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Sep 22, 2012, 04.40 PM IST
A lot of corporates are now taking up the job of promoting healthy investment habits amongst their own employees and IT major Infosys is among them.
V Balakrishnan, CFO, Infosys said, "Financial planning is very important for any individual. It is all about having a clear roadmap of financial security when one retires and it is a financial empowerment of an individual. It also helps them to manage some of the contingencies they see on their way. At Infosys, we do conduct a regular session. We bring in some professional financial planners and create sessions with the employees which will help them to clearly map out the financial strategies."
In an effort to promote the best investment practices, CNBC-TV18's panel consisting Sanjay Sinha, Founder, Citrus Advisors and Lovaii Navlakhi, MD & CFP, International Money Matters solve Infosys employees’ personal finance queries.
Below is an edited transcript of the discussion.
Q: We have seen a lot of news flow during this week. Is this a good time for retail investors to be take a plunge?
Sinha: That would also depend as to what is the horizon for which you are investing. Most people normally judge the market on a very short horizon of maybe a month or three months and one year is a long term in the market. The audience here is very young. If the question is relevant to equity as an asset class, in my opinion, they should surely even now look at entering the market because the market, at any point of time, are influenced by three factors - liquidity, valuations and events.
It is very rare when you find that all these three events converge in the same direction. At any point of time, one of the other factors will keep pulling the market in different directions. But occasionally, all these three factors tend to converge and then you see an exclusive move in the market and that is, at times, very unpredictable. It is very difficult to time yourself in that.
Even for a layman, a broader understanding as to whether there is enough liquidity coming into the market and whether the events are likely to swing on the positive side, should be good enough indications. Those who have some knowledge of equity should be able to assess on the valuations of the market at any point of time whether they are not too stretched. If the answer to all these seem to give you a positive answer, it is time to enter the market. The time now is also a good time to enter.
Q: When we talk about personal financial planning, a lot of people take that to understand only investing in mutual funds or maybe one or two asset classes. Could you take us through the scope of financial planning as a whole?
Navlakhi: First of all, people tend to equate that they need to get into financial planning when they have money. I think the absolute opposite is true. When do you not have enough funds to meet your goals is when you need to do financial planning. When you have enough money then what we call ‘wealth management’. I think it is very important to determine what your goals are not what money you have. People tend to forget that fact. Looking at goals need to be again broken down into what is required in the short run so maybe a little bit of micro cash flow planning for the next 12-18 months.
For a young audience, it may seem too early to plan for retirement. But you need to plan, the earlier you plan for retirement, the better it is. Financial planning will look at cash flow planning, will also look at retirement and in between that you will look at investments, returns required and risk.
I think financial planning focus is lot more on controlling risk rather than generating return. Not to say that we will not help you generate return but if you can protect your risk, then the returns you make is the cream on top.
Earlier you start financial planning, the better it is. After you get to this stage, you will look at planning on building assets. How do you want those assets to devolve? Do you have a will in place? Is there some tax planning measures you require to do this so that your money does not dwindle after you are not there. It is a lot more complex, involved and what everybody understands.
Q: There are a lot of mutual funds in the market. How do we assess and invest? How do you decide the asset class based on your risk profile?
Navlakhi: First is the risk profile. What is the type of return that you require to meet your goal? The time horizon is very important. After you have defined that, you should define how much should go into which equity mutual fund. There are two-three broad diversified equity fund classes. There are index funds, large cap funds and midcap funds. There are plenty more, but I think for a beginner, these three are enough to look at in the equity class.
Maybe 10-20% of your money should be invested in index funds, around 40-50% in large cap funds and the remaining can go into midcap funds. Choose a staggered manner of investing. Invest small amount of money in a fund. If it does well, put more money in. I think that’s the basic way to begin. How do you select the fund? I may be biased but I think you should select an advisor and not select the fund. I think that’s very important. Everyone thinks that do-it-yourself is the best way to do it. But there is a lot more hidden behind that and you need an expert to guide you through.
Q: In a volatile market, would it be advisable to invest in low-beta shares?
Sinha: It may not necessarily contain risk. The choice between a high-beta and a low-beta share is largely to do with the fact as to whether the risk associated with a high-beta share is something that you can manage. Whenever you deploy your assets in a particular asset class, there is something called an opportunity cost. Suppose there was a potential return of about 15% to be obtained and you deployed your money in an asset class where you could only get 10% as a return. So, that 5% is the opportunity cost of a misdeployed asset. In a volatile market, is it just confined to the broader market or is it because there are certain sectors which are bringing about certain amount of volatility? You might have chosen a low-beta stock in a volatile market and that low-beta stock, unfortunately, maybe in a sector which has got the wrong side of the market moves.
There is actually no easy way to say that in a volatile market, you should chose a low-beta or a high-beta stock. Whenever you invest in equity as an asset class, there is a lot of ambiguity as to what is the long-term in the market. The long-term definition doesn’t have to do with time scaling, it has to do with industry cycle. When you enter into a particular stock, it is in an industry that goes through a cycle. If you have chosen to enter into a stock in an industry, which is on the declining phase of the cycle then a three-year or five-year or seven-year will be a long-term, which will not give you any return. But if you enter into a stock of a sector, which is on an ascendant curve of an industry cycle then the return maybe just one year or three years. So, choose your stock and sectors much more diligently when you decide to invest in a stock.
Q: After QE3 and ECB news, we found that the markets are rallying but still metals and mining sectors are hammered down. For a country like India where infrastructure and power are still deficient, is it a good idea to invest in these sectors with a very long horizon in mind?
Sinha: If you look at a variety of sectors from which you could make choices, metals and mining sector may not be a sector where you should be invested for an extremely long-term because the profits of the mining companies are dependent on the commodity prices. Commodity prices are influenced more by what happens to the global economy than what happens to the local demand and supply factors in India. We, as a country, have a very small proportion of the global GDP. What's happening may be to the US economy, the European economy and the Chinese economy, has a larger bearing on the commodity prices.
In an environment where the global growth is not as good as what it was probably three years back, the outlook on commodity prices to remain firm for too long is not there. Therefore, there have been instances in the recent past when the commodity prices have spiked largely because of the speculative flows of money into commodity, ETFs and people have taken some speculative positions in commodities. But with the launch of QE3, there is again an expectation that a similar thing might get repeated. This may not necessarily hold because when the last spike happened in the commodity prices, there was still some optimism about the world economy to be coming out of a recession and getting into an enduring path of growth.
Today if you see the consensus opinion, it is much more subdued now. I would not expect the commodity prices to spike and remain at alleviated levels for too long. At best, the mining and metals stocks could be a trading play; it cannot be a long-term part of your portfolio.
Q: I have been reading about fixed maturity plans and them gaining momentum over a period of time. What's your advice? Also, how are they different from fixed deposits and other deposits?
Navlakhi: Whenever you are investing in a debt product, you are looking at a fixed deposit versus a fixed maturity plan versus an open ended debt or fixed income scheme of a mutual fund or PPF, there is a variety of them. You need to club first based on maturity, which means how long you would want to invest for. If you want to invest for one year and you are looking at a one year fixed deposit product, you should compare it with a one year product that is available in the mutual fund side or on any other instrument.
The second thing to look at is the rate of return after tax; that will vary from person to person depending on the tax bracket you are in. So if you happen to be in an earning tax bracket, and therefore, you are in the 30 per cent tax bracket then looking at fixed deposit where interest is subject to tax, you need to reduce that return on the fixed deposit by 30 per cent and arrive at your rate that you are getting post tax.
Compare that with a fixed maturity plan, which also invests in similar underlying products but because it is a mutual fund, there is a little tax arbitrage available. If you are investing for more than a year then it is treated as capital gain so that tax rate is only 10 per cent. If you are investing for less than a year in any debt product or mutual fund then there is a dividend distribution tax that comes in around 15 per cent. It allows you to bring down your tax slab on your return from 30 per cent to 15 percent.
If you happen to be in the 30 per cent or even 20 per cent tax bracket, you should look at other products other than fixed deposits. If you happen to be in the 10 per cent tax bracket, frankly, it may not make too much of a difference except that in a debt mutual fund, there is a chance of making higher or lower return. There is no guarantee on returns.
Q: What's a good time to keep reviewing your investments, should it be monthly, quarterly, half yearly or should it be at the end of a rally or a turn in the market?
Sinha: A quarterly review should be reasonable. But let me give you a caveat. Whenever there is a very sharp movement in a particular asset class, you should review whether your allocation needs to be rebalanced or not otherwise a quarterly review is appropriate.
Navlakhi: Also, if a goal has changed for you, something new has come up or some goal has got met or some calamity has come, which you had not planned for earlier, which requires you to review your goals is when you definitely need to look at that. So that’s more strategic. What Sanjay spoke about is a little more tactical. You could do that although you may have done a review in August still you may actually take action in the middle of September as well.
Q: As an inexperienced investor, how do I select a broker?
Sinha: You should be guided by three factors. One of them should be the cost at which you are able to transact with him. The second is the convenience with which you are able to transact with him because nowadays many people can transact online. Thirdly, you should check whether he gives you any value added service in addition to just enabling the transaction.
Q: I have taken a couple of ULIPs and the objective was basically a life cover plus a corpus of amount at certain part of life. I have realized that you end up paying huge amount of percentage 18-15-10 for a period of years. While I compared after that with a term insurance, paying whatever minimum possible plus put the rest of the money in SIP through mutual fund, I think that is a better way of investment, is that right?
Navlakhi: I think ULIPs have their place in the market I don’t think they are all bad. There is initially cost on a ULIP which you have to worry about but the most important thing is that you should have got into the ULIP with the plan to stay invested and keep paying premium for at least 15 years. If that was not your intention then that was a bad product.
The other big advantage of a ULIP is that you can actually re-allocate your money across equity, debt, cash etc. If you are not doing that then you are probably not taking full advantage of the ULIP as well. The question about whether I can get out is the best way to doing it. Frankly, it depends on your plan what sort of cover, what is the surrender value etc that will need to be seen before you determine whether you can get out or not. But if your time horizon is less than 15 years, don’t look at ULIP.
Q: As I am just starting my career , what are my options in terms of investments and which one should I go for?
Navlakhi: The first thing that you need to do is to start investment but with protection. Is there a family member whom you are taking care of with your income? If you are, then the first thing to do is to take a term insurance, which will cover that amount that you are contributing. That is the number one thing to do.
Two, start looking at growing your corpus. Probably look at mutual funds, look at a systematic investment plan, look at the different diversified equity funds to invest in, start that way. I am sure in your company, you are getting a PF deduction etc so your debt is starting to be taken care of.
Q: What is the best valuation method in equity either it is fundamental analysis or technical analysis because it is seen in the past that many companies that has been fundamentally valued pretty well have sunk below their book value also. What should be the way out?
Sinha: I think it is not a binary choice. You can’t say that only fundamental analysis works in the market and technical analysis works - both have their place. But what would be a more generic answer to you would be that when you select the stock, it should be done on a fundamental analysis. When you want to buy that stock that should get influenced more by the technical analysis because the technical analysis normally tells you the shorter term performance of the stock much better than it does the longer term performance. Fundamental analysis will tell you as to whether the company has a much more enduring life as far as the business entity is concerned.
May 23 2013, 16:33
- in Asian markets
May 23 2013, 09:33
- in Technicals