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Bubble trouble, a pension plan and Facebook foes

LiveMint logoLiveMint 28-07-2017 Monika Halan

Markets are too high, I will wait for them to cool down before I invest. Nifty broke 10,000 and Sensex is at 32,000, is it too high? We’re in bubble territory for sure. Markets are in an overdrive—this ends badly. Markets are looking ahead and pricing in the structural reform the government is doing. Goods and services tax (GST) will cause markets to drop in the next 2 months—we’re just a few days away from a crash. Market is pricing in the long-term benefits of more taxpayers, less black money and better compliance due to GST.

Listen to the voices about the market and you’d imagine people are talking about two very different things. There are two voices that we hear today—one believes that we are already in a stock market bubble. The other believes that small corrections will happen, but we are in a long-term bull run.

How should you think? Who is right? Are we in a bubble or aren’t we? Should you invest or not? Is the Sensex too high? For retail investors, the first lesson is this—stop watching the Sensex. The Sensex is just a number. It can neither be ‘too high’ or ‘too low’. I’ve been tracking household finance for more than 15 years and have been asked this question at every market top—at Sensex 8,000, 10,000, 20,000 and again now at 32,000. The market index simply reflects the average price of 30 stocks that belong to the index called the Sensex. If the price rise is backed by fundamentals like profit growth, nothing stops it from going higher. But if the index is rising due to other factors like too much money chasing a few stocks, then a correction is due. I’m not taking a call on who is right, but asking the question: should you exit? No. You have no option but to be in the market. Sitting on cash or moving money to other investment products is not an option. You don’t have the time or knowledge to time the market perfectly. Remember that even well-paid fund managers have gone horribly wrong with their cash calls in the past few years. For two schemes run by the same fund house by different managers, one sat on cash and the other was fully invested. It took the fund manager of the scheme that took the cash call over three years to recover from the sudden uptick in the market. You need to continue investing regularly for the long term in the stock market. Do use this market rise to rebalance your portfolio. Remember that your risk today comes from getting greedy and doing something rash.

Would you like a guaranteed post-retirement income of Rs5,000 a month? You need to have Rs7.5 lakh ready to invest. Rs5,000 does not get you far these days but can work to prepare a base for your other investments that either earn a lower return or take a higher risk than this guaranteed plan. I’m talking of the Pradhan Mantri Vaya Vandana Yojana (PMVVY) that is open for subscription till 17 May 2018 from the government-owned Life Insurance Corporation of India (bit.ly/2uoOGUK). This is a refurbished version of the earlier Varishta Pension Bima Yojna (bit.ly/2uYCX0H) with lower rates and a new name.

As fixed deposit (FD) rates have fallen, those whose deposits are maturing are discovering what we mean when we say ‘reinvestment risk’—or the risk of investments earning less in the future. The 5-10 year State Bank of India FD rate is now at 6.75%, down from the 9.5% levels in 2011. As a family, you can invest a maximum of Rs7.23 lakh to draw an annual pension of Rs60,000 or invest Rs7.5 lakh to get a monthly pension of Rs5,000. This works out to a yield of 8.3% if you take the annual pension and 8% if you take the monthly pension. For a retired person living in a metro, Rs5,000 a month is small potatoes, but can yet provide a base level of guaranteed income in a portfolio of investments. The good part is the lock-in of the rate for 10 years. Remember that we now have an inflation targeting central bank that will keep inflation in the band of 2% to 6%. At the higher end of the band, the pension product still gives a real 2 percentage point return. If you are familiar with mutual funds and can understand how to choose monthly income plans (these are nothing but debt funds with about 20% invested in equity), you may look the other way from this product. But if FDs have been your staple diet till now, do use this product to give a base level of income at a higher rate. (I’ve been writing about retirement in a series for a few weeks, you can read one of those columns here).

No, not for liking your Facebook posts, but to use as evidence in insider trading cases. At an Institute of Company Secretaries of India seminar last week in Mumbai, an official of the capital markets regulator official told a rapt audience stories of how the Securities and Exchange Board of India (Sebi) is using social media footprints to establish relationships in insider trading cases. Those front-running to make illegal profits now need to watch their digital exhaust carefully because the regulator’s certainly looking at it. Good to hear that regulators are adding the use of new technology to their regulatory arsenal.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at monika.h@livemint.com

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