Tuesday, October 24, 2017

Ban direct investing in stocks

How about introducing the investment equivalent of beef ban by forbidding investments in stock for retail investors

By Narayan Krishnamurthy

We are mostly a nation of foodies—rich or poor. Any social gathering is incomplete without food, and most often discussions hover around food – ingredients, taste, quality, quantity and so on. Even in times of rising food prices, seldom are discussions about consuming less or rationing at social dos. Yet discussions lingering over food rarely get into cost of food items or the rising healthcare costs owing to poor eating habits. The recent beef ban has taken up more mind space among vegetarians than those who may actually be affected due to the ban. 

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Wish the same zeal is seen when people discuss their finances, especially investments. Just the way a balanced diet is good for a healthy body, asset allocation is healthy for your financial life. Like your body needs its quota of proteins, carbohydrates, fats, fibres and vitamins, so too does your portfolio need its regular quota of nutrients to stay healthy. So, say fats; which are necessary is like insurance, fibre is like fixed return investments, carbohydrates are like real estate and equities are like proteins which build muscle to your investments.

Stocks ban

Now, think of banning direct investments in equities for retail investors? I am not sure how many retail investors will protest, but I guess the entire broking fraternity will protest the ban vehemently. While almost all broking houses will sing praise of  how investing in equities in the long run builds wealth, these days, rarely do you come across retail investors who have built wealth with investments in stocks. 

In fact, until a year ago this existed in a lucid manner, when the UPA government had introduced the RGESS (Rajiv Gandhi Equity Savings Scheme). This scheme did not ban direct equity investments, but encouraged taxpayers to invest passively in equities and claim tax deductions on the investment. However, the scheme failed miserably. The reason was two pronged—the scheme was not advertised well and those who were to sell had no incentives in selling the scheme. 

The tales of small investors who made several lakh of rupees by investing in shares of Reliance Industries or Wipro are rarely heard. Yes, excel sheet experts will rattle off the wealth one would have made had they invested in a single share of Infosys in 1991 or any other company. The reason for such infrequent sighting of small investors who made their wealth by investing directly stocks is more to do with a trading mentality than being an investor in a company for the long run. 

Moreover, every bull run in the past two decades has witnessed a high number of demat accounts being opened and many small investors jumping into the investing fray when the markets peak. Many tend to lose money in this period and then turn away from investing completely. There are several ways to get equity exposure with your investments. You could invest in equity mutual funds, Ulips offered by life insurance and the NPS for some level of active equity exposure. 

Then there are passive ways to benefit from equity exposure—invest in exchange traded funds that mirror major stock market indices or the CPSE ETF and now even the EPF contribution which has some allocation to equities. Just the way you cannot do without protein in your diet, your investments cannot do without equities. Those who are beef eaters are like traders and investors in direct equities. They are used to investing in stocks and need their quota of proteins in this form. Retail investors do not crave or need equities in the same fashion, and would be advised to look for alternate ways to get equity exposure. A ban on direct equity investment for most retail investors will do a lot more good than discussing the beef ban.

At present there are those who feel that the current chorus on beef ban is not to crib over considering several other forms of meat are still available for consumption to balance dietary needs. 

And, no matter how right you eat, exercise is vital. In fact, if you’re physically active, you can play around with your diet and get away with eating food suited to someone half your age. Instead of getting bogged with all the noise around the beef ban, look at ways in which your investment portfolio can follow a balanced diet that will not only suit your risk appetite, it will also ensure your investments work for you and help you achieve your financial goals. 

 

 

nk@outlookindia.com

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