Tuesday, July 31, 2012

India's continuing infrastructure nightmare

Sometimes, I hate being right.

image source: http://economictimes.indiatimes.com/photo/15300593.cms

600 million people in India are without electricity. In my response to another blog, I had insisted that India's infrastructure situation is precarious and can only get worse with time. Today's headlines and the past weeks' suffering from nearly 33% of India's population (60+% by today's headlines) clearly point to the worsening situation.

my thoughts on this issue and the original blog that precipitated my article can be found via:
India's infrastructure nightmare

more on today's happenings from the Economic Times:

Power grid failure: world's biggest blackout points at years of power sector neglect

Power grid failure: World's biggest blackout points at years of neglect of power sector

NEW DELHI: Electricity supply crashed across a vast swathe of India for the second time in 36 hours, disrupting lives of over 600 million people and presenting an unflattering picture of an aspiring superpower struggling to provide even basic power. 


People are literally dying. What more will it take to set an apathetic government and populace into motion? This incident is tantamount to an act of war on the country of India; not due to any external entity, but due to the reprehensible dereliction of duty by the populace and the media. Yes, I blame the people of India. The politicians, the IAS and other bureaucracies might be more directly responsible, but it is essentially the populace that has failed themselves by regularly choosing to be governed by a cabal of nitwits. This is the government the country has not because of some celestial misfortune, but because of its actions. This is the government the country deserves. This is karma in action, and as the wise philosopher said, "karma is a bitch".

Thursday, July 05, 2012

Investing in Indian mutual funds does not inspire confidence

Investment pundits, gurus, speculators, and charlatans long touted the BRIC sector. These days, the Indian hot-market story seems dated and out of vogue: probably because the Indian market's recent decline has besmirched some of its luster.

However, there still remains a case for prudent investment. In any market. Especially a down one.

And one of the easiest ways to start investing in any market is perhaps through mutual funds.

To buttress the motivation behind this blog, a minor sojourn follows.

The basic idea of a mutual fund is captured fairly in its name: it is a fund mutually owned by all the fund investors. Consider the case where 3 individuals with limited financial resources want to invest in the equity market. Sane equity investment requires that investment risk be mitigated through diversification. In simpler terms, the individuals should NOT plunk down all their money into just one company because then they'd have all their eggs in one basket. Instead, they should consider spreading out their risk by investing in a diverse set of companies. However, that can take a lot of capital (e.g. brokers might sell only in slabs of 100 shares), and this restriction can (rightly) keep out a lot of low net-worth individual investors.

Instead of individually trying to diversify their company specific risk, what if the investors got together, pooled their money and bought shares of 3 companies with their combined resources? that would spread the risk over 3 egg baskets, instead of 1 risky basket for each individual. What if they decided to take this good idea further and involved their in-laws, neighbors, friends and other communities? With a 1000 individuals, they could buy shares of every strong company on the market, almost totally diversifying away company risk!

In its simplest terms, this is what a mutual fund is: an investment company capitalized by several individuals for the express purpose of investing in an underlying asset class. The management of this special company (henceforth referred to as the "mutual fund") has one clear role: investing peoples' money for them. To ensure that the company can attract investors, the management has to show that it has scruples and that it is competent. Attention to detail, openness and presentation then become benchmarks by which managements try to demonstrate, and potential investors evaluate, managements' worthiness. Of course, these are in addition to the actual fund performance. But, as managements are obligated (morally AND legally) to often remind us: "past performance does not guarantee future results". Which essentially places a lot of emphasis on the foregoing exhibition and evaluation.

In light of above, I find the lack of attention to detail in the Indian mutual fund industry utterly dismaying. In reading through prospectus' and official website descriptions of several mutual funds (and of governing bodies!) I routinely find spelling errors and grammatical blunders. This horrifies me: the management that does not care to look at automated spell checkers (or rather know enough to employ people who would care about such simple, low hanging fruit) are being entrusted with hundreds of millions of peoples' hard-earned money!

Exhibit A: Page 2 on Goldman Sachs' BeeS Benchmark S&P CNX 500 fund

There can be no assurance or guarantee that the investment objective of the respective Schemes will be achieved. However, the performance of Benchmark S&P CNX 500 Fund may differ from that of the respective underling index due to Tracking Error.

Exhibit B: HDFC Mutual fund

Entry Load
(For Lumpsum Purchases and investments through SIP/STP) NIL 

Unfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the investors' assessment of various factors including the service rendered by the ARN Holder.

I actually googled "unfront" to see if this was some new jargon in the Indian markets. I concluded it is a typo for "Upfront". Also, I actually had to fight my auto-correct to type "Unfront".

Exhibit C: AMFI

The Information provided on the AMFI website is based on the information provided by the members. As such AMFI does not take any responsibility for its accuracy, completeness and timeliness.

The AMFI Disclaimer above is by far my favorite. It is tantamount to blanket recanting of everything posted on the website of an association formed, by the mutual fund companies themselves, with the explicit mission of spreading trust and awareness of mutual funds in India. I wonder what information  AMFI actually is responsible for on its own website.

I'd be happy if these were the only instances of head-slapping reading I have as yet encountered. Sadly, that isn't the case. I don't list them here since I have long since lost context on where and how I encountered these errors. I'll add to these as and when I run across more.

Till then, share my agony and ecstasy.