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Good vs evil

The dark side of financial products - when evil overpowers good

Good vs evil

There are some children's stories in which every good character has an evil side. A dark magician has cast a spell because of which the characters' evil side always dominates. After all these years, I can't quite recall the details, but I can see the same thing in personal-finance products and services nowadays.

Let's look at all the financial products you need, starting with insurance. There's term insurance, along with health insurance, which is a must-have product everyone should have. Every family should use term and health insurance to ensure that all financial needs are taken care of in the event of an illness or death. However, there's the evil side of insurance, ULIPs and traditional policies which provide little insurance cover, poor investment returns after costs, and are designed to enrich agents and the insurance company. Far too many savers get taken in by the hard sell around ULIPs, endowment policies and such, and do immeasurable harm to their family finances. This is an issue that we have tackled strongly right from the time of this magazine's (Mutual Fund Insight) launch and we're visiting it once more in this March 2023 issue of 'Mutual Fund Insight'.

However, this story of the evil side of financial products overshadowing the good side is not limited to insurance. Look at stocks.

The best way to build long-term wealth is steadily investing in a set of carefully chosen fundamentally sound companies for years. However, brokers will guide you towards actively trading derivatives, where almost no one ever makes any money. Don't believe that? Do you think that given the sheer amount of activity around futures and options, many people must be making good profits? There's hard evidence now. A recent SEBI study shows that about 90 per cent of futures and options traders lose money. That's the evil side that utterly overpowers the good side in terms of activity level.

Now, look at mutual funds. Investors need a handful (three-four, at most) of diversified equity or hybrid funds for their long-term needs and around a similar number of fixed-income funds. The evil side of mutual funds is the endless stream of increasingly specialised funds launched by the fund industry and hard-sold by distributors. There are over 7,000 mutual funds in India available as over 1,500 distinct plans. Each one has some stated investment logic, and the regulator approves each. And yet the reality is that some 90+ per cent of these do not need to exist and any actual investing need can be taken care of by a very small set of funds.

Let's come to cryptocurrencies now. You need cryptocurrencies only to trade in narcotics, transfer the proceeds of your crimes, fund terrorists or get ransom from your kidnapping or ransomware victims and other similar activities. If you are into these types of businesses, then the ability to move funds globally without detection is the good side of crypto for you. These are activities that are an appropriate fit for the actual use of crypto. However, the bad side of crypto is to consider it an investment-worthy asset and start trading on the various self-declared 'exchanges' and other financial shenanigans that have come up. These are a path to financial ruin. Not only is crypto not an asset in which investments can be safely made but it is also an unregulated wild west, as FTX and many other bankruptcies show.

Why does this light side/dark side duality exist for practically all financial products? I don't want to go into a huge discussion of incentives and regulatory structures but I'm sure everyone reading this page understands the root causes. The more important question for us investors and analysts is to ensure that we can see through the fog and choose the suitable options for us. We always hope to do that in this 'Mutual Fund Insight' magazine and everything else that Value Research does.

This editorial appeared in Mutual Fund Insight March 2023 issue. To read the cover story and other insightful analyses, columns and articles

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