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Here is how you can avoid ghost of trailing returns

Sumeet Vaid of Freedom Financial Planners shares his views on financial investments and how to do right asset allocation of money.


He says, “It has been repeatedly proven that 90 percent of the returns which the portfolio generates is because of right asset allocation and within asset allocation, you need to have right balance between equity, fixed income and gold”.


Below is a verbatim transcript of the interview:


Q: Retail investors normally tend to ride the tailwind of a good rally, be it any asset class even gold lately and this has been the undoing of many a retail investors. Now that stock indices have risen and stand 5-6 percent from their all-time highs how can you help make them take sensible investment decisions?


A: Most of the times we have seen retail individual investors are always trailing the returns and I call this ghost of trailing returns. In history, when gold touched Rs 30,000 per 10gm, most of the people started buying gold exchange traded funds (ETFs) at that point of time.


Right now, the phenomena is -- because last few months or a year fixed income return especially in the debt funds have been in double digits -- a lot of retail investors are going towards that and that reflects the collection of mutual funds.


Overall industry also has a problem in terms of pushing the product which sells the most, which is always like driving looking in a rear-view mirror.


So the ideal thing that needs to happen when most of the investors are planning their asset allocation is to have a goal. I have been coming to your show for the last few weeks and every time I come, I say, goal is a very important because as soon as one sets a goal, one puts a time horizon and the amount of money needed in that particular time horizon. With that one works backward and gets the asset allocation right.


It has been repeatedly proven that 90 percent of the returns which the portfolio generates is because of right asset allocation and within asset allocation, one needs to have right balance between equity, fixed income and gold otherwise for the investor to generate an optimal return, which is nothing but a risk-adjusted return over a long period of time is almost impossible.


So simple tip, get a financial plan, within that have your goals very well articulated, get the right asset allocation and follow it with discipline otherwise you will keep getting struck by this ghost of trailing returns.


Q: Is your advise that we remain completely insensitive or blind to what is the price of gold, its trend, what is the Sensex, what is its trend, the levels yearly, monthly, quarterly should not bother the investor at all, he should remain insensitive to it and just invest according to a systematic investment plan (SIP) and then asset allocation?


A: For an individual investor, for a retail investor, that is not his job. His job is to get his goals achieved in life and his job is to get right asset allocation. It is for the fund managers, for the experts like us to go and understand what is happening day-to-day and try and see because of these movements do we need to change asset allocation or not. Stay put is something which is very difficult and that exactly what one needs to do in order to make money out of any kind of market especially if you are an individual investor.


Q: Ramesh Kumar, businessman from Yamuna Nagar wants to invest Rs 20,000 per month with minimal market risk for about 5-10 years and he wants to know where he should be investing? We do not know his age. What would you tell him to do?


A: For me, it is a completely wrong question. He should not be asking about investing for 5-10 years with minimal risk because risk and returns go hand-in-hand in terms of investments.


The question should have been articulated as, “I have got 5-10 years long goal, my goal is this amount of money, I need to generate for children’s education, what should I do to get it right?” You should get the right goal. You should ask yourself the right question. I think everything else will flow from that.


I will articulate a goal for him and say, you want to plan your retirement in 10 years, you have Rs 15,000 surplus, what should you do? So at a very base level without any data, I will say, you should invest 70 percent in equity, 20 percent in fixed income and 10 percent in goal. Within equities, you should look at a mix of largecap diversified funds and some midcap funds. I am not giving names because we do not understand but some names like Birla Sun Life or DSP BlackRock are good funds and rest in fixed income funds with long-term income funds and gold ETFs. You should get this portfolio right, keep having a regular discipline for 10 years and get a financial planner who will stand between you and market emotions.

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