When was the last time you made investments based on a specific goal, with a time horizon, in line with your risk profile and using the asset allocation methodology.
Well let me take you through each of the above noted points, so that the next time you make an investment you know the method in the madness.
Goal
The final purpose or aim; the end to which a design tends, or which a person aims to reach or attain is a goal.
It is also the purpose toward which an endeavor is directed; an objective.
Well if you’re investing Rs. 1000 or Rs. 1 lakh or Rs. 1 million, have a goal. The goal could be any of the following:
• To buy a car worth Rs……..
• To buy a house Rs………….
• To go on a vacation which will cost Rs……….
• To donate for charity Rs…….
• To build a corpus of Rs………..
• To build a corpus for the education/ marriage of a child or also self., etc
Do remember the goal should be measurable in money terms
Time Horizon
Once the goal is set and decided, the next step will be to have a time horizon
The time horizon need to be set based on the requirement of the maturity of the investment ( if, one time) and in case of regular systematic investments, the corpus required and the rate of return required over the period of investment.
A goal without a time horizon is like a ship without a destination. Setting a time horizon in line with a goal is very important.
Risk Profile
Risk Profile is a tool which checks your risk taking ability and also the degree to which various risks are important to you.
One should ask a few questions to understand one’s risk profile
1. Is capital preservation more important than returns?
2. Are you willing to accept fluctuating movements when investing for the long term?
3. Do you want a regular income stream through dividends, or with growth through capital appreciation?
4. Will you accept above-average risk to generate above-average returns?
Asset Allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
The three main asset classes - equities, debt / fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.
A realistic goal statement – An illustration
I will invest Rs. 10,000 every month for the next 10 years, at an expected rate of return of 12% in a balanced Mutual Fund for a corpus of Rs. 22 lakhs.
Lets now understand does the above statement is in line with the Ist statement of this piece:
Goal : Corpus of Rs. 22 lakhs
Time Horizon : 10 years
Risk Profile : Moderate ( 12 % return )
Asset Allocation : Balanced Mutual Fund ( which invest 65% Equity; 35% - Debt)
Conclusion
Going forward wherein , one needs to make an investment , do have a goal; time horizon for investment , understand your risk profile and also follow the asset allocation methodology.
If this exercise is overwhelming, do engage a financial planner and wealth manager who will be part of your wealth creation journey.
Tuesday, December 22, 2009
Saturday, December 19, 2009
Bank Fixed Deposit – Are There Effective Alternatives ?
Retail Investors have taken out ~ Rs. 12,000 crores from the Equity Market and the Mutual funds ( equity based) from Aug’09 – till date.
In the same period, inflow into Fixed Deposits ( F.D) of banks ( ~ Rs 3,27,245 crore deposits mopped up from the public in the Ist 6 months of this fiscal) and Post office schemes (~ Rs 79,237 crore mopped up from the public in the April-September period. This is ~32 % increase from what the institution collected in the same period last year ) have seen a sharp rise.
Assured returns and capital protection appear to have driven this behavior.
Once bitten, twice shy. Yes and this is true . Many of us who have invested in the early half of 2008 in equity instruments, the returns may still be negative.
Are Bank Fixed Deposits and Post office schemes the only instruments available as safe risk free and assured return options?
Risk Free & Assured Return – Yes ( in the case of Post Office Schemes )
Inflation Proof - No ; Easy Liquidity – No
Many of the mutual funds , offer investors to invest the funds in debt instruments , which are AAA+ rated or AAA rated Corporate Debt instruments; Government Securities, which enables the investor to generate higher returns in debt as compared to deposits in Bank F.D’s .
An illustration should help in understanding this:
Say you have Rs. 10 lakhs with you , with an risk free investment horizon of 1 year . A Bank FD, will give you a return anywhere between 6 – 6.5%(i.e Rs. 60,000 – Rs. 65,000) today. However, an investment in an Income Fund (100% Debt Fund of a major Mutual Fund) , should enable you to generate a return in the range of ~ 9-11%. (i.e Rs. 90,000 – Rs. 110,000).
This carries the same amount of risk which a Bank FD carries ( Technically one can argue that Rs. 1 lakh of the FD is guaranteed by the Government of India , which is not the case with a Mutual Fund)
Do allow your money to work for you and at the same time ensuring your requirements are being met.
Be an informed investor.
In the same period, inflow into Fixed Deposits ( F.D) of banks ( ~ Rs 3,27,245 crore deposits mopped up from the public in the Ist 6 months of this fiscal) and Post office schemes (~ Rs 79,237 crore mopped up from the public in the April-September period. This is ~32 % increase from what the institution collected in the same period last year ) have seen a sharp rise.
Assured returns and capital protection appear to have driven this behavior.
Once bitten, twice shy. Yes and this is true . Many of us who have invested in the early half of 2008 in equity instruments, the returns may still be negative.
Are Bank Fixed Deposits and Post office schemes the only instruments available as safe risk free and assured return options?
Risk Free & Assured Return – Yes ( in the case of Post Office Schemes )
Inflation Proof - No ; Easy Liquidity – No
Many of the mutual funds , offer investors to invest the funds in debt instruments , which are AAA+ rated or AAA rated Corporate Debt instruments; Government Securities, which enables the investor to generate higher returns in debt as compared to deposits in Bank F.D’s .
An illustration should help in understanding this:
Say you have Rs. 10 lakhs with you , with an risk free investment horizon of 1 year . A Bank FD, will give you a return anywhere between 6 – 6.5%(i.e Rs. 60,000 – Rs. 65,000) today. However, an investment in an Income Fund (100% Debt Fund of a major Mutual Fund) , should enable you to generate a return in the range of ~ 9-11%. (i.e Rs. 90,000 – Rs. 110,000).
This carries the same amount of risk which a Bank FD carries ( Technically one can argue that Rs. 1 lakh of the FD is guaranteed by the Government of India , which is not the case with a Mutual Fund)
Do allow your money to work for you and at the same time ensuring your requirements are being met.
Be an informed investor.
Saturday, November 28, 2009
Dubai & Our Investments
Woke up on Friday morning, hearing the news that Dubai World, a government owned investment company of Dubai has asked for rescheduling of $ 59 billion debt,(repayment due on 14th Dec’09). This particular news sent the world financial market in a downward tizzy. (The right noises made by the Governments reduced the fall) .What has happened in Dubai has definitely affected the investment horizon. A probable sovereign default, which was last witnessed in Latin America (Argentina in mid 90’s), was the last thing expected out of Dubai .
Q & A
• How does it affect our investments?
• Should we sell off the investments in equity?
• Should we move all the investments to debt ?
• How will Gold – as an asset class react to this crisis?
The above questions are but natural. The Sensex which is meeting resistance at 17,000 levels, can touch lower levels. How low or how high ???. The market is the best judge.
What are the steps we need to take during this time of volatility?
• Based on the risk profile, have an asset allocation (Equity; Debt; Cash; Gold) in place, if one has not considered the same.
• Every fall is a good opportunity to buy. Staggered buys in value stocks are recommended.
• Debt instruments (besides Bank Deposits, including Income Funds and Hybrid Debt Instruments of Mutual Funds ) has always to be actively considered.
• Gold in the short run could face the heat. No fresh investments in gold are recommended at this juncture. In the same vein, Gold as an asset class can never be ignored.
Recommendation
• Re-visit your current investments
• Look at the Time Horizon for investments. If its tied with a financial goal, do not panic. We’re in it for the long term.
• Cash is king… However, use every fall to invest in equity in a staggered manner.
• Have a re-look at the debt portfolio. Income funds / Hybrid Debt instruments of Mutual Funds are recommended.
Q & A
• How does it affect our investments?
• Should we sell off the investments in equity?
• Should we move all the investments to debt ?
• How will Gold – as an asset class react to this crisis?
The above questions are but natural. The Sensex which is meeting resistance at 17,000 levels, can touch lower levels. How low or how high ???. The market is the best judge.
What are the steps we need to take during this time of volatility?
• Based on the risk profile, have an asset allocation (Equity; Debt; Cash; Gold) in place, if one has not considered the same.
• Every fall is a good opportunity to buy. Staggered buys in value stocks are recommended.
• Debt instruments (besides Bank Deposits, including Income Funds and Hybrid Debt Instruments of Mutual Funds ) has always to be actively considered.
• Gold in the short run could face the heat. No fresh investments in gold are recommended at this juncture. In the same vein, Gold as an asset class can never be ignored.
Recommendation
• Re-visit your current investments
• Look at the Time Horizon for investments. If its tied with a financial goal, do not panic. We’re in it for the long term.
• Cash is king… However, use every fall to invest in equity in a staggered manner.
• Have a re-look at the debt portfolio. Income funds / Hybrid Debt instruments of Mutual Funds are recommended.
Wednesday, November 18, 2009
Equity Investment – Investment Avenue for all
As a financial planner and wealth advisor, one of the situations I encounter from my clients is about investments in direct equity. This is more pronounced in those nearing the retirement age.
Inflation and taxes are certain and eat into the returns given by risk-free instruments (Government bonds; Postal Monthly Income Scheme, .etc) and fixed deposits (Corporate / Bank deposits).
So, is there an approach wherein we can invest in equity and still be immune from the risk associated with this investment avenue.
The solution lies in, not avoiding the risk, but in managing the risk.
Mantra – Equity Investment
Each time when I suggest the need for equity investment in the overall Portfolio of my clients, the recommendation is based on the following factors:
• Time Horizon
• Risk Profile
• Asset Allocation
Each of the above elements are interlinked and should not be looked exclusive of one another.
Lets now briefly look into each of the above factor in more detail.
• Time Horizon - One of the most important factors determining investment in an equity investment is the Time Horizon. If the client does not have the need for redeeming the investment corpus for a period of 24-36 months, we recommend allocating part of the total investment portfolio in equity investments. The percentage of allocation and corpus to be invested is determined by the risk profile and asset allocation, which we’ll delve upon later in the article. At this stage, we also set the triggers for exit . This will again ensure that the returns do not remain only in paper, but are also encashed.
• Risk Profile – The willingness to take risk for achieving higher returns is measured by risk profile. Again the ability for higher risk has to be compared with the Time horizon and Asset allocation. And I do agree to the stated argument that the age group of the investor is important, but , as stated earlier , it is not the all important factor. So, say a person of age 60, with a life expectancy of 75 years, needs a regular income and has a corpus of which , say 30 % of the same is not required for 24-36 months. In this instance we would definitely recommend 10 % of the corpus to be invested in equity with exit to be adopted on achieving the targets set, at the time of entry.
As stated earlier, managing risk is recommended as opposed to avoiding risk. With the increasing life expectancy and market turbulence, investing in only fixed income securities , is a sure-shot route to capital erosion .
• Asset Allocation - The apportionment of investment among different asset class ( Direct Equity; Mutual Fund; Fixed Income Securities ; Government Bonds; Cash) from time to time in accordance with the prevailing investment outlook is Asset Allocation.
Investors do this to take advantage of a broader range of opportunities among the varied investment avenues, to improve the potential return. They also expect the different categories will perform differently during the same investment period . Moreover, diversification of portfolio is also achieved through asset allocation. Over time this can even out overall portfolio volatility.
Nothing can harm the client more than effecting an asset allocation based on the risk profile. So say for an aggressive investor, steering the investments into “ Equity” and for conservative investors into “ Bonds” , cannot be the right advise. Because in this instance, risk profile is the only consideration taken into account.
Investors who had adopted this strategy, would have certainly be spared the blues of 2008 downturn.
Conclusion
In the last decade, Indian economy has been one of the fastest growing economies. And quite a few has missed the bus . One of the major reason -being risk averse and risk avoidance.
The answer lies in “ Not avoiding risk , but managing the risk.”
Inflation and taxes are certain and eat into the returns given by risk-free instruments (Government bonds; Postal Monthly Income Scheme, .etc) and fixed deposits (Corporate / Bank deposits).
So, is there an approach wherein we can invest in equity and still be immune from the risk associated with this investment avenue.
The solution lies in, not avoiding the risk, but in managing the risk.
Mantra – Equity Investment
Each time when I suggest the need for equity investment in the overall Portfolio of my clients, the recommendation is based on the following factors:
• Time Horizon
• Risk Profile
• Asset Allocation
Each of the above elements are interlinked and should not be looked exclusive of one another.
Lets now briefly look into each of the above factor in more detail.
• Time Horizon - One of the most important factors determining investment in an equity investment is the Time Horizon. If the client does not have the need for redeeming the investment corpus for a period of 24-36 months, we recommend allocating part of the total investment portfolio in equity investments. The percentage of allocation and corpus to be invested is determined by the risk profile and asset allocation, which we’ll delve upon later in the article. At this stage, we also set the triggers for exit . This will again ensure that the returns do not remain only in paper, but are also encashed.
• Risk Profile – The willingness to take risk for achieving higher returns is measured by risk profile. Again the ability for higher risk has to be compared with the Time horizon and Asset allocation. And I do agree to the stated argument that the age group of the investor is important, but , as stated earlier , it is not the all important factor. So, say a person of age 60, with a life expectancy of 75 years, needs a regular income and has a corpus of which , say 30 % of the same is not required for 24-36 months. In this instance we would definitely recommend 10 % of the corpus to be invested in equity with exit to be adopted on achieving the targets set, at the time of entry.
As stated earlier, managing risk is recommended as opposed to avoiding risk. With the increasing life expectancy and market turbulence, investing in only fixed income securities , is a sure-shot route to capital erosion .
• Asset Allocation - The apportionment of investment among different asset class ( Direct Equity; Mutual Fund; Fixed Income Securities ; Government Bonds; Cash) from time to time in accordance with the prevailing investment outlook is Asset Allocation.
Investors do this to take advantage of a broader range of opportunities among the varied investment avenues, to improve the potential return. They also expect the different categories will perform differently during the same investment period . Moreover, diversification of portfolio is also achieved through asset allocation. Over time this can even out overall portfolio volatility.
Nothing can harm the client more than effecting an asset allocation based on the risk profile. So say for an aggressive investor, steering the investments into “ Equity” and for conservative investors into “ Bonds” , cannot be the right advise. Because in this instance, risk profile is the only consideration taken into account.
Investors who had adopted this strategy, would have certainly be spared the blues of 2008 downturn.
Conclusion
In the last decade, Indian economy has been one of the fastest growing economies. And quite a few has missed the bus . One of the major reason -being risk averse and risk avoidance.
The answer lies in “ Not avoiding risk , but managing the risk.”
Monday, November 16, 2009
Product Misselling – Wealth Destroyer
As a financial planner and wealth advisor, review of clients existing portfolio throws up many interesting facets. Investments are majority of times undertaken out of emotions ( eg: Stock markets going up and the client do not want to look at the fundamentals before investing ) , obligation ( eg: a friend or a relative hawking an investment product and one feeling obliged to buy out of compulsion) ; tax planning (eg: Its that time of the year , when one needs to submit the investment proof to the employer and one need to save the taxes and makes an investment in a product , not considering whether its suitable as per one’s need )
Let me share with you one such incident where the investment type and goal for corpus creation are misplaced.
Background
Goal : Corpus required for the educational needs
Time Horizon : 10 years
Investment amount : Rs. 30,000 p.a
Corpus required : Unknown- (Rs. 30,000 was the maximum amount the client could spare, hence the amount invested)
Investment Product: Pension Plan (as suggested by the advisor)
The most important thing while choosing a product is know the time horizon and the measurable goal. In this instance, we know the time horizon (10 years). However the measurable goal – corpus amount for educational need is unknown. Without this, the whole exercise is an exercise down the drain.
Another grey spot is the recommendation of the investment product. In this instance, at the end of the premium paying term of 10 years, the entire corpus is required at one go for fulfilling the educational requirement. With a pension product, 1/3 rd of annuity amount is available for immediate commutation and the rest being paid monthly.
This is in total divergence of what is required by the client.
On inquiry with the client, it was noticed that the client was not aware about the distribution of the corpus amount post the premium paying term.
Recommended Product:
In this case, the advisor should have recommended a child plan of an insurance company wherein the client also wanted a risk cover. Alternatively, a structured product ( a term plan and investment in mutual fund for the premium amount) could have been another recommended solution.
Conclusion:
The client was ignorant about the distribution of the corpus post the premium paying term. It’s also the responsibility of the client to know and understand the product specifics. ( Do ask questions about the investment products with your advisor, always ) Moreover, the financial advisor should have also recommended a product suitable to the client needs and not as per the advisor needs. (This could be either product ignorance or product push)
A wrong product choice, instead of creating wealth will lead to destruction of wealth.
Let me share with you one such incident where the investment type and goal for corpus creation are misplaced.
Background
Goal : Corpus required for the educational needs
Time Horizon : 10 years
Investment amount : Rs. 30,000 p.a
Corpus required : Unknown- (Rs. 30,000 was the maximum amount the client could spare, hence the amount invested)
Investment Product: Pension Plan (as suggested by the advisor)
The most important thing while choosing a product is know the time horizon and the measurable goal. In this instance, we know the time horizon (10 years). However the measurable goal – corpus amount for educational need is unknown. Without this, the whole exercise is an exercise down the drain.
Another grey spot is the recommendation of the investment product. In this instance, at the end of the premium paying term of 10 years, the entire corpus is required at one go for fulfilling the educational requirement. With a pension product, 1/3 rd of annuity amount is available for immediate commutation and the rest being paid monthly.
This is in total divergence of what is required by the client.
On inquiry with the client, it was noticed that the client was not aware about the distribution of the corpus amount post the premium paying term.
Recommended Product:
In this case, the advisor should have recommended a child plan of an insurance company wherein the client also wanted a risk cover. Alternatively, a structured product ( a term plan and investment in mutual fund for the premium amount) could have been another recommended solution.
Conclusion:
The client was ignorant about the distribution of the corpus post the premium paying term. It’s also the responsibility of the client to know and understand the product specifics. ( Do ask questions about the investment products with your advisor, always ) Moreover, the financial advisor should have also recommended a product suitable to the client needs and not as per the advisor needs. (This could be either product ignorance or product push)
A wrong product choice, instead of creating wealth will lead to destruction of wealth.
Sunday, September 13, 2009
Equity Investment – Should one shy away
Earlier in the week I had gone out to purchase the groceries for the week. One of the items I purchased was ToorDal (Pigeon Pea) for Rs. 95/-kg. The week earlier, the price was Rs.70/kg. The price rise in a week was in excess of 35 % in absolute terms. Many of us will attribute this to drought effect and I also tend to agree. Recent newspaper report also point that indifferent climatic conditions are here to stay.
This took me to a new thought process. Does shying away from Direct Equity investment work in the long run. I do know quite a few people, totally refrain from investing in Direct Equity investments . ( This could be an understatement) The logic being shared varying from – It‘s a gamblers paradise or its difficult to track or the share price movement is like a see-saw.
There could be some truth in all the above but are they a sufficient reason to shy away from this investment avenue?
The interest rate on risk-free debt instruments are in single digits, coupled with inflation and the taxes, leaves one with a Return on Investment ( ROI ) in real terms to be between 2 - 3.5%.
As a financial planner and wealth manager, I do suggest my clients to have an equity exposure of 10 – 15 % at the minimum if the time horizon in excess of 3 years. India is one place to invest in. The growth opportunities presented by the Indian economy should be taken advantage of. Investments in Growth stocks could give an estimated CAGR return of minimum 18 – 20 % p.a. ( I'm being conservative here).
So folks, do not be averse to use this avenue as one of the Investment opportunities . A competent financial advisor and wealth manager could definitely suggest the right course of action in this regard.
This took me to a new thought process. Does shying away from Direct Equity investment work in the long run. I do know quite a few people, totally refrain from investing in Direct Equity investments . ( This could be an understatement) The logic being shared varying from – It‘s a gamblers paradise or its difficult to track or the share price movement is like a see-saw.
There could be some truth in all the above but are they a sufficient reason to shy away from this investment avenue?
The interest rate on risk-free debt instruments are in single digits, coupled with inflation and the taxes, leaves one with a Return on Investment ( ROI ) in real terms to be between 2 - 3.5%.
As a financial planner and wealth manager, I do suggest my clients to have an equity exposure of 10 – 15 % at the minimum if the time horizon in excess of 3 years. India is one place to invest in. The growth opportunities presented by the Indian economy should be taken advantage of. Investments in Growth stocks could give an estimated CAGR return of minimum 18 – 20 % p.a. ( I'm being conservative here).
So folks, do not be averse to use this avenue as one of the Investment opportunities . A competent financial advisor and wealth manager could definitely suggest the right course of action in this regard.
Saturday, September 5, 2009
Financial Planning – What’s the Ideal time
One of the frequent questions I encounter is what is the ideal time for financial planning.
Folks just out of college and working in their Ist job, want to enjoy the money now and generally state that they will start saving a year or two into the job.
A year or two into the job, some of them are into some sort of debt , majorly on account of spending beyond their means.
Another year or two down the road, its time to marry and settle down. The courtship period starts ( a beautiful time of our life and not be missed) and the expenses again start to hit the roof ( You all know the answer to this) .
Another year or two passes and its time to start a family .
Suddenly one realizes that nearly 5 - 6 years of the earning life has passed by and one is still at the starting block in wealth creation.
( There are definitely exceptions to this and I commend all those who have effectively managed to have a corpus by this time).
So what does this indicate.. Do we have a way out …How can we ensure that we’ve a corpus , howsoever small it is at every important events of our lifecycle
Is there a mantra – No
Is there a method – Yes
What is this method called - Financial Planning.
Financial Planning – It means to plan for the financial goals ( future needs) with the available financial resources and optimizing the same.
Is Financial Planning only about Investments?
Is Financial Planning only for the wealthy? Or
Is Financial Planning only about planning for post-retirement life ?
The answer to all the above is --- No
Financial Planning is for all and it has no ideal time.
The time is now. Right now.
If you’ve missed the bus during the early part of your earning career, you can still plan for the future .
The power of compounding always works in favour of the early starter .
However, with a systematic and disciplined approach one can always achieve one's financial goals.
One of my favourite suggestion to all my clients is to save a minimum of 10% of the income which one receives every month in to a financial product ( Mutual Fund/Debt/Equity , as per the risk profile and asset allocation) , which will ensure that wealth creation is not hampered.
This virtually means that you do not allocate funds for savings post the expenses, but other way round.
This way one is disciplined , without lowering the standard of living .
So folks, whatever your age group, there is no time barrier for initiating your financial planning process.
The time is now . Right now .
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