foreign partners, they can offer their investors the best of both worlds. With SEBI prohibiting mutual funds to levy an entry fee on investments, PSU funds can put their parents’ distribution network to work to their advantage at a time when most of their private sector peers face the challenge of motivating the more traditional IFA channel.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=10&MainType=Ana&NewsType=Trends&id=41

UK Sinhato succeed Bhave at Sebi

Senior bureaucrat and chairman of UTI Asset Management Co. Ltd U.K. Sinha will become the next chairman of the Securities and Exchange Board of India (Sebi).

A Central government panel headed by cabinet secretary K.M. Chandrasekhar has chosen Sinha from a list of candidates including senior bankers and bureaucrats, according to three persons familiar with the development.

A formal announcement by the government is expected in January.

Sinha, who will assume office in the third week of February, declined comment.

A self-confessed “music aficionado”, Sinha brings to the table a rich experience in capital markets. A 1976 batch Indian Administrative Service officer from the Bihar cadre, he was a joint secretary in charge of capital markets in the ministry of finance before heading UTI Asset Management, India’s fourth largest mutual funds by assets. Sinha is also the current chairman of the Association of Mutual Funds of India, or Amfi, the industry lobby group.

Besides, he has headed a recent committee set up by the Central government to rework the framework governing foreign investments.

A postgraduate in mathematics and a lawyer by education, Sinha started his career as a probationary officer in State Bank of India.

As joint secretary in the banking division of the ministry of finance, he played a key role in the merger of ICICI Ltd with ICICI Bank Ltd to create India’s first universal bank. Between June 2002 and October 2005, as joint secretary in the department of economic affairs, he made key decisions on issues relating to the capital market, external commercial borrowings, pension reforms and foreign exchange management.

In 2005, he was chosen to lead UTI Asset Management when its then chief M. Damodaran was picked for the post of Sebi chairman. While Damodaran as well as incumbent C.B. Bhave had a three-year term, Sinha, who turns 59 in March, will have a five-year term.

During Bhave’s eventful three-year term, that comes to an end on 18 February, the global markets witnessed an unprecedented crisis and the local market went through several landmark policy changes for mutual funds, the primary as well as secondary markets.

A series of changes beginning with the banning of entry loads have altered the face of the Rs.7 trillion mutual fund industry. While investor interest has been protected, fund houses are still trying to adjust their business models to the regulatory changes.

As head of UTI Asset Management, Sinha was at the receiving end of the regulator’s move to ban entry loads on mutual funds last August. He had then called for a level playing field across different product categories such as mutual funds and insurance policies.

Bhave wanted to create a level playing field by having a say in the regulation of unit-linked insurance plans, or Ulips, but could not do so. Both Sebi and the insurance regulator fought hard and when there was no solution in sight, the finance ministry stepped in and asked both to seek a legal solution that would be binding. But before the court could take it up, the government issued the ordinance to settle the matter in favour of the insurance regulator.

Being Sebi chairman, Sinha will decide on the fate of two key policy papers introduced during Bhave’s term. A panel headed by C. Achuthan has redrawn the rules governing corporate takeovers and another panel, headed by former Reserve Bank of India governor Bimal Jalan, has recommended the framework governing market infrastructure institutions such as stock exchanges, depositories and clearing corporations.

Both these reports have certain controversial provisions and they will keep Sinha busy in the initial days, especially the takeover code as the Sebi board has already begun discussions on the draft.

Then there are orders against MCX Stock Exchange Ltd and the Sahara group, challenged in the courts.

Sebi also slapped show-cause notices against Anil Ambani, the head of the Reliance-Anil Dhirubhai Ambani Group, and has been pursuing insider trading charges against Reliance Industries Ltd, India’s most valuable firm by market capitalization.

These and investigation into India’s biggest corporate scam, at the erstwhile Satyam Computers, are expected to be high on Sinha’s priority list.

A love for music and Urdu poetry will probably help him fight the stress associated with a market regulator’s job. “In the mornings, while walking, I listen to music on my iPod. Everyday, I enjoy listening to music for an hour after reaching home... Listening to music, while driving to work or back home, is very relaxing,” Sinha wrote in a newspaper early this year. “Indoor games like bridge also help me unwind; being good at numbers helps there, I guess. I love analysing numbers, having done my postgraduation in mathematics and statistics.”

Corporate affairs secretary R. Bandyopadhyay, department of disinvestment additional secretary S. Pradhan, Madhya Pradesh principal secretary G.P. Singhal and two State Bank of India managing directors, S.K. Bhattacharya and R. Sridharan, were contenders for the post.

The panel, headed by Chandrasekhar, includes financial services secretary R. Gopalan, department of personnel secretary Shantanu Consul and finance secretary Ashok Chawla.

Source: http://www.livemint.com/2010/12/15021007/UK-Sinhato-succeed-Bhave-at-Se.html?atype=tp