A journey from saving to investing

Last evening, Mr Shroff came back a worried man from a routine portfolio review with his Investment Advisor. It all started in a fairly unremarkable fashion and Mr Shroff couldn’t help but smile a bit as he looked at the portfolio returns.

A conservative investor with an aversion to equities, most of the portfolio comprised of fixed income securities. The portfolio has performed well, of course helped by decline in the interest rates. However, the Investment Advisor looked fairly stern and grimly pointed out that a significant contributor to the portfolio returns were the mark to market valuation of debt securities.

Also many of the high interest earning fixed deposits that Mr. Shroff had kept with the banks are due for maturity in the next few days and have to be redeployed. In recent times, the interest rate on FDs had sharply declined and the future returns will not be similar to the past. The Investment Advisor was right in cautioning Mr. Shroff that he needs to be prepared for lower future returns given the current allocation. With interest rates dipping lower, credit off-take at multi year lows; Banks are not keen to offer high interest rates to renew FDs.

Also Debt Mutual Fund returns benefitted significantly from the dip in policy rates. With the Central Bank’s cautious stance on inflation, the easing cycle may witness a pause in near future. All this does not seem to augur well for a pre-dominantly conservative investor like Mr. Shroff. Not only are the future returns expected to dip, more significantly some of the goals may come under threat.

It is clear that many conservative investors like Mr. Shroff by being completely averse to Equity are compromising their long term financial goals. This is because fixed income portfolio cannot be a significant outperformer of inflation. Investing a portion of one’s wealth in good quality companies is a way to diversify the portfolio.

One of the key features of good quality companies is steady growth in earnings and in most cases the rate of growth in earning is higher than the inflation rate. Since Mr. Shroff is extremely busy managing his business, the Investment Advisor recommended a few proven Mutual Funds to invest into.

This, however, doesn’t mean that it’s a smooth path for the portfolio. This is because Equities tend to be more volatile than fixed income securities and are vulnerable to market momentum and investor sentiment. Hence, one needs to recognise that the portfolio can be marked up or down by such movements. Only those with a high EQ , patience and discipline emerge winners. Thus began the long journey of Mr. Shroff from a saver to an investor.