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Sep 10, 2012, 06.05 PM IST
In an endeavour to help young investors make better investment decisions, CNBC-TV18’s team met Dr. Ritu Anand, VP and Deputy head Global HR to find out the kind of investment initiatives that Tata Consultancy Services has undertaken for their employees.
In an endeavour to help young investors make better investment decisions, CNBC-TV18's team met Ritu Anand, VP and deputy head Global HR to find out the kind of investment initiatives that Tata Consultancy Services has undertaken for their employees.
“It is morally our responsibility to ensure that while they are on their path of working and earning money, we put a compensation structure in place which excites them and also educates them towards wealth management,” explains Anand.
Giving them an option for planning their compensation, the company gives employees a free hand at choosing their salary component, deciding how much will go as tax and how much they can save and take home. This is called a bouquet of benefits, which is embedded as part of the salary for all people.
The company also ensures that as part of their induction, wealth management companies and banks meet trainees for one-to-one sessions for making them aware how investments can take place. As employees move into their hierarch in their tenure in TCS, there are regular training programs or awareness sessions.
CNBC-TV18's panel consisting Tushar Pradhan of HSBC AMC and Hemant Rustagi of Wiseinvest Advisors talk to TCS employees to solve their investment queries.
Below is the edited transcript of the show.
Q: Given the current market volatility, what's the best argument that we can give to people who are not savvy investors, who are just starting out so that they are more comfortable with the idea of investing in equity and that they don’t go away thinking that equity is a big monster that is out to get them?
Pradhan: There is a lot of education that needs to be done in any case. Generally, equities always attract investors when the market is at its peak. They keep waiting, wanting to see proof whether money can be made. By the time a lot of money is made, the move comes in and as night turns into day; the equity markets are the way they are, they fall off a cliff after that.
The advantage today is that we have already fallen off a cliff and the only way that one can encourage is that as much as it might be a little bit of under a cloud at the moment, your chances of making money in the equity market from here on, are pretty good. What is very essential to understand is that equity is a very long-term game. Mostly, it is the short-term that defines returns for most people. They either get extremely euphoric and commit capital, which they should not be committing to or on the reverse, they get so shocked by their experience that they never enter equity markets alone. These are the two extremes that most of the investors fall into. I think a more general interest in this will help them get forward in their goals.
Q: A lot of the time investments do go wrong for people. So for someone who has had seen their portfolios net worth probably come off a little bit since the markets came off, how can it be rectified?
Rustagi: One has to analyze why the portfolio has not performed. Is it that I didn’t select well? I didn’t invest the way I should have invested or did I become very aggressive while investing in it? Did I invest much more than I should have invested? I think you need to go back and find out the reason when you started investing.
When the market is doing very well, suppose you invest in mutual fund, you tend to invest in funds which are the flavor of the month. You invest in very aggressive funds and you change your asset allocation overnight, take out all the money from that and put it in equity. Suddenly, you see that your portfolio has become very aggressive and that generally takes you beyond your risk taking capacity.
If someone has gone wrong in terms of asset allocation, I think it is very important to go back and see whether you have exceeded your risk taking capacity or not. If that is the case, I think you need to rebalance your portfolio, bring it back to a level which you are comfortable with and it should be in sync with your risk tolerance. Also, if you have non-performing stocks or funds in the portfolio, you need to weed them out or if you have aggressive funds, slowly weed them out, make it more diversified. Once you do that, you will see the asset allocation working for you.
Q: Given a choice between investing in inflation adjusted asset classes like real estate compared to an option of investing in stock markets, which one will you choose and why?
Pradhan: It is not that easy a question to answer because I, for one, will recommend that any investor who has never actually been exposed to the equity market before should never venture into the equity market alone. It is a place, which is quite dangerous; these risks are not visible and only painful experiences will give you an idea of what it is all about.
Coming to real estate, it has been beating inflation for sometime but that has not been the case for all the time. One of the other drawbacks if you want to invest in real estate is that most of the times, these investments become very concentrated. As you know, certain properties appreciate more while some appreciate less and your overall return depends on that one investment and that is pretty much a very concentrated risk.
Third point is liquidity. People tend to think that real estate is liquid. One should not get carried away by returns by the stories moving around. There are reports that house prices have gone up three times but it is not that easy to execute. So when we start off small, when we are trying to save for longer goals in the future, real estate is not one of those things that you could possibly do.
Q: What is a good percentage of your income that should be kept aside as an emergency reserve?
Rustagi: Emergency reserve is a very important aspect of financial planning. When you establish your financial goals, you decide for what period you need to invest and what is the target that you need to achieve, it means you are committing your money for a certain period of time. Emergency funds are required in case you need money for some contingency. You don't want to stop investing because you already committed some money. If you do not have adequate emergency reserve, the first thing you will do is if you are investing through SIP, you will stop that.
Generally speaking, depending on what state of life if you are if someone is married, have children then ideally around 6 months of monthly expenses should be kept aside as emergency reserve. Otherwise, three months is also okay.
The reason for that is so that you do not disturb your investment process at all. Even that is very important to put it in a proper investment option. There are liquid and ultra short-term mutual funds, which give tax efficient returns. So, while it is an emergency reserve, it is also important to earn tax free returns.
Q: Equity is a very attractive option when a person goes for a long term option. But when an investor in the age group of 22 to 29 years who wants to get into some short term investment, can he still consider equities or should he go with the majority choice of Fixed Deposit (FD) which does not provide you an attractive return?
Pradhan: Equities do have the potential for higher returns. But you have to remember that the returns in equities don't come in a linear fashion. For example, if you invest in an FD for five years, and two years down the line, there is a need for funds, it is very easy to break the FD and get the money back.
But if you were to invest in the equity market for a five year term, and you need the money in two years. It may not incrementally rise in the next two years; it could be much higher or much lower than what you actually invested in. So that is the nature of that asset. Unless you understand the variability in the capital, one should not be encouraged to invest in equity in the short term.
You are free to kind of take a chance. You have seen many times that investment returns, especially in equities, are done in a very short period of time. If you take the year 2009 calendar from January to December, the entire market, on an average, went up 70% in one year. If you get that kind of return, all problems will be solved. But that is one year after three years of pretty sub-par returns.
Q: I started earning recently and I have made no such investments. As a first time investor, where should I start from?
Rustagi: At this stage, you can define goals for yourself today. Goals may be for the short term, medium term and long term. The moment you define your goals you will know when you will need money to accomplish a particular goal. Then you have to give a target for each of these goals.
For example, after one year for whatever reason, you want money you need to have a target for that. How much money do you need? Set targets for each of these goals. Once you have done that, there is a process called asset allocation. Once you decide asset allocation, go for an option which is diversified in nature. For example, look at mutual funds.
Mutual funds, whether it is a debt option or an equity option, are diversified in nature. Also look at options, which are tax efficient. Mutual funds are much more tax efficient compared to traditional options. If you follow this process, investing will become very simple. You will start keeping aside some money for something you will need for 25-30 years. You cannot image the kind of corpus you can get.
Q: I am an investor who has just started investing in small amounts. In today’s market scenario, there are a lot of foreign investments. How should an investor like me select my portfolio that has a mixed balance of domestic growth as well as international market?
Rustagi: For you, the focus has to be on the asset allocation. You should not depend too much on what is happening in the market today, whether foreign money is coming or not. These are events that will keep on happening in the market. There will be stages where more money will come into the market from abroad; there will be times where not much money will come into the market. But at this stage of your life, you need to decide your asset allocation first.
You need to decide how much of your money should go into equities, debt and gold at this stage. Because if you are at the beginning of your career and you are looking at building some corpus, you can wait to include gold at a later stage. So, you can basically look at asset allocation between equities and debt.
Within that, suppose you plan to invest 60% into equities, then you need to decide the right way of investing in it. Should you be investing directly into stocks or should you take the help of a professional fund manager in a mutual fund. If you are not familiar with the stock market, if you don't have the wherewithal to invest there, go for mutual funds. Investing directly in the stock market means you should know exactly what is happening in the stock market and the international markets, how the economy is getting impacted, what is the impact of all these onto your portfolio.
Go for diversified vehicles like mutual funds. Even with a small investment of Rs 10,000-15,000, you get a basket of 40-50 stocks. The other diversification is, like you there are lakh of investors, who are investing in your mutual funds schemes. Go for those options where you can diversify your investment vehicle rather than jumping into the stock market.
Q: How much do market sentiments play a role in an investment decision?
Pradhan: If one has to purely follow the greats in the investment field, they advise you that you should never look at market sentiment. If there is any way to shut out the noise of the market that’s the best way. There is a real life example where there was an investor in a mutual fund who actually had moved his house and he was not actually getting account statements. So, he thought that his money was lost.
Finally after about 15 years, he returned to the mutual fund office and said that he had invested a good amount of money and he wanted the money back. The officials at the office said, ‘since you moved and you didn't inform us, we didn’t know where to send the statement but don’t worry your money is not going anywhere.'
When the statement was sent to him of over 15 years, he was overwhelmed. The power of compounding, which had happened over 15 years was so much that he didn't believe that he could have made that kind of money. But he may not have made that money if the statements had reached him. What could have happened is in between, he would have used that sentiment. People would have said, 'this is the right time to get out' and it would have forced him to make a decision. So, the key to successful equity investing in the long run is to remain invested.
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