INVESTMENT NUANCES

An investor is someone who commits capital in order to gain financial returns. Warren Buffett, the investment legend, defines investing as “… the process of laying out money now to receive more money in the future.”  An investor differs from a trader. An investor puts capital to use for long-term gain, while a trader seeks to generate short-term profits by buying and selling securities repeatedly. Therefore, the frequently asked question is whether investment is an art or science? Investment is neither an art or nor science; instead it is common sense based on three important tenets – discipline, patience, and knowledge. An investor must be wary of the market cycle and understand that when he invests, for all the gains that he will make, he will also incur some losses. It is impossible to only gain from the markets and not undergo some loss. However, a seasoned investor will mitigate his losses and increase his gains to ultimately improve his financial position. In this article we discuss some important facets that an investor must consider while he undertakes his investment journey.

Know
Yourself

There are no set piece solutions for investing or template that fits many or
all investors. Each investor is different and before you embark on your
investment journey, make sure that you know and understand yourself as an
investor. There are some important financial aspects that you must understand
and then devise your investment strategy. If you are unable to do it yourself,
then seek help from a financial advisor who can help you to do it. First, is to
establish your cash flow. If you are a salaried person then financial planning
is relatively easier due to fixed cash flow. For a businessperson, it is
trickier due to cash flow and business cycle uncertainties. Second, is setting
your life’s financial goals that include children education and marriage, house
purchase, retirement, dream vacations, and consumer durable among others. In so
doing, also decide on the time horizon for each of these goals to then classify
them into short, medium, and long-term financial goals. Third, is the aspect of
your risk-taking ability that is function of your age, cash flow and liabilities?
This will help you to decide whether you are an aggressive, moderate, or
conservative investor. Fourth, beware of venturing into investment options that
you do not understand merely because your friend does it or your advisor has
asked your to do it for higher returns. Invest only in what you understand and
are comfortable to deal. Fifth, invest in yourself and purchase health/life
insurance early in life to keep the premiums low. Normally, one should consider
separate family floater policy for health and critical illness coverage and a
term insurance policy for life coverage. Ideally, your life coverage should be
10 times of your annual salary.

Compounding – Einstein called “compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.” Compounding is the process of generating more return on an asset’s reinvested earnings. To work, it requires two things: the reinvestment of earnings and time. See the chart below where we have calculated the yearly compounding of rupees 1 lakh that earns 12 percent annual interest. In 30 years, it has grown to almost rupees 30 lakh. However, it has taken nearly 7 years to double and 21 years to grow 10 times. Thereafter, in the next 10 years it grew from 10 to nearly 30 times of the initial investment. As is evident, the exponential growth of the investment is only in the latter half of the investment period when the investment has grown from nearly 5 to 30 times. Therefore, the investor must start investing early to give himself adequate time for the compounding to work and minimise withdrawals or keep reinvesting the returns.

Real
Returns

understanding that real returns are the gains made after offsetting the
inflation and taxation will help an investor to consider and invest for maximum
total returns. Inflation erodes the purchasing power of money e.g. in 30 years,
real value of rupees 100 will become rupees 11.34 at 7 percent annual
inflation. The real rate of return is the return adjusted for inflation or
other factors. Adjusting the rate of return offers a better measure of
investment performance and allows for a more effective risk versus reward
measurement. Nominal rates are usually always higher than the real rate of
return. Even though fixed deposits guarantee returns, after tax and inflation
deduction, the real rate of returns in these varies between 0.45 to 0.75
percent. Investing in equities is one of the ways to beat inflation as they
generate positive real returns over long-term.

Flexibility – an investor must always remain
flexible in his investments by investing in different types of investments and
maintaining cash reserve to take care of emergencies (emergency fund) or take
advantage of investment opportunities. There are many types of investments like
mutual funds (open and close ended), ETFs, individual stocks and bonds, real estate,
and various alternative investments. An investor becomes a shareholder or part
owner by buying the company shares in dematerialized (Demat) form and thus
participates in the company’s growth/decline through rise/fall in share prices.
Besides, you also earn dividends that the company gives to its shareholders.
Before buying shares, the investor must use his power of observation, artful
questioning, and logical deduction to decide on the company. If the investor
buys company bonds, then he is loaning money to the company in exchange for
periodic interest payments plus the return of the bond’s face amount when the
bond matures. Both government and companies issue bonds. Several agencies issue
ratings to these bonds to evaluate the probability of whether a bond issuer
will default. Some of the important rating agencies are Standard and Poor
(S&P), Moody’s, CRISIL, ICRA and CARE. The investor should buy higher rated
bonds, which means the company has less chances of default. Government bonds
come with the sovereign guarantee and are relatively risk-free. Mutual fund
investment is best suited for passive investor who cannot actively track the
market or keep themselves abreast on a day to day basis. These are pooled
investments managed by professional fund managers that allow investors to
invest their money in stocks, bonds or other investment vehicles as stated in
the fund’s prospectus. Mutual funds use the end of trading day Net Asset Value
(NAV) for valuation and make distributions in the form of dividends and capital
gains based on this. They offer you the advantages of professional management,
high liquidity, and more tax efficient returns. Unlike mutual funds, ETFs
(although like mutual funds in many respects) trade constantly, like shares and
stocks, while the markets are open.

Diversification – to diversify means that the
investor must invest in various asset classes to manage his risk and earn
higher returns. This happens because the positive performance of some
investments neutralizes the negative performance of others. After, diversifying
his portfolio into various asset classes like equity, debt, gold, real estate
and fixed income instruments, the investor must also consider diversifying
within some of the these individually. He can consider buying securities of
large, mid, and small market cap companies or let us say mutual funds of
different asset management companies or different fixed income instruments like
PPF, FDs or SCSS and so on.

Keeping
Track
– after
investing, it is equally important to keep a track of your investments.
Ideally, you should review your portfolio on a half-yearly basis and if this is
asking too much then at least once a year is necessary. The portfolio review
will indicate the gainers and losers in the portfolio, the financial instrument’s
performance in relation to its financial goal and the overall growth of the
portfolio. Having reviewed the portfolio, the investor must then rebalance his
portfolio. In so doing, he must shed his losers, switch, or reinvest in other
asset classes to maximise gains and offset losses, and realign his portfolio
with his financial goals.

Technology – like all other facets of life,
technological advancement also has a significant impact on investors. The
digitization of the bourses and concomitant dematerialization of securities has
eased the investment avenues for investors. It has facilitated research and
analysis by investors by opening the plethora of information and tutorials on
the net, generated options for them to invest in various financial instruments
and significantly reduced paperwork by facilitating investment through the
click of a button. The next big change is the introduction of robo-advisory
services, which use technology for client portfolio management by using
algorithms. All these have eased out investor apprehensions and reduced tariffs
and fees.

Emotions – there is no place for emotions in
investments. An investor should be aware of the fear of loss or regret, greed,
risk aversion and bandwagon effect during his investment. An investor should
hold his stocks or other investments dispassionately and consider their
purchase or sale objectively. He should shed them when they have delivered the
result, stopped giving profit or outlived their utility. One cannot make an
investment for indefinite period; relate it to a financial goal or investment
horizon. Prudent investment is to the use financial assets that are suitable
for your financial goals and objectives by considering the risk/return profile
and the available time horizon. To do this, you must keep the fees and taxation
minimized, and rebalance the portfolio periodically.

Understanding
Markets
– know
that markets are volatile in the short-term. As the investment horizon
increases, probability of loss reduces. Sensex movement in the last 39 years
has proved that the likelihood of losing money for periods of 15 years or more
has been zero. Since 1979 till date, markets have given a CAGR of 17.1%. If
wealth compounds at this rate, then an investment in the stock market doubles
every 4.5 years. Robert Kiyosaki had suggested, “it is not how much money you
make, but how much money you keep, how hard it works for you, and how many
generations you keep it for.” If an investor stays fully invested in the market
then he will earn a lucrative CAGR that beats volatility and inflation.
However, if he tries to time the market, then he runs the risk of missing days
that registered some of the biggest gains and the CAGR will drop drastically.

Discipline – a disciplined approach in
investment by taking the SIP/SEP route help you to beat the market volatility,
achieve rupee cost average and reach your financial goal faster. Since the
early bird catches the worm, prudence lies in starting as early in life as
possible. Elders can inculcate the habit in their children by making them save
small amounts from their pocket money that they give them during school or
college days. Let us exemplify this with the case of two investors – Mr. Wise
and Mr. Unwise. Both investors invest rupees 36 lakh over different time spans
of their life. Mr. Wise invests rupees 10,000/- per month from the age of 25 to
55 years, whereas Mr. Unwise invests rupees 15,000 per month from 35 to 55
years. At the end of their investment period, Mr. Wise’s investment grows to
rupees 7.01 crore, but that of Mr. Unwise grows to only rupees 2.27 crore – a
shortfall of rupees 4.74 crore. There is no dearth of financial calculators or
ready reckoners, available on the internet, which show the exponential growth
of your wealth through the SIP route. Another aspect that an investor must
consider is to increase the SIP amount by 10 or 15 percent every year. Evident
from the table below is the fact that if an investor tops up or increases his
SIP of rupees 10,000 by 10 percent every year, then his corpus at the end of 30
years will be 150 percent more.

Details
SIP
without Annual Increase
SIP
with Annual Increase
Per
month SIP amount
Rupees 10
thousand
Rupees 10
thousand
Rate
of return
12% 12%
Investment
period
30 years 30 years
Total
amount invested
Rupees 36
lakh
Rupees
1.97 crore
Corpus
after 30 years
Rupees
3.53 crore
Rupees
8.83 crore

Taxation – since taxation is a dynamic
process and undergoes changes frequently an investor must keep himself abreast
with the taxation policy of his country. This will help him to invest in tax
efficient financial instruments that will also assist in simultaneous wealth
creation. In our country, government levies tax on your income through stipulated
income tax slabs. Government considers your annual interest income from various
fixed income instruments as part of your income and taxes them as per your IT
slab. Additionally, it also levies varying capital gains tax on your equity and
debt instruments and taxes them based on you holding duration (short-term if
you hold equity for less than one year and debt for less than 3 years, and
long-term if you hold both for periods more than their short-term duration
respectively). Capital gains harvesting or setting off capital losses are some
of the means to reduce taxation legally, provided you reinvest the capital to
maintain the corpus. Equity Linked Savings Scheme (ELSS) investment in mutual
funds with a 3-year lock-in period, provides lowest lock-in period and tax
efficient returns with tax savings under Sec 80C of the IT Act.

EVOLVE FINANCIALLY WITH AN ADVISOR

  According to the third CFA institute investor trust study survey covering 3,127 retail investors and 829 institutional investors worldwide, 70% of Indian investors work with professional advisers compared to 54% globally; 81% of these began work with advisers in the past six years. Of these Indian investors, 31% investors listen to primary advisers, 30% depend on online research and 19% take advice from friends and family. The investor looks for someone who will act in their best interest and can achieve high returns. In another survey, sixth-annual Legg Mason Global Investment Survey (LMGIS), 44% investors with financial advisors feel that volatility is “positive – if managed properly” as against 27% without advisors. This indicates that investors with advisors are more likely perceive volatility as an opportunity. The chart below is reproduced from a survey report of IIMS Data works Survey and shows with whom would Indians trust their money.

Benefits of Financial Advisers

  So, what do the
financial advisors bring to the table for you? According to Accenture
Consulting survey report. “a human advisor (even if advice is provided
virtually) is still seen by a slight majority (51 percent) as the most reliable
option for new investment ideas. 57 percent of investors felt human advisors
(virtual included) provided the best customized advice.”

Decision Making – Financial
advisors assist you in objective decision making. Generally, an investor tends
to get emotionally attached with his portfolio. When the markets undergo
upheaval, he is liable to get swayed by the volatility and take biased
decisions. A good professional advice from his financial advisor will assist
him to arrive at objective and well thought through decisions. Moreover,
financial advisors come to you with experience, intimate knowledge of financial
products and market research. By virtue of their work, the financial advisors
are in touch with numerous wealth managers, investment bankers, mutual fund
managers and most importantly the common man to know the market sentiment and
its buzz. This makes decision making more holistic by avoiding myopic and
blinkered market view.

Diversification – They help you to diversify your investments. The financial advisor understands the importance of diversification as a means to beat the market volatility and thus helps you to stay on course to meet the financial goals. Statistically, as per the LMGIS survey, advised investors are better informed and more confident to diversify their portfolio into asset classes other than equities.   

ASSET CLASS
% OF ADVISED INVESTOR
% OF DO IT YOURSELF (DIY) INVESTOR
Equities
44%

60%

Real Estate
31%

18%

Domestic Bonds
24%

13%

Alternatives
21%

12%

Golds/Metals
19%

11%

International Bonds
14%

1%

Taxation
– A common DIY investor may not understand the taxation intricacies of various
financial instruments. Furthermore, taxation is a dynamic process and staying
updated regarding various facets is also critical. To make maximum gains, the
investor must know how to work around the taxation labyrinth correctly to avoid
paying taxes unwisely and coming under the taxman’s scanner.

Risk Profiling and Goal Planning – A financial advisor will put you through the paces of risk profiling and financial goal planning before suggesting investment options. This is the correct and methodical way of going about investment.  A DIY investor at times overlooks these important aspects and gets carried away to invest in a financial instrument that is marketed better than others even though it may not suit his risk profile or meet his financial goals in the given time frame. Financial advisors tailor your portfolio from a plethora of financial instruments to suit your risk profile and help you meet your financial objectives within stipulate timeframe.

ProfessionalismFinancial advisors bring professionalism to your investment management. In accordance with your risk profile and financial goals, they carry out annual or half-yearly portfolio reviews and rebalancing to minimize losses and maximize gains. Next, they track the markets continuously and advice you at opportune times to book profits or cut out losses appropriately through redemptions, switches or purchases.

Better Returns – The use of a Financial advisor provides you the opportunity to generate better returns. The chart below is made from a sample survey carried out in the USA where it was deduced that advised individuals had a minimum of 25% and a maximum of up to 113% more assets than unadvised individuals. This was possible since advised individuals stayed invested for longer-term and had properly diversified their portfolios.

How to Select a Suitable Financial Advisor

Qualifications and Credentials – Dime a dozen financial advisors are available in the market. This makes it difficult for an investor to choose the right man for the right job. To choose a financial advisor wisely, an investor must look for a Securities and Exchange Board of India (SEBI) registered investment advisor (RIA) who preferably is a certified financial planner in jaipur (CFPCM ), which is mark of excellence granted to individuals who meet the stringent standards of education, examination, experience and ethics. Since the agents represent few companies, they can sell products of only those companies. Market Regulator SEBI feels the need of segregating distribution and advice and is moving in this direction. Stoppage of upfront commission for agents, fee-based Financial advisory services and trail commission-based distribution agents are some the regulatory norms being brought about by SEBI. This will protect the investors from commission-driven agents who tend to offer biased financial advice to secure a maximum commission.

Experience and Reputation
– A post graduate in finance related subjects or a graduate in any discipline
with five years’ experience in financial sector is eligible to apply to SEBI for registration as an
investment advisor. Therefore, the investor must look for an advisor with more
than five years’ experience with good market reputation.

Client Base and Assets Under Management (AUM) – Depending on his
financial net worth, the investor must choose the financial advisor based on
his client base. If the investor is a high net worth investor (HNI) then he should look for a
financial advisor who deals with HNIs and if the investor is
medium to low net worth investor then he should look for advisors whose
majority clients are of equal financial status. This will ensure desired client
relationship services and investment plans. It will be prudent for the client to
find out the AUM of the financial advisor
to gauge his overall market standing.

Referrals and Trust
– A referral from a friend or relative will go long way to shortlist the
correct financial advisor. A number of portals are available online to select,
however, it is difficult to gauge their integrity and service before putting
your money through them. The single most important aspect of the client
relationship is trust, which takes time to build up. It is only prudent to
initially invest small sum with the financial advisor and then take time to
gauge his returns, service and work ethics. If satisfied, your subsequent
investment could be a larger sum. It is advisable to give yourself two to three
years to correctly gauge the financial advisor before making more substantial
investment with him. Financial crisis tests the advisor-client trust. As per third
CFA institute investor study, 83% of Indian investors believe their advisers
are prepared to handle the next crisis, compared with 55% of investors
globally.

Watch Out Aspects

Vested Interests
– The financial advisors can be influenced by mutual fund houses or NBFCs to
sell their products because of additional gratifications that they offer to
them. Alternatively, he may be under pressure to meet their financial targets.
This results in a conflict of interest wherein the advisor tries to push
through financial products that do not suit the requirements of the investor.

Promise of Excessive Returns – The average equity returns vary between 12 to 15 percent.
All financial products investing in equity markets are subject to market risks
and an investor must understand that risk and returns are directly
proportional. Therefore, to invest on promise of absurdly higher returns of 25
to 35 percent is to take unnecessary risk.
DIY Investors – There are numerous pitfalls that a
DIY investor has to overcome. He must sift through labyrinth of information
available and then undertake correct documentation, have the courage to take
difficult financial decisions, beat the habit of chasing performance and
returns, keep a track of all investments and undertake periodic reviews
objectively.

SIMPLIFICATION OF MUTUAL FUNDS

SEBI RE-CATEGORIZES AND RATIONALIZES MUTUAL FUNDS 

Ø  Background: There were 42 SEBI registered Asset Management Companies (AMC) in India with 2,043 Mutual Funds (MFs), which offered 9,680 possible choices to investors through their various plans and schemes. This confused the stakeholders and made it very difficult and cumbersome to choose the correct scheme. Therefore, the Securities and Exchange Board of India (SEBI) decided to classify and rationalize the plethora of MF schemes. In its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017, it reasoned that “it is desirable that different schemes launched by a mutual fund are clearly distinct in terms of asset allocation, investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of the similar type of schemes launched by different MFs. This would ensure that an investor of MFs is able to evaluate the different options available, before taking an informed decision to invest in a scheme.” This circular was applicable to only open-ended schemes as follows: schemes in existence; schemes for which SEBI has issued final observations but have not yet been launched; schemes in respect of which draft scheme documents have been filed with SEBI as on date and schemes for which a mutual fund would file draft scheme document. After considering representations received from Association of Mutual Funds in India (AMFI), it issued some amendments to the ibid circular as per its circular SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017.

Ø  New Categorization: These two circulars issued instructions to categorize existing schemes that permitted one scheme per category except these three: Index Funds/ETFs replicating/tracking different indices; the fund of funds having different underlying schemes and sectoral/thematic funds investing in different sectors/themes. MFs were to carry out the necessary changes in all respects within a maximum period of 3 months from the date of observations issued by SEBI on the analyzed and detailed proposals submitted by MFs. The aforesaid proposals of the MFs were to include the proposed course of action (viz., winding up, merger, fundamental attribute change etc.) in respect of the existing similar schemes as well as those that are not in alignment to the categories. SEBI classified the schemes broadly in the groups and subcategories as given in the table:

Main Category Number of Sub Categories Details of Sub Categories of Funds
Equity Schemes 10 Multi-Cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap, Dividend Yield, Value, Contra, Focused, Sectoral/Thematic and ELSS
Debt Schemes 16 Overnight, Liquid, Ultra Short Duration, Low Duration, Money Market, Short Duration, Medium Duration, Medium to Long Duration, Long Duration, Dynamic Bond, Corporate Bond, Credit Risk, Banking and PSU, Gilt, Gilt with 10 Year Constant Duration and Floater
Hybrid Schemes 6 Conservative Hybrid, Balanced Hybrid, Aggressive Hybrid, Dynamic Asset Allocation or Balanced Advantage, Multi-Asset Allocation, Arbitrage and Equity Savings
Solution Oriented Schemes 2 Retirement and Children
Others Schemes 2 Index/ETFs and Fund of Funds (Overseas and Domestic)

Ø  Market Capitalization Norms: Until now each fund had its own definition of large, mid and small cap stocks. Therefore, even in a large-cap category, the weighted average market capitalization of mutual funds ranged from Rs. 29 thousand crores to Rs. 1.9 lakh crore. Therefore, to ensure uniformity in respect of the investment universe for equity schemes, SEBI defined market capitalization norms for the listed companies. For its implementation and compliance, it asked MFs to adopt the list of stocks, to be prepared by AMFI and updated every six months. The defined market capitalization categorization is as follows:

v  Large Cap: 1st to 100th company in terms of full market capitalization

v  Mid Cap: 101st to 250th company in terms of full market capitalization

v  Small Cap: 251st company onwards in terms of full market capitalization

Implications for AMCs

Ø  Actions: The above circulars entailed that the MF houses undertake the following actions:

v  Change in scheme name

v  Change in investment objective

v  Fundamental change in investment strategy

v  Change in portfolio asset allocation

v  Change in category or investment theme

v  Change in fundamental attributes of a fund

v  Merger of schemes

Ø  Portfolio Management: Scheme merger will bring down the number of portfolios to be managed, thereby giving time to fund managers to focus their efforts on generating alpha. Fund managers may have to reshuffle scheme portfolios every six months based on AMFI revising the market cap list, which will increase their costs and impact their returns.

Ø  Trails and Commissions: Merging of various schemes might bring uniformity in commission paid by asset management companies (AMCs). However, the merger of schemes will result in the renegotiation of distributor commissions and the management of trails, thereby increasing transaction costs.

Ø  Equity Funds: Some of the large-cap funds will lose their sheen and returns since they will not have the flexibility to invest beyond the large-cap basket of 100 companies to generate alpha. There will be only 150 companies categorized under the mid-cap universe as compared to the current 400 stocks, as a result of which fund managers will have limited options to invest in the mid-cap category. This may force the investors to turn towards multi-cap funds that afford greater flexibility to the fund manager to generate a better alpha.

Investor Awareness:

Ø  Changes: The changes by SEBI create uniformity in the characteristics of similar types of schemes, enhance transparency and standardize disclosure requirements. It groups and names mutual fund schemes based on investors’ underlying investment objectives and offers flexibility to investors on the nature of investments and risk exposure. The new categorization will facilitate the investor to make an apple to apple comparison. Not only will this help him to choose the scheme, but it will also help him to know and understand the impact each scheme or fund will make in his portfolio.

Ø  Hurry Not, Worry Not: Almost all the fund houses have mentioned that these proposed changes are to be effective from 3rd or 4th week of May 2018. Investors need not to hurry or worry to exit and re-enter funds at this stage based on returns alone, without knowing whether the fund will fit you in its new category and attributes. Instead, they must wait for funds to settle into their new categories and then take considered decisions based on their risk profile. If there is a minor change in the fund mandate, then investors could ignore the past performance and wait for the fund to build a track record.

Ø  Debt Funds: The NAV of debt funds fall when the interest rates rise and vice versa. Therefore, SEBI has chosen the Macaulay duration (a measure of how much the NAV will vary when the interest rates change) to classify how volatile the debt fund NAV is to the interest rate movements. SEBI has also made an effort to segregate credit risk by differentiating corporate bond and credit risk funds. However, the gilt category does not have any restriction on duration and this can be painful for investors who wish to avoid credit risk completely and also minimize rate risk. The naming convention of debt schemes is as per the risk level of end investments. The nature of risk carried by debt schemes may still not be understood well by investors as simply changing the name might not highlight the quantum of risk element in these schemes.

Ø  Hybrid Schemes: Under the current categorization, these have been defined into three types: Conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund. For an investor, the scheme differentiator will still remain a concern.

Ø  Portfolio Review: The new categorization necessitates a portfolio review by the investors based on their risk profile and financial goal planning. The problem is that investors who wish to exit or switch a scheme that has changed mandate or has merged will have to pay capital gains tax because of this SEBI ruling. In case they decide to continue with some of their ongoing schemes, then they must monitor the returns closely for the next 12 months and then take a call.

Ø  Financial Advisory Services: Last but not the least, it is better to check your choice of funds with your financial advisor in Jaipur to ensure you are not comparing funds whose past record is not comparable. Be wary of going merely by the ratings offered by various websites (unless they clearly state what their new methodology is), if the comparison is done with new peers based on past data. When it comes to reviewing your funds, stick to comparing the fund with its respective benchmark and check if the fund is able to deliver 2 to 3 percentage points more than the benchmark in the case of equity.

PS: Dhirendra Kumar, CEO Value Research, suggests “Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36 schemes. Here’s what remains: multi-cap for long-term investing, aggressive hybrid funds for medium-term savings, ELSS funds for tax saving combined with long-term savings, and short-term debt funds as a superior alternative for bank fixed deposits. That’s it.”

DO NOT PUT ALL YOUR EGGS IN ONE BASKET: DIVERSIFY

Introduction

➢ Diversification is a fundamental of investing. Oxford dictionary defines diversification (especially in business) as the act of developing a wider range of products, interests, skills, etc. in order to be more successful or reduce risk. Online portal Investopedia elaborates diversification as a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

➢ Why Diversify? Diversification will safeguard your portfolio against total loss, hedge your investments to cater for market volatility and accommodate your financial goals at varying timelines. Ipso facto, diversification of the portfolio must take place in the undermentioned varied asset classes.

Asset Classes

➢ Large numbers of asset classes, as follows, are available in the Indian market and it is important to understand their peculiarities before investing in them:-

Real Estate. Investment in real estate can be done by purchasing residential or commercial property (land, bungalows or flats), REIT (Real Estate Investment Trust) or REMF (Real Estate Mutual Fund). Investment in real estate is capital intensive and thus should be done early in life by availing home loan option to avail its tax saving advantage. Even so, one must avoid using entire savings towards payment of home loan EMI and concomitantly invest a portion of it, preferably through SIP, to ensure wealth creation. To avail maximum advantage, investment in this asset is for a long duration of at least a decade plus. The property market, which is fuelled by black money is on the decline due to Government instituted measures to restrict its use in the economy. Thereby, this asset may yield lesser returns in India in the coming decade. Retail investors should be wary of frauds and cheat galore in this sector and should carefully check the documents before striking a deal.

Equity (Stocks). Investing in the equity or stock market is a good option in the long run (minimum 7 to 10 years to ensure good returns). Investment in equity can be done directly by the investor through demat (dematerialization) account or through mutual funds (MFs) with high equity exposure. While the MFs are managed by professional fund managers, investments in the demat account will require the investor to manage them himself. For this, the investor should be abreast with the market trends and carefully select the stocks (large, mid or small cap) based on his risk profile. Since 1990 to date, the Indian stock market has returned about 17 percent to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average, stocks have paid 1.5% dividend annually. A safe expectation would be 15 to 18 percent average return provided the investor stays invested for more than 5 to 7 years. It is felt that 100 minus your age is the percentage of your total net worth that should be invested in this asset class. E.g., if your age is 40 years then 100-40=60% of your portfolio must comprise of equity. Nevertheless, this is just a yardstick and one must seek his financial advisor’s advice before investing. The relationship between risk and returns in this asset class is directly proportional.

Fixed Income Instruments. Indians by nature, especially the burgeoning middle and salaried class, are moderate or conservative investors. Probably, this was one of the reasons that helped us tide over the economic meltdown of 2008 with relative ease. A wide array of fixed income instruments is available in India for a retail investor. To name a few – bank/post office fixed and recurring deposits/provident funds, Government/Corporate Bonds and a plethora of Debt MFs. These instruments give an effective post-tax yield of 6 to 8 percent per annum that barely beats the inflation. Moreover, the interest earned is also taxable in most cases that further compounds to the investor woes. However, these instruments are a good means of investment to give stability to your portfolio since the erosion of principal investment due to market volatility is nil to a bare minimum. As the investor’s age advances, these instruments become prudent investments for the elderly.

Cash/Liquid. This investment is suitable for investors to cater for short to ultra short-term financial goals. Investing in Liquid or money market/cash instruments is a good option since they have high credit quality and are highly liquid. Considering the low risk, the returns in these instruments vary from 6 to 8 percent per annum.
Bullion. Traditionally, Indian investors are crazy about investing in gold. The market now offers gold Exchange Traded Funds (ETFs) that rule out the physical holding of gold with freedom from ensuring its security. The latest Government launched Sovereign Gold Bonds is another good option since they carry a sovereign guarantee, on the interest, and an individual is exempted from Capital gain tax arising on their redemption. They are available demat and paper form with a minimum tenor of 8 years with an option to exit in 5th, 6th and 7th years. Another metal, silver is also a good option to invest. Bullion is good to hedge your portfolio against market volatility and about 5 to 10 of your net worth must comprise of this asset. Investing in jewelry is not a wise decision because you lose 15 to 20 percent of the asset value on each transaction due to nonrefundable labor charges. The best way for physical holding is buying coins & bars from reliable sources.
Arts and Antiques. This form of investment is gaining ground for high net worth individuals or genuine art and antique lovers. This form of investment is fraught with danger of fakes and swindling. However, a genuine masterpiece can fetch you your asking rate if the buyer needs it.

Conclusion
➢ Is it prudent to invest in all the above asset classes? The answer to this question will depend on the investor’s risk-taking ability based on his age, financial goals, and cash flow. Ideally, a twenty to thirty-year-old investor starting his career must invest 80% in equity, 10 to 15% in fixed income and bal in gold. During his middle age, he must invest in real estate to own shelter by the time he retires and avail tax benefit. However, he must continue his equity exposure after moderation to take care of his home loan. The Financial Goal Planner in Jaipur Helps you to During his sunset years, he must help you to reduce his equity exposure and enhance his fixed income exposure to safeguard his principal investment and also get assured monthly income from investments.