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An Uncertain Future

The unchanging nature of the financial environment of the past--even though it was an artificial creation of our political system--has prepared many of us poorly for the brave new world of constant change

Many years ago, perhaps shortly after the birth of Value Research, I obtained a booklet containing a historical record of interest rates offered by the State Bank of India. Although I have forgotten the exact details, I remember that there was one entry for rates announced in 1942 or thereabouts and the very next entry was for rates announced in 1966. That was the way things used to be-interest rates that were valid for about a quarter of a century. After that the frequency of new interest rate announcements increased rapidly and the list started looking increasingly modern.

The unchanging nature of the financial environment of the past-even though it was an artificial creation of our political system-has prepared many of us poorly for the brave new world of constant change that we are facing now. And the change is coming even to parts of the system which appear to least expect it.

A few days ago, it was decreed that the postal life insurance scheme will be permitted to invest in the equity markets. It is an indication of how much attuned to the virtues of the stock markets we have become that this news was greeted in many quarters by a rejoicing over the fact that it meant an additional 10 or 15 thousand crore rupees coming into the stock markets.

But this number is not even remotely correct. This is, approximately, the total corpus of the postal life insurance scheme and it is unlikely that more than ten per cent or so of the amount will ever get invested into equities. And of course, a thousand crores coming into the markets nowadays are like a drop in the ocean.

However, this announcement is significant for other reasons. The postal life insurance scheme is being cutoff from any kind of government support. This insurance organisation, which is a sort of an in-house insurance supplier to government and quasi-government employees, will have to fend for itself as far as earning returns goes. Even though pension reforms are stuck yet again in the predicable left-right routine that is currently the fate of many reforms efforts in Delhi, postal life insurance will have to manage on its own. Mind you, postal life insurance is not a mandatory deposit-it is a discretionary insurance scheme which is different only in that it can be purchased by public employees.

As we've seen in the context of many other types of changes in the financial system, what looks like freedom at first sight actually often turns out to be responsibility in the guise of freedom. Making money in the equity markets looks like the easiest thing in the world today. However, if investors who are used to a certain stability in returns are going to enter the world of equity investments over the next few years, then there is no doubt in my mind that many of them are going to lose money.

Sure, god is in his heaven and India is shining in the sky and the stock market will continue to rise but there will be plenty of ways to make bad investments. I think that the best way-more now than ever--for new and inexperienced investors to invest is to invest through mutual funds that have an established track record of stable growth and this is true even of institutional investors.