After Lokpal, it's time for an investor revolution

The country is in a rebellious mood. Ordinary citizens are fed up of corruption, inflation and the widening wealth divide. They have wholeheartedly embraced the Anna movement.

The strength of the movement is reflected in the way the government has bowed down to the will of the people and is scrambling to table the Jan Lokpal Bill. The effectiveness of the bill itself may be debateable, but the awareness of corruption has become widespread.

An ordinary citizen can now face up to any corrupt official, low down or high up in the order, and proudly say that she will not pay a bribe no matter what the consequences. This assertiveness was not there a few months back. Hopefully the Anna movement will be the turning point for the average Indian.

Indian investors too will have to start a revolution. The revolution should be against: (a) wealth destroyers in the equity markets, (b) corrupt officials managing pension and trust funds, (c) financial product sellers who have sold them products that make money only for the financial service provider and not for the investor, (d) investment firms that dupe investors of their hard earned money, (e) advisors who have sold them products for the high commission offered by product manufacturers, (f) scamsters promising them unreasonable returns, and (f) quacks telling them where to invest.

How will the revolution start? The starting point is each investor will have to go back to the drawing board and see where she has been cheated. An investment made in a stock that has lost more than 50 percent of its value due to poor corporate governance, bad management, poor business practices and unreasonable future profit projections is a clear case of cheating the investor by the company management.

The markets have punished such companies, but that does not help the investor. The loss cannot be recovered but the next investment done by the investor will have to be in companies that care about shareholder wealth and not about increasing promoter wealth.

The compulsory investment in provident and pension fund by all salaried employees is the second starting point. The government fixes the rates of interest offered on such investments, but that does not in any way compensate for inflation or cost of living. The compulsory nature of such investments takes way the opportunity cost of investing in assets that generate higher returns.

The statutory nature of investments made by provident and pension funds gives rise to a huge dose of corruption. Officials managing such funds favour brokers who pay them off and make investments in fixed income instruments at higher prices than those prevailing market prices. The Money Matters case is a prime example of such kind of corruption. Investors should ask for transparency in the functioning of provident and pension funds with much more accountability than it is at present.

Investors who have invested in wrong financial products sold to them with the promise of high returns should shun the financial service provider involved. The advisor who advised investors to invest in such products should also be shunned. Investors should demand more information on fees and commissions paid out to intermediaries as also demand explanations on why such products were sold to them.

Investors must raise their eyebrows when an investment company or a scamster offers them unreasonable returns on investments. If a AAA-rated corporate bond is yielding 9.4 percent, an investment return of more than 15 percent is unreasonable in a fixed income instrument. The ability of borrowers to service such high interest over a long period of time is limited and usually firms offering such high interest rates end up defaulting.

Anybody can give investment advice. There is enough advice in media and the internet from investment quacks claiming to be professionals. Such quacks will not even be allowed to enter a professionally managed investment firm. Investors should be wary of such quacks and the investment advice offered by them.

The revolution starts with you the investor. Do not wait.

Arjun Parthasarathy is the Editor of  www.investorsareidiots.com , a web site for investors.