Wednesday, 17 December 2014


There is a lot of furor about the increasing number of crime against women in India which is multiplying at a worryingly alarming rate. The rage sees no end, especially when we have women being raped every day, in every city of the country, even after the highly brutal Nirbhaya rape case and the new laws enforced after it. She may be gone today, but has awakened the minds of others to help women and change her plight in our country, a country where we worship women.

But, making that change is not quite an easy thing to do. There are a lot of things which the authorities and law enforcement agencies have to do for stopping and eradicating this worst kind of atrocity which can be inflicted on a woman. While putting in place proper mechanism for prevention of such a cowardly act is of utmost importance, but at the same time it is equally important to try and understand why such an act might be committed in the first place and what education and awareness needs to be provided to avoid such an untoward and undesirable occurrence.

For that, let us delve into the brain of the rapist. Let us understand the scientific and psychological aspect of the brain and how does the brain actually “fool” the rapist into executing such a horrific act. Then let us appreciate some simple measures which any man can take to train their brain in the right manner.

We may talk a lot about psychological behavior and how it is a very important factor in determining our success in every facet of life but do we really know how to develop our “brain psychology” so that it works for our benefit and not otherwise. I am not a doctor, scientist or psychologist by qualification but a finance person by occupation and an author by choice. I do think that understanding human brain psychology is of utmost importance in the finance world as well as in any field – basically its most important for us humans to succeed as social animals. Now, what is human psychology, for that we have to understand our human brain and how it functions because finally we all our controlled by our brains (conscious and subconscious minds). Dr. Paul MacLean, a great neurologist and researcher, has brought the concept of “Triune Brain” or the three layered brain.      

The three major layers or 'brains' were established successively in human evolution. Each of the three brain layers represents a distinct evolutionary stratum that has formed upon the older layer before it like an archaeological city. The oldest layer is the reptilian (non-thinking) brain, the second oldest is the mammalian (emotional) brain and the most recent is the cerebral (thinking) brain. Each of the three brains is connected by nerves to the other two. Each brain operates as its own brain system with distinct capacities for perceiving and responding to the environment and each can become dominant depending on the circumstances. The major problem with human psychology and irrational behavior is that the integration and coordination between the three brains is inadequate, a genetic problem in our species. This has implications for human development.

Reptilian Brain or R-complex: The reptilian brain is the oldest layer - the most 'primitive' of the three brain components and makes up the entire brain mass in reptiles. The reptilian brain consists largely of structures. Functions of the reptilian brain are related to physical survival and body maintenance - digestion, reproduction, circulation, breathing, stress responses, territorial instincts, social dominance, sexual behavior, ritualism, social dominance, status maintenance, deception, tendency to follow precedent, awe for authority, social pecking order behavior, compulsiveness, deception, prejudice and resistance to change, rigid, obsessive, compulsive, paranoid etc. The functioning of the reptilian brain is activated when the organism perceives threat and the needs for survival and safety predominate. This part of the brain is active, even in deep sleep. Kindly note, this is the only part of the brain which is NOT in human control – lot of bad human behavior, wrong decisions and other psychological problems happen because of the reptilian brain and a not proper functioning mammalian brain.

Mammalian Brain or limbic system: The second layer middle part of the brain occupies the lower fifth of the human brain and developed with the evolution of mammals. As a brain system, the mammalian brain consists of a series of brain structures around the brainstem which contains the Reptilian brain. The mammalian brain functions in primary seat of emotions of fear, joy, rage, pleasure and pain, attention, and affective (emotion-charged) memories, what gets your attention, unpredictability, feeding, fighting, fleeing and memory.

Cerebral cortex or neo-cortex or rational thinking brain: The third layer which occupies five sixths of the brain is known the 'neocortex' or the 'cerebral cortex'. The cerebral brain is the latest evolutionary development of the brain.  The cerebral brain is involved with most mental activity, including spatial and mathematical thinking, meditating, dreaming, remembering, processing and decoding of sensory information.  The cerebral brain is divided into left and right hemispheres -left and right brain.  The left hemisphere is linear, rational, and verbal and controls the right side of the body. The right hemisphere is spatial, abstract, musical and artistic and controls the left side of the body. For example, generally speaking, highly educated people like doctors, lawyers, engineers, Chartered Accountants etc have highly developed “left cerebral brain” while persons involving in creating professions like actors, singers, painters, musicians, writers etc have more developed “right cerebral brain”.

The interaction of the three brain layers forms the biological basis for the interaction of concepts, emotions and behaviors which make up the learning process. The reader might think that the cerebral brain dominates the mammalian and the reptilian brains. However, you will be surprised to learn that the cerebral brain generally is the weakest of the three and that the mental functions of the cerebral (thinking) brain can be hijacked by the functions of the other two brain layers. This is the main reason why totally rational individuals take totally irrational decisions under specific situations of life. For example, the reptilian (non thinking) brain runs automatically and not in our control (because it controls vital survival functions like breathing, digestion, circulation, reproduction etc) and it is that part of the brain which immediately starts functioning even without our knowledge. Suppose, somebody gave you a complex mathematical problem, you will not have a direct answer, you will have to activate your cerebral (thinking) brain to solve the equation. On the other hand, the reptilian brain immediately gets activated even before we realize – suppose you just see picture of say a burger or pizza, your mouth might immediately water although your cerebral (thinking) brain knows that there is no such burger or pizza but the reptilian brain had stored the real burger or pizza picture in its memory which you might have eaten in the past and associates the photo picture with it. Hence, although we may be rational human beings and like to use our cerebral (thinking) brain but most of the times are fooled by the automatic images of the reptilian brain which “fools” the mammalian (emotional) brain to re-direct the power to it instead of the cerebral “thinking” brain.

Sex is one of the things which is controlled by the reptilian brain. God perhaps made it that way because the continuation of our entire species depends on it. It is only when two persons are bonded in a physical relationship that the next generation comes into being. Hence, the physical attraction of sex has to be very strong. If it were left to the thinking brain than a situation might have arisen when many people would have opted out of having sex which would then threaten the very existence of our species. Therefore, the Creator, in His own wisdom, made sex a part of the very powerful reptilian brain so that it becomes a very controlling force for any living creature to actually avoid it which will than insure the very existence of any species.

Also, there are certain very powerful indigenously manufactured chemicals which the brain releases during “love making”. They are the pleasure, bonding, calming, soothing chemicals like dopamine, oxytocin, serotonin, norepinephrine which the brain releases during sex which makes a person feel happy, pleasurable, excited, bonded, natural prosaic and makes the memory of that stored in their brain. When sex is had between husband and wife these chemicals become the “loving four” chemicals while when sex is had outside that i.e. adultery, porn, rape then these same chemicals become the “dangerous four”. These are very powerful brain chemicals and the reason behind most addictions including those related to drugs, tobacco, porn etc.

Now, let us understand the functioning of these brain layers, brain chemicals and perhaps the biggest social menace – sexual abuse and rape. When a male / female observes an attractive handsome / beautiful person of the opposite sex – the person unconsciously would get some kind of immediate sexual attraction / arousal. This is because the reptilian brain which stores the images and pictures and not in our active control immediately flashes backs some kind of image / picture of any person of the opposite sex which the person under question might have seen etc in the past and then he / she relates that picture to the person whom he/ she is currently viewing which in turn leads to some kind of excitement / arousal / interest in the person and upto here is natural, unconscious and uncontrollable. From now onwards what happens within the 3 brains is most important. The picture from the reptilian brain then goes to the mammalian brain which is the emotional brain which then attaches the joy of what it had or can experience with the person of the opposite sex in the past and at the same time it also experiences the fear of doing something wrong etc. The cerebral (thinking) brain is all the while saying that it should just keep quite and not proceed any further because it is wrong – however the cerebral brain is the weakest of the three unless the other two brains have relinquished their power in its favour. Now, in the majority of us, the mammalian (emotional) brain will not heed to the reptilian brain and give the power to the cerebral (thinking) brain and hence the person will sit quietly. However, in few persons, the mammalian brain will give the power to the reptilian brain which in turn will lead the person to do some wrong act like rape although his cerebral brain had been all the while stating that it is wrong. Further, in a normal person the thinking is in a wide perspective but when he gets sexually aroused then due to the release of those “natural drugs” like dopamine, norepinephrine, testosterone, oxytocin and serotonin the thinking becomes narrowly focused only on the sexual arousal to the exclusion of other thoughts like social values, Government laws, family, work etc.

So, whatever is the phase of life, the problem happens with over-active reptilian brain and a weak mammalian brain. Hence, the key to succeed is to slowdown our reptilian (non-thinking) brain, have a very strong mammalian (emotional) brain so that it can re-direct the power to our cerebral (thinking) brain.

These are some useful tips which will help a person slow down its mammalian brain and redirect the power to the cerebral (thinking) brain:

  • Learn to delay gratification: If you want to buy a new dress or ornament or any other item don’t just rush to buy it. Think over it, ponder over it for some time and then take a rational decision. Also, every morning when we get up, with all the modern technology and gadgets, its become an addiction that even before brushing we rush to check our smart phones, tablets etc. Just avoid it. When you get up, take some fresh air, admire nature, delay the impulses of checking your emails and messages. These simple acts are actually powerful and will go a long way in taming the Mammalian brain.
  • Control your eating: In the modern fast food age, eating has also become an addiction. Try to control your food habits, particularly the intake of sugary and junk food. This will help you in slowing down your emotional brain and making your thinking brain stronger.
  • Stop watching porn or any unhealthy sexual behavior: Porn is known to be the drug of the new generation. It is available almost freely, discretely, easily and at any point of time. Porn creates a kind of illusion in the brain of the viewer and releases the same brain chemicals like dopamine, oxytocin, serotonin and norepinephrine which are released in a healthy sexual relationship. Consumption of porn is related to altering the reward paths of the brain. Sooner or later, a porn addict would like to “act out” what they have been watching on screen. It’s not that all porn addicts are rapists but all rapists are most probably addicted to porn.
  • Practice Breathing: This is one of the most important aspects which will help a person fight any addiction – sex, drugs, alcohol, tobacco etc. The only natural act performed by the reptilian brain which is in some human control is “breathing”. Yes, breathing is a natural thing required for the survival of any living organism. However, breathing is the only natural function which is in some control of humans. Learn to practice breathing. Slightly imagine the things which makes you addict in your mind (sex, alcohol, tobacco etc) and then notice your pulse rate going up. Now, immediately slowly breathe in for 10 seconds, hold your breath for 10 seconds and then breathe out of 10 seconds. Repeat this for 10 times. Your pulse rate would have come down. Now, imagine all the good things which will happen if you leave your addiction like having a nice family, success in career or studies, respect in society, spiritual progress etc. This exercise will tame your reptilian brain and teach your emotional brain than whenever there is any danger situation then it has to redirect the power to your cerebral or thinking brain. 

Men who fail to win woman’s heart by love, try to forcefully damage her body by rape but they miserably fail at that also as they are unable to touch her soul. Men should want to win a woman’s heart by love and not her body by force. Let us educate and teach men that women are to be loved and not raped.

Psychologists say that more often than not, rape is less about the sex and more about power. Victims can be old grandmothers, small children, even people who are physically ugly and not sexually attractive in any way; they all can be rape victims. Even when an attractive person is raped, it is still very much linked to power and ego- the rapist, who cannot be with that person in a normal way, it trying to exert power and have what they want, glorifying his ego - regardless of the victim's wishes. So, we must ask ourselves this question: what is the perpetrator feeling powerless about, that they feel the need to express it in such a violent and hurtful way? There may be many factors in their life that make them feel powerless: lack of money, not being respected in society/family, problems at work, not achieving dreams, and so on. That is of course no excuse for their behaviour, but we should try and get to the root of the problem and address it there to bring about real change. Just looking at the symptoms will not relieve the society of any ill; it is the cause that must be treated.

Very often, people who are angry are hurt somewhere inside, and the anger is a way of crying out for love. Unfortunately, that very anger pushes love away from them, and that is a lesson they have to learn in this life. For example, a child who is constantly screaming and throwing tantrums is usually just asking for love and attention. However, even a mother who loves the child greatly, gets tired of incessant screaming. I read something beautiful recently: A wise doctor once said: "There is nothing that cannot be treated with care and love". Someone asked: "What if it does not work?" The doctor smiled and said, “increase the dose”.

There is a question we as society should ask ourselves: what is causing so many people to be sexually perverted in our society? I don't know if Indian society has the guts to face the truth today, but one day, it will have to. The truth is that sex is a very strong drive. The lack of joyful sex can literally drive a society mad. In men, the unhappiness expresses itself as violence and abusive behaviour. In women, it gets expressed as nagging, and often redirecting the suppressed energy on other things such as shopping sprees, eating junk or sugar cravings or excessive attention towards children. There are men and women who are terribly unhappy in life - emotionally, mentally and sexually. Society is sick, and it needs to admit this before it can undertake the journey to healing.

Let all men realize the inner functioning of their brain and what makes them weak during dangerous situations so that they can take rational positive decisions and avoid causing substantial damage to the opposite person, to the society, their families and also to their ownselves.

Live and let live.

Sunday, 8 June 2014


We are all born into genius. Sadly, most of us die in mediocrity. I am going to die one day. We all are going to someday shed our earthly bodies and leave for another voyage – the journey of the soul. But then, does the journey of the soul begin when we actually die physically. Is the soul actually alive when we are here on this planet?

A child knows what it wants to accomplish in life. At that point, everything is clear and everything seems possible. As children, we are not afraid to dream and yearn for everything. But, as time passes, a mysterious force begins to convince us that it is not possible. By repeating the same pattern again and again, are we moving towards the death of our very soul?

Everybody has a ‘personal calling’. This is the promise between God and us. It is the promise each one of us makes to God before embarking on our earthly journey. Whoever you are, you have a personal calling, a desire that originated in your soul. This is clearly your mission on earth; the purpose of your very existence on this planet.

Everything is this world is mysteriously linked to other things – some visible, some invisible. Consider the example of the relationship between man and money. In the golden old days there used to be no money. Goods and services used to be exchanged for goods and services. However, with the invention of “paper currency” the relationship between man and money has totally changed. The creator himself has become the slave of its creation!

The world is moving forward technologically but we humans are moving backwards financially. We may have all modern facilities like online banking and investing, credit and debit cards, access to financial information, easy loan facilities but our financial knowledge is diminishing. Today, we see young educated people earning very good income but then not able to protect their money from financial predators, they pay everybody like the government, banks, electricity bills, telephone bills, children school fees etc but forget to pay themselves via surplus budget, don’t know when to cut spending and when to spend to get rich, have no protection in the form of financial insurance, are not aware of the difference between saving and investing, buy liabilities mistaking it to be assets with negative leverage which puts them in the web of unnecessary avoidable recurring expenses which then sadly makes them “slaves of money” for life – wage slave of the employer, tax slave of the government and loan slave of the bank.

The only thing certain about money is that it is uncertain. There is a need to unravel the mysterious behaviour of money and reveal its deepest secret rules. Money is the only thing which is available in abundant in the world today, it is available at the free will of the government and how fast their printing machines can function. The poor work for a living, the middle class get into debt and keep working for money while the rich make their and other people’s money work for themselves. We need to learn to make our as well as other people’s money work for us. When you achieve financial independence, you can live a personal debt-free life, enjoy your retirement, spend without feeling guilty and leave your legacy. Someone needs to make you retire from your work as your money will start working for you.

Perhaps its my personal calling and duty of the soul to make you realize your relationship with money, your life and introduce you to your highest self and inner soul purpose.

But then, do we have the courage to live our life and attain our highest goals? Or do we start believing in the greatest lie? We reach a certain point in our lives when we lose control of what’s happening to us and our lives become controlled by fate. We begin to talk like those around us -- we walk like them, work like them and live like them. This is the world’s greatest lie.

We are all trained in this world to live a lie and let our soul perish while still physically alive.

To keep our soul alive, we need to let our physical mind and body take some risks. Each one of us needs to do something that is sometimes scary – physically or mentally – because it brings out the very essence of our existence and enriches the soul. While doing so, there will no doubt be certain experiences that try to derail us from achieving our highest self.

People: Choose your companions with care. So many of the good souls on earth have lost their way in the crowd. They have forgotten the real purpose of their existence. The more you worry about being applauded by others and making money, the less you’ll focus on doing the great work that will generate applause and make you money. To double your net worth, double your self-worth because you will never exceed the height of your self-image. 

Love: This is a very powerful force and bonds each one of us strongly to the world. We are influenced by ties of love to move in certain directions in life. Those who love us will always want us to move in the right direction. But to many of our loved ones, the right direction is the tried and tested direction of the world. They may not recognize their own journey and may misguide us as well. Don’t allow love to weaken you. Instead, use it to light your own true path. And guide your loved ones to discover their soul’s true journey. 

Money: Whether you like it or not, money is a powerful drug that can make or break you. It is a medium of exchange and a store of value. It has lot of energy. If you don’t know the 10 Commandments for Financial Freedom, you are likely to face both problems of scarcity as well as of excess money. Recognize your relationship with money. If you don’t become its master and achieve financial freedom, it can become the most formidable wall on your path to true success.  

Fear of Failure: Every journey has its ups and downs and life is no exception. It will be full of hits and misses. Sometimes, even after doing everything right, you might still fail to achieve your goal. But so long as there is life, there is hope of success. Remember that there is no true failure except that of no longer trying. If you really want to achieve true lasting success, then learn to “fail forward,” i.e. move ahead from initial failures to ultimate success. People who “finally succeed” embrace failures as their friends, learn from their negative experiences and don’t repeat them. So my friends, don’t let initial failure derail you from your journey towards fulfilling the purpose of your soul.

Lack of Appreciation: When you don’t behave like others, when you don’t walk on the path selected by others, it is likely that people will not appreciate you initially. The one’s who don’t answer their own callings can’t really appreciate your calling. Think of the musician who is sitting at the corner of a party hall and playing his music. People are walking around, talking around, eating around and making merry but nobody cares to listen to his music. Nobody appreciates his music. Nobody is listening to his music. But this is not completely true. God is listening to his music. God is enjoying his music. He is playing the music for God by answering his personal calling. And when his soul unites with that of God, it’s a matter of time before ordinary souls, mortal humans, are attracted to him and his work strikes a chord with the whole universe.

Sometimes in life something changes, sometimes in life some world changing thing happens, sometimes in life visionaries see the impossible as inevitable, sometimes in life someone dares to go where no one’s gone and leave a trail of excellence behind, sometimes in life an individual listens to their personal calling following the path which God had selected for them on earth, sometimes in a generation someone dares to believe that the things that are hardest to do are often the things that are the best to do, sometimes some person does something which touches numerous people and once in a lifetime a book like “Mad Money Journey” is conceptualized and written which touches the heart of readers and critics alike.  

I have listened to the calling of my soul. Through my book Mad Money Journey, it is my destiny to help you discover your destiny. It is my purpose to teach you the relation between man and money. It is my mission to take you on a life-changing expedition across countries, cultures and professions, where you are bound to experience joy and fear and discover the very purpose of your existence on this planet.

Do write to me about how you were freed from the shackles of money, how you were introduced to your soul’s mission, and how you are now on the correct path towards achieving it. I can be reached at or follow me on Twitter at  and my Facebook page is

Let us start a community of soul searchers.

Friday, 28 March 2014

The Side Effects of being a Fund Manager

A common man believes that an investment guru, research analyst, market strategist or for that matter a Fund Manager is invincible. He has a very good educational background, vast experience, an army of personnel to assist him and all the tools required in the world to manage people’s wealth in the most effective manner generating above average market beating returns. But is it really true? Is the Fund Manager really able to beat the markets, year after year? Is the Fund Manager’s performance better than the common investor? Is the Fund Manager invincible? Probably not. Because if that were the case, then why over a periods of a decade or more, approximately 75% of all “actively” managed stock funds underperform the passively constructed stock indices? But then why is it so? After all a fund manager has all the wherewithal to be successful and easily win the battle against a common investor – education, knowledge, experience, team, support, resources etc. So, let us now understand inspite of all these added advantages, what are the side-effects of being a Fund Manager which actually stops him from beating the common investor on the street. 

Side Effect 1: Outperformance not possible – Humanly
Fund managers suffer from side effect number 1 of trying to consistently and continuously outperform the markets which are humanly not possible. I humbly submit that it’s very difficult, if not impossible, to beat the stock market indices consistently over a longer period of time. Its not possible – humanly. If that were not the case, then why over periods of a decade or more, approximately 75% of all “actively” managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that “there are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know where the market is headed. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know where the market is headed”. Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that “if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful, but they’re really not”. Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that “we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it”. Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! Then for the investors who are always on the look out for the next hot fund, the next great sector fund or so, Bethany McLean, columnist for Fortune magazine wrote “skepticism about past returns is crucial, the truth is, much as you may wish you could know which funds will be hot, you cant and neither can the legions of advisors and publications that claim they can. That’s why building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic”. And let me further quote Mr. Jon Bogle, founder and retired CEO of the Vanguard group “Index funds eliminate the risks of individual stocks, market sectors, and manger selection. Only stock market risks remain”. In other words, when you invest in a passively managed index fund than all the risk relating to the fund manager, his / her stock selection and market timing, individual sectors etc all go and the only risk which remains is the risk of the whole stock market and that is precisely the risk which would like to expose yourself to when you invest in equities. Nicholas Taleb has written an excellent book titled “Fooled by randomness” wherein he explains the role of chance in life and in the markets and I will recommend that book to anyone who believes that he can consistently pick winning stocks and / or time the markets to perfection. Last but not the least I would like to jot the words of the great legendary investor Warren Buffet who once said that “most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bear the net results (after fees and expenses) delivered by the great majority of investment professionals”.

Side Effect 2: Success linked to “AUM” and not “returns”
This is a sad reality of the fund management industry. There is no strict alignment in the interest of the fund manager and the fund investor. Return is the prime objective of the fund investor while “assets under management (AUM)” is the prime objective of the fund manager. Its simple, for the investor the fund returns is the money what he makes from the investment while for the fund manager his returns are linked to the asset he manages. Hence, there is a clear dichotomy in the structure itself. Yes ofcourse, if the fund performs well than it would be able to garner more assets and thus more return for the fund manager. However, notwithstanding this, the fact of the matter is that in the quest of garnering more assets, funds do compromise on quality and objectivity in the quest for raising their AUMs.

Side Effect 3: Launching NFOs
Today with hundreds of existing schemes is there really a need for a new scheme for the investor. Is it really that the fund manager is able to offer something new through a NFO. Take the example of equity schemes, today a plethora of funds are available – large cap, mid cap, small cap, multi cap, diversified, sector funds, theme funds, asset allocation funds, growth oriented funds, value oriented funds and many more. So after the availability of such a bouquet of funds is there really a need for a new NFO. Ofcourse yes. There is investor fatigue with the existing funds as their performance would not be up to the mark. Its difficult for the fund distributors to market those funds. However, the fund house has to somehow garner new funds because their return is linked to the AUM. The fund distributor has to sell funds because their commissions and fees are dependent on the quantum of funds sold. So what is the solution out of this deadlock. Simple. Take an old product, give it a new packaging, use heavy impressive financial jargons to lure the common investor and then aggressively sell it through the loyal fund distributors. Although a fund manager may know that there is no need of a new product but then he has to keep launching new products so as to remain in the minds of the investors and garner fresh funds from them. This is yet another side effect of being a Fund Manager.

Side Effect 4: Cannot practice what they preach
A fund manager will educate an investor to be patient with equities as they are ownership in a business which create wealth over the long term. But are they themselves able to actually follow what they preach? May be not always. This is because the net asset value (NAV) of the fund is declared on a daily basis and their performance is measured on a weekly, monthly or quarterly basis. If the fund manager were to follow his brain and do the right investments then his heart would cry as he loses the AUM and probably his job. Therefore, the fund manager has to sacrifice long term value creating investments in the quest for achieving short term unsustainable profits. In the market, while most of the people being successful in the short term, actually end up as losers in the long term and it applies to the fund manager also. This is a very sad situation. A fund manager invariably is forced into this side effect with the result of the investor losing a very good opportunity of creating long term wealth.   

Side Effect 5: Advocate Market Timing Funds
Fund managers advice that we should never time the markets. Theories like superior returns from stocks are generated not by “timing” the market but by “time in” the market are propagated. But do these erudite fund managers themselves follow such principles. Not always. This is simply because they themselves advocate “market timing funds”. They derive new formulas to invest like dynamic asset allocation funds, low P/E funds etc. These are nothing but market timing funds which aim at investing or changing asset allocation based on some pre-determined formulas. Kindly note that historically we have seen that almost 90% of portfolio variability is due to asset allocation while only 10% of the variability in portfolio performance is due to market timing and stock selection. The only thing in our control is asset allocation and the good news as just mentioned is that 90% of portfolio variability is due to asset allocation. All assets move in business and economic cycles of their own and while one asset might be in a bear market there might simultaneously be another asset class in a big bull market of its own. The broader asset groups of equities, bonds, commodities and real estate (others being art and currencies) will lead you to the gateway of long term wealth creation and sustenance. Therefore, instead of promoting asset allocation for long term wealth creation, many a times, funds promote market timing fund strategies.

Side Effect 6: Mis-selling of Income Funds
Income Funds are nothing but interest yielding debt products. But, when someone deducts high fees from interest rate then what would happen – substantial fall in the income yields. That is what happens with income funds which are loaded with high fund management expenses. Now, when should you invest in an Income Fund? Investments in income funds should ideally be done when the interest rates are high because of dual factors – firstly, the inherent yield of the income fund would be high which will ensure high accrual income and secondly, if interest rates are currently high then other things remaining constant, there is more likelihood of it going down in the future. However, unfortunately Income funds are not marketed when interest rates are high or moving up. Infact, income funds are widely promoted when interest rates have already moved down. This is because of faulty outdated advise from fund managers. The reason is very simple – when interest rates have already moved down in the near past, the return from Income Funds would be unsustainably super normal. This high untenable return is then projected as the likely future performance of the fund and sold along with the notion of “safety of capital”. And mind you, the returns shown are “annualized returns” – I fail to understand that how can someone annualize the return of a market related product, it can be done only in the case of an accrual product. For example, if say the stock index goes up by 2% in one day then can by any stretch of imagination someone just annualize it and say the annual expected return on it would be 730%! Certainly not. But then this is done and an accepted norm for marketing Income Funds to the innocent unsuspecting investor. Hence, investing in income or gilt funds is nothing but paying heavily for buying an interest paying security and then hoping to earn capital gains on it! But then income fund are seldom sold based on this premise but rather as a safe debt product which is likely to yield higher than liquid funds.

Side Effect 7: Mis-management of Income Funds
Any fund manager hates when his fund underperforms. And the fund manager would certainly not like when there is negative return on a debt product like an Income Fund. Hence, during an increasing interest rate environment, the fund manager would just reduce the maturity of the fund and start managing an income fund like a short term plan. But, that was not the objective of the fund. That was the view of the investor – when the investor wants to take interest rate risk and entrusts his money to the fund manager then who is he to take the call on behalf of the investor? And the worst of them are dynamic funds which give the right to the fund manager to increase or reduce the maturity of the fund based on his interest rate outlook. Needless to say, predicting interest rates is a risky bet in which most of the fund managers miserably fail leading to substantial loss of investor money and trust. There is gross mis-management of income funds from which fund managers suffer.

Side Effect 8: Promoting relative performance
A fund is marketed on the basis of relative and not absolute performance. What does it mean? Simply put, it means that if a Fund Manager looses 5% while the market looses 10% than the fund manager has done an excellent job. But, does this serve the purpose of the investor? Is the investor putting his money for getting positive returns or for getting lesser negative returns! Ofcourse for getting positive returns. But then the fund manager’s performance is measured against a so called “benchmark” and if he beats the benchmark which includes generating a lower negative return than he becomes a “star fund manager” and is able to garner huge funds because finally the fund and advisor’s income is related to the AUM and not its performance. In this AUM game, the investor is a sad loser.

Side Effect 9: Taking unwarranted risk in Liquid Funds
This is another side effect of being a fund manager. A liquid fund may have negligible interest rate risk since it runs a very short maturity but it certainly has credit risk as it primarily invest in corporate papers. And mind you, for getting 5 to 10 bps of higher return, many times a fund takes unnecessary and avoidable risk of investing in not the best quality of papers. A liquid fund is for parking surplus funds and an investor would not want his capital to be put at risk for getting a few basis points of higher return. But then the fund manager suffers from this side effect of trying to generate that extra 10bps return in expectation of higher AUM; in the process subjecting the gullible investor to unnecessary and unexplained risks.

Side Effect 10: Eternally Bullish
Yes, whether it is life or money, we have to be bullish or optimistic and it’s a very good quality but in the investment world we also have to be realistic. There are times when the underlying conditions like GDP growth, macro numbers, inflation, interest rates, currency ,movements etc are positive while at certain times they are actually negative. A fund manager is supposed to give a true picture of the underlying economic and business scenario so as to allow the investor to take an informed educative decision. However, we hardly see any fund manager being out rightly negative on the above mentioned economic and business conditions; the underlying variables are the same, only the method of portraying them is different. Why the fund manager suffers from this “ever bullish” side effect is very simple – a fund manager’s return is based on the AUM and his job is to attract maximum funds; if he himself is not bullish then how would a common investor be bullish and invest in his fund? Hence, a fund manager suffers from the side effect of being “eternally bullish”.

To conclude, we saw the side effects from which a fund manager suffers. However, are we to completely blame them from it. Probably not. In our quest for getting the best returns for our money, we “force” the fund managers to take undue unwarranted risk. Having said this, the fund managers also have to assume more responsibility and take utmost care while managing funds – finally they are not just dealing with other people’s money but also trust – money lost can be earned back but trust lost might never be able to be earned back.

Friday, 31 January 2014

What Fund Managers and Advisors won’t tell you

Everybody wants to benefit from growth. Everybody wants to benefit from movement in interest rates. Everybody wants to get the best returns for their surplus funds. In short, everybody wants the best returns for their investments. But, everybody does not know how to achieve it. The simple answer put forth before a common investor is “mutual funds”. Since, they offer professional fund management with even a small investment amount; it is the answer to many investor’s problems.

However, do the fund managers and mutual fund advisors and distributors tell you all the facts relating to your mutual fund investments. Or there are some things which they may not state. Let us examine those facts which a mutual fund manager or advisor may not tell you.

The mutual fund manager or advisor may not tell you that:

Hidden Fact 1: Expenses eat into your returns
A mutual fund may have lot of expenses like fund management expenses, loads etc. Although, these may appear to be small but over a long term, say 10 years, they may eat into almost 20% to 40% of your returns. Hence, you are paying high costs for fund management and distribution and if the fund does not generate that much “extra return” on your investments then you are simply paying high costs for sub-optimal performance. Kindly note, it the financial world, poor performance does not come cheap, you have to pay dearly for it!

Hidden Fact 2: Fund NAV is meaningless
The investor will not be told that the fund NAV (net asset value) in itself is meaningless. The typical investor feels that a fund with a lower NAV is cheap compared to a fund with a higher NAV. There is nothing further from truth. This blunder is because the investor neither understands nor appreciates the difference between price and value. A MF unit in itself has no value – it is “not” an asset like a house property, bond, equity stock, gold etc. Yes, the MF unit in itself simply has no value on its own – it derives the value from the underlying asset which it owns. The NAV is nothing but the value of the total underlying assets of the fund divided by the number of units.  The corollary to that would be that a MF unit can’t be costly or cheap – it is not an asset in itself which can be costly or cheap – it derives its value from the underlying investment. If the value of the underlying investment goes up then the NAV will go up and vice versa. For example, there are two funds – A and B. Now, the NAV of Fund A is Rs.10 per unit while the NAV of Fund B is Rs.50 per unit. Does this mean that Fund A is cheaper than Fund B. Not at all. The NAV simply means that Fund A is holding such assets in totality which when divided by the total number of units results in a NAV of Rs.10 and ditto computation for Fund B which results in NAV of Rs.50. Further assume, that the portfolio of both these Funds is exactly the similar. In that case, a 20% rise in the value of the portfolio will result in a commensurate 20% increase in the value of the NAV of the Funds – Rs.2 in the case of Fund A while Rs.10 in the case of Fund B. This is another derivative of the first two mistakes – an investor can’t become more foolish when he / she invests in a MF NFO simply because it is available at “par value”. As explained above, the MF NAV is meaningless in itself as it is merely the value of the underlying asset. Hence, while investing in MFs don’t look at the price of the NAV but rather the underlying value which is derived from the portfolio of the Fund.

Hidden Fact 3: You can lose money in Fixed Income Funds
You may not be told that you can lose money in Fixed Income Funds. The name is fixed income but the income from it is certainly not fixed. There are different types of risks associated with fixed income securities like credit risk, interest rate risk, yield curve risk, basis risk etc. The most common risks which an investor attaches to fixed income investments is credit risk. Having said that, there is one more risk which is as important as credit risk i.e. interest rate risk. Few people understand this risk. If you are investing in long duration Income or Gilt Funds than you are at the mercy of interest rates. And interest rate risks is directly associated with the maturity of the security – the higher the maturity the larger the interest rate risk associated with it.

Hidden Fact 4: Income or Gilt Fund will be able to beat a normal debt product only if interest rates were to fall
This is another hidden fact which you may never listen. Income Funds are nothing but interest yielding debt products. But, when someone deducts high fees from the interest rate then what would happen – substantial fall in the income yields. That is what happens with income funds which are loaded with high fund management expenses. Hence, investing in income or gilt funds is nothing but paying heavily for buying an interest paying security and then hoping to earn capital gains on it!

Hidden Fact 5: Liquid Funds offer risk free returns
This is another misconception in the mind of investors which is merrily exploited by mutual fund managers and distributors. As mentioned earlier, there are different category of risks while investing in debt funds. A liquid fund may have negligible interest rate risk since it runs a very short maturity but it certainly has credit risk as it primarily invest in corporate papers. And mind you, for getting 5 to 10 bps of higher return, many times a fund takes unnecessary and avoidable risk of investing in not the best quality of papers. A liquid fund is for parking surplus funds and an investor would not want his capital to be put at risk for getting a few basis points of higher return.

Hidden Fact 6: Ignore Index Funds
This is another very common mistake which MF investors commit – ignoring a simple low cost index fund in favour of the high cost actively managed fund. And generally nobody encourages or advertises an index fund. Why? The answer is simple – the fund management fees are minimum in an index fund. Remember that it’s very difficult, if not impossible, to beat the stock market indices consistently over a long period of time. If that were not the case, then why over periods of a decade or more, approximately 75% of all “actively” managed stock funds underperform the passively constructed stock indices. The fact of the matter is that most people have no reason whatsoever to believe that they can pick winning stocks or time the markets and their success at it would be the same as it would be like throwing darts at the financial pages. I would like to quote Dr. William Bernstein who told that “there are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know where the market is headed. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know where the market is headed”. Nothing more succinctly explains the real world of professional investing and stock picking. Mr. Merton Miller, Nobel laureate and professor of Economics of Chicago commented that “if there are 10000 people looking at the stocks and trying to pick winners, one in 10000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful, but they’re really not”. Then I would quote Mr. Rex Sinquefield, co-author of Stocks, bonds, ills and inflation that “we all know that active management fees are high. Poor performance does not come cheap. You have to pay dearly for it”. Thus, active fund management is nothing but paying heavy fees for underperforming the passive indices! The conclusion therefore is that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat atleast 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds. But unfortunately, you may not receive this simple advice from most of the fund managers and distributors.

Hidden Fact 7: SIP is the best route to investing
SIP or Systematic Investment Plan is a popular term promulgated by mutual funds, their distributors and financial planners as a safe and sure route of investments in equities to outperform the markets and create wealth over the long term. SIP is certainly safe for mutual funds and distributors because they get committed continuous money for the long term on which they can earn fees and commissions. It is also safe for the financial planners to recommend because if anything goes wrong then they can blame the SIP system. However, for an investor, it is just another method of investing. It has its pros and cons. SIP works the best in a bull market or a volatile but rising market. On the other hand, SIP under-performs in a bear or sideways market.

Hidden Fact 8: Fund Churning is injurious for long term wealth creation
You may generally not receive the advice that “fund churning in injurious for long term wealth creation”. Instead, fund churning might be a popular advice showered on you by your MF Distributor. Instead of churning your fund just churn the MF distributor who gave you that advice. Distributors love the churning game – simply because it gives them extra commissions and fees while it gives you extra income tax, expenses and most probably a sub optimal fund. But the worst aspect of trading funds is that it allows the counterproductive emotions of investing to supersede the productive economics of investing. The dream of a perfect plan will never come true if mutual funds are traded as if they were stocks.

Hidden Fact 9: Owning too many funds
Usually you may not be advised to limit the number of funds you own. To paraphrase the old adage, "too many funds spoil the perfect plan." Why should this be so? First, the more funds you own, the greater the chance that a truly inspired fund selection will have its success spoiled by another fund that falls on its face. The problem has been called "diworsesification," for it leads investors to build a portfolio of funds containing so many individual stocks that it becomes contradictory for the holder. Even more counterproductive is the active trading of mutual funds. Typically, an investor today holds funds for but three years, an absurdly inadequate time frame for appraising the results of an investment program that should be inherently long term by nature. What is worse is that the funds may have been ill-selected in the first instance—funds with inflated performance, funds investing in hot market sectors, funds advertised on television, funds that trade actively and relinquish much of their profit to taxes, funds with high costs that didn't seem to matter when their past records looked so good.

Hidden Fact 10: Fancy Funds, fads and fantasies
Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds are simply smart tactics to collect money from the gullible investors. No sector or theme continuously performs well over a longer term. Even worse than it, a sector fund is generally launched after the sector has already performed well because the fund has to show good past performance to attract fresh investor money. And by applying the “law of averages”, it becomes more likely that the sectors which have already performed well in the past will actually not perform so well in the future. Hence, never fall prey to fund gimmicks and invest in sector or theme based funds.

To conclude, you may not hear everything you should be hearing in regards to your mutual fund investments from the fund managers and advisors. However, reading and thinking between the lines would greatly aid you in recognizing the hidden facts. And once the hidden facts come fore to you, don’t pretend to hide behind them. Instead pay attention to them, try to listen to what message it has to offer, learn from them and go on to become a more clever informed articulate mutual fund investor.