Informed Investor: Start the journey of wealth mgmt early

CNBC-TV18’s special show Informed Investor, in association with the National Stock Exchange, endeavours to educate communities of investors about the best practices and how they can create wealth and manage it better, without the fear of markets. One question at a time, the aim is to chip away the myths that obstruct a person’s transformation from a saver into investor.

This episode concentrates on the largest growing community of India, the BPO executives. With punishing schedules, having to track various time zones, they find little time to manage their finances. A research conducted showed that contrary to their image of flamboyant ready spenders, BPO executives were quite conservative with regards to their investments. The survey found that nearly 45% wanted to avoid risk entirely, and an overwhelming 70% wanted nothing to do with equity markets. Of the 8% who were willing to invest in equities, an astounding 53% only wanted to create wealth proactively while only 14% were doing it for tax saving reasons.

To help them tackle their finances, and arming them with expert guidance, are two of the mot popular financial advisors in the country Sharmila Joshi, Head Equities at Fairwealth Securities and Prakash Diwan, Chief Portfolio Strategist at Asit C Mehta Investments.

Below is an edited transcript of the show. Also watch the accompanying videos.

Abidi: What is it that can be done to bring people from the BPO community, who are in their 20’s-30’s, into the stock market?

Diwan: Most of the youngsters, while clearly articulate wealth creation as an objective would end up staying away from the markets because of lack of information, lack of education. So investor education is the key. When people understand that equities is a long-term play, and when you are younger you are better suited to do that, that is exactly when they would start looking at it.

In our market, equity is seen as trading; it is seen more as speculative, which is not the case necessarily. So the right element of investor education is getting them to understand the dynamics of financial planning, and that will herald a very new era of youngsters getting into equity at the right time, starting the right things to journey for wealth creation. I think it’s all to do with information flow and education at the end of the day.

Abidi: Most of the BPO executives are young, and like all young people they want to live it up and spend a lot of money. What is the right age for them to actually start investing and how would you start to scale it up with rising incomes?

Joshi: When you are young, your risk profile is more. Things have changed dramatically in these last 10 years; when I started working there weren’t so many job opportunities, so you had to head on to what you had. But things are now significantly better, which is why people are more inclined to spending. That is also great because it is one of the ways to help your economy.

But that being said, the younger you start the better, because that means you are giving yourself enough time for wealth creation. Somewhere you need to factor in that investment is also part of your expense. Most people think of investing whatever is left after their expenses, but that is not the way it works. You have to factor in investment as part of your expense and be disciplined about it.

Abidi: Someone with a profile like this, how should they go about allocating their assets? I am sure equity would for am a part of it, but what are the other options that they could try?

Diwan: Classically and traditionally, the formula has been that you subtract your age from hundred and what ever is left is what goes into equities. Historically we have seen equity and debt were the two classes that were available to most Indian investors, but fortunately now you have currencies, commodities etc. Gold itself has such a significant allocation. I think you need to sit with your planner, set out your goals, set out your milestone and know exactly when you would need large chunks of money from your investment.

I am not against people spending, but you would rather spend from your investments than your savings; that is a huge difference. So in asset allocation, there is a predominance of equities in the beginning, and maybe you can 5-10% in real estate, gold etc. That makes an eclectic mix.

Let us understand assets allocation is critical because all assets behave in different cycles. What you are trying to do is you are trying to minimize volatility on an overall basis, on an aggregate basis. If equities do not do well, debt does well; if debt does not do well probably gold has done well. So you make the best of it by averaging out on all these cycles and that is exactly what this whole balance is all about.

Abidi: If in the current market, the way things are right now,- what is the one asset class that is really standing out that someone like a BPO executive perhaps in their early thirties could actively look out for?

Joshi: There is no vanilla answer to that because people have different requirements. I think first you need to get that planning in place. For instance, if I don’t have a house, then whatever may be the market, my first goal should be to find a house that I can buy.

If I already have that in place, then yes at this point in time equity is a good place to be in. Don’t try to force yourself to do something which you are temperamentally not suited for because I think that is when all things start going awry. It is easy to get carried away by some one who meets you on the street and says I make so much money in trading everyday; if that is not your temperament, if that is not your skills, then don’t get into it.

Something that we cannot stress on enough is that traders and investors are two different sets of people. Retail investors by the very definition are people who would invest to the medium to longer term and not necessarily trade on a day to day basis.