S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
38,251.80 |304.80 0.80%	70.29 |-0.13 -0.19%	29,530.00 | 10.00 0.03%	74.28 |4.38 6.27%	5.00% - 7.00%

 

Lately, the Securities and Exchange Board of India (SEBI) has been assessing the scope of limiting the equity exposure of individual investors based on their net worth.

The market regulator is deliberating on individual investors compulsorily obtaining a net worth certificate from Chartered Accountants and brokers. This statement would be the basis to decide how much you, as an investor, can invest in equity and equity related instruments such as derivatives.

Clearly, SEBI is concerned about retail participation in leveraged derivatives trade. It also wants to discourage retail investors from going overboard with equity assets.

This proposal has been receiving mixed responses from major players in the industry. If implemented, can this well-intended proposal do more of a disservice?

Let’s find out…

What’s been the global experience?

Globally, such practices are in place but they are largely applicable to investors investing in unregulated securities/companies.

For instance, in the U.S., securities not registered with the Securities and Exchange Commission (SEC) can choose not to disclose vital information to investors. It saves a lot of compliance cost for the companies involved.

But, needless to say, investing in such unregistered investment avenues is exceptionally risky. Especially if a person doesn’t possess the knowledge to understand the intricacies and isn’t in a solid financial position to absorb potential losses.

Therefore, anybody living in the U.S. and interested in investing in private funds, hedge funds, or venture capital funds has to meet some criteria pertaining to annual income and net worth. Such investors are called accredited investors.

Indian context…

Less than 5% of Indians invest in direct equity and those exposed to derivative trading are even fewer. Moreover, a few states have a higher share in total equity transactions happening in India.

In the recently concluded AMFI Summit, industry veteran Mr Deepak Parekh, Chairman of HDFC Ltd. drew attention to low participation of Indian households to mutual funds, “Compared to global standards, in India, mutual fund AUM penetration as a percentage of GDP is still very low at 11 per cent compared to the global average of 62 per cent. This means there is a huge market that still has the potential to be tapped.”

Therefore, overexposure to equity assets may not be a systemic risk in India just yet. In contrast, more than 50% of Americans invest in equity. Had the participation be alike or more in India, then that could become a systemic risk. 

But one can’t be negligent either.

The popularity of equity assets is growing fast among investors now. And apparently, that’s making the market regulator worried about many novice investors getting carried away. To ensure they don’t commit a fatal mistake which could prove catastrophic, SEBI seems to be getting proactive to safeguard investors’ interest.

There have been past instances where a trader lost years of his wealth in just a few bad trades. With digital technologies revolutionising trading activities, concerns of SEBI are understandable.

Can regulations supersede investor education?

And that’s the real question.

Resting the responsibility of deciding how much an investor can invest in equity shares and equity derivatives on brokers and Chartered Accountants will increase administrative costs. Already, the pricing power of brokers in the stock broking industry has hit rock-bottom.

Chartered Accountants might be the right professionals to certify the net worth of investors. However, does SEBI believe they will be more competent than SEBI-registered investment advisers to decide the asset allocation of investors?

And why not make investors competent enough to take a call themselves based on their financial situation, goals, and risk appetite?
That’s an equally important question.

SEBI also needs to clarify, if new norms will be applicable only to investments in equity shares and equity derivatives or they will extend to equity-oriented mutual funds as well.

Can Insurance Regulatory Development Authority (IRDA) take similar steps to limit investor’s exposure to equity-oriented ULIPs?

[Read: 5 Factors To Look Into While Buying ULIPs]

Let’s see what experts have to say about this…

While speaking to the Economic Times, some market experts have given their candid opinions. To read their views in detail, you may read the full story published in the Economic Times dated August 20, 2018.

“Defining a certain dedicated percentage of investment in equity as a percentage of one’s total net worth is a noble thought (from the point of view of risk mitigation). However, such stipulations need not be directed through regulation. Bringing in regulatory framework to define asset allocation may mitigate risk in the short term.

However, equity as an asset class is a long-term wealth creator and therefore, these regulatory changes should not be an opportunity lost for investors. At the same time, not enforcing asset allocation through regulations should not be an excuse for investors to take unnecessary risks. One should start investing only after thorough analysis and complete awareness of the risk being undertaken. Even ancient scriptures mention about financial planning.” – Mr A. Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund, who also the present Chairman of AMFI

Will SEBI implement its proposal?

Before taking any decision on this topic, the market regulator will carefully assess the impact of its decision on the participation of retail investors.

Stories floating in media suggest that brokers fear they will lose significant business if the new norms are implemented.

Or, will SEBI make it mandatory for all market participants to highlight the adverse impact of overexposure to equity in all their communication to investors? Just like you get warnings printed on some OTC (Over The Counter) medicines.

All said and done, SEBI has every reason to curb proliferating leveraged derivative trades. Note that trading and speculating could prove to be hazardous to your health and wealth; not good for your financial stability and wellbeing.

What should investors do?

If you don’t have expertise in investment planning, consult a SEBI-registered investment advisor. The personalisation of any investment plan is extremely crucial.

(Image source: flickr.com)

You may also be overexposed to equity assets. You should find out what’s an ideal asset allocation for you.

[Read: 5 reasons why asset allocation is important for your Financial Goals]

Personalised and prudent asset allocation plays a crucial role in optimising risk-adjusted returns. In simple language, how much portion of your investible surplus should be allocated to various asset classes such as equity, fixed income, gold, and real estate.

Consider the following points listed below while investing:

✔Your age

✔ Your investment objectives

✔ Your financial goals

✔ Your risk appetite

✔ Number of years left before financial goals befall

✔ Current financial situation—income, personal and household expenses, assets, liabilities etc.

[Also read: How a Smart Robo-Advisor can Help You Chart Your Asset Allocation]

Did you just realise that you have been investing in ad hoc manner mirroring another’s investment decisions, and have ignored your personalised asset allocation and financial planning to accomplish your life goals?

It’s never too late to take corrective actions.

Reach out to Financial Planner today!

Want PersonalFN to help you define your asset allocation and draw a viable financial plan?

Yes?

Do not hesitate to call us at 022-61361200.

You can also schedule a call with PersonalFN’s SEBI-registered investment advisers, or even drop a mail at info@personalfn.com and we will be happy to help you.

PersonalFN’s investment advisers effectively serve as Financial Guardians and put your interest at fore. The advice is rendered in an unbiased manner and handhold you on the journey of wealth creation to accomplish your envisioned financial goals.

Is it Worthwhile Investing in Small-Cap Funds Now?

The leading stock market indices, S&P BSE Sensex and CNX Nifty, are near an all-time high. They have bounced back sharply from the lows of March 2018.

However, the fortunes of small-sized companies haven’t changed much; many of them are still in the depths of despair.

Small cap stocks had a free run between 2013 and 2017. Despite the steep fall they have been experiencing since February 2018, many of them have generated high double-digit returns on a 5-year period.

The chart below denotes that although the margin of outperformance has eroded severely of late, the small-cap index has still outperformed the bellwether index.

To read more, please click here.

Should Change In Controlling Stake At DSP BlackRock Mutual Fund Worry You?

In May 2018, the US-based BlackRock Inc., the world’s largest asset manager, stated that it would sell its 40% stake in DSP BlackRock Investment Managers Pvt Ltd (the AMC) to its joint venture partner DSP Group.

Subsequently, the Board of Directors of the AMC and Trustee Company, DSP BlackRock Trustee Company Pvt Ltd approved this change in controlling stake on May 7, 2018, and later the capital market regulator, SEBI, too waved the no-objection flag.

However, the investors in various schemes of DSP BlackRock Mutual Fund (now known as DSP Mutual Fund) got a bit worried. The Average Assets Under Management (AAUM) managed by DSP Mutual Fund is over Rs 89,400 crore as per the data from the Association of Mutual Funds in India (AMFI) as on June 30, 2018.

To read more, please click here.

Do You 'Trade' In Mutual Funds? You're Making A Grave Mistake!

Jignesh is a third generation entrepreneur. He runs a two-storey retail jewellery shop on the busiest street in the town. He’s expanded his business impressively after taking it over from his father, but this wasn’t a struggle. His elder brother has helped him immensely in expanding the business.

Therefore, Jignesh always had spare time to do other activities.

So he became a stock market trader.

Share trading was a thrilling experience for him. It earned him some money. Then he decided to take this ‘thrill’to the next level and started dealing in Futures and Options (F&O).

While it rewarded him at times, on many occasions, he lost money. The recent experience has been the worst. He lost around Rs 10 lakh in a month’s time during the market meltdown that happened post budget.

To read more, please click here.

UTI Equity Savings Fund: Should You Invest?

Equity Savings Fund as categorised by the market regulator, SEBI, is a Hybrid Fund. Meaning, it invests in equity and equity related instruments (including derivatives), debt & money market instruments, and would explore arbitrage opportunities. If there are no arbitrage opportunities available, the scheme has the flexibility to invest in debt.

UTI Equity Savings Fund (UESF) is one such hybrid scheme from the stable of UTI Mutual Fund. It is a new and unique addition to the product basket of the fund house.

Under normal circumstances, UESF will invest 65-90% of its assets in equity & equity related securities (including cash future arbitrage and net long equity position), and the remaining 10-35% in debt & money market instruments (including securitised debt).

To read the complete note, click here.

SBI Magnum Midcap Fund: Case Of A Falling Star

Have you seen a ‘Falling Star’?

If you have, then you would probably wish for fortune, prosperity or good health for yourself and your loved ones.

Many believe falling stars have the power to fulfill ones wish. And it’s a human nature to secretly wish on a falling star, with a belief that it might come true. Anyways, it doesn’t cost anything to try your luck.

But personally, I am not equipped to say for sure if wishing on falling stars really works or not. Neither have I personally believed in creating fortune with stars that shine in the sky at night, nor the ones that many investors refer to in the world of mutual funds.

Because in mutual funds even a 5 Star rated fund can probably lose its rating from 5 Star to 1 Star and so your money.

SBI Magnum Midcap Fund is one such example of a falling star that has lost its stars on the list of many research houses, in a years’ time and so the faith of its investors. It came into the limelight backed by its stellar performance in CY 2014 & 2015, to become a preferred choice for investors looking for the most profitable mid cap fund.

To read the complete note, click here.

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Free-Float Methodology: A free-float methodology is a method by which the market capitalization of an index's underlying companies is calculated. Free-float methodology market capitalization is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market. Instead of using all of the active and inactive shares, as with the full-market capitalization method, the free-float method excludes locked-in shares such as those held by insiders, promoters and governments.

Quote:"When a management team with a reputation for brilliance joins a business with poor fundamental economics, it is the reputation of the business that remains intact.”‒Warren Buffett