The general idea of financial independence is to have enough income to pay for your living expenses for the rest of your life. In practice, it means having a financial plan or a budget, and following it diligently, Aashish Shanker, Head of Investments, Motilal Oswal Private Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt
Q) India's Independence Day is around the corner. Amid the pandemic, how important is financial independence for investors, and how best they can attain it?
A) The general idea of financial independence is to have enough income to pay for your living expenses for the rest of your life.
In practice, it means having a financial plan or a budget and following it diligently.
In turbulent time likes these, it needs no reiteration that investors should be very disciplined with their personal finance decisions.
The important points to note to be financially independent are as follows:
An adequate rainy day fund:
The importance of having an emergency fund is critical during the current pandemic situation with a lot of uncertainties relating to businesses and job continuity.
It is advisable to keep at least 3 to 6 months of your expenses as an emergency fund and putting those funds in highly liquid instruments such as liquid funds or fixed deposits.
Having all your savings into financial instruments that have lock-in periods would be unwise going forward.
Keep a close watch on expenditure management:
It would be prudent to postpone large expenditures that are discretionary until such time that things become normal, to maintain adequate liquidity and savings.
Avoid spending money on big-ticket items during online sales from e-commerce companies until it is of utmost necessity.
Do not take fresh debt/leverage:
It is advisable to not take new loans during a pandemic situation, as there is very less income security with possible salary cuts, job losses on account business slowdown.
Any default in the repayment of loans could negatively impact your credit score and future borrowing ability. On the contrary, you should try to repay your liabilities starting with higher interest loans such as credit card debts to reduce your financial burden.
Keep your SIPs going:
After witnessing a bear market in equities, investors usually get cold feet in deploying new money to beaten-down strategies. Instead of timing the markets, one should continue their investments based on the existing financial plan.
Keep reassessing your financial plan:
Periods like these give opportunities to reassess risk tolerance appetite and rebalance the portfolio to the desired levels. A risk assessment done during sunny days have chances of being wrong mainly due to overestimating the risk appetite.
Consult your financial adviser:
It is the right time to have your financial planning done by your financial advisor and sticking to the same. Any impulsive calls without such consultation could again be detrimental to the financial health of your portfolio.
In summary, it would be prudent to draw up your Investment Charter, which is a vision document that lays down the philosophy, framework, and process of managing your portfolio, while also aiming to understand broadly, the purpose of investment, horizon, liquidity and risk appetite.
Q) Some new NFOs have been launched recently to tap US markets. Do you think that investing abroad is a must in one’s portfolio? What are the factors which one should watch before investing in overseas funds?
A) The historical correlation (over the last 30 years) between the domestic Nifty50 index and the US S&P500 index is just 0.24.
This builds a good case for diversification of a domestic equity portfolio by investing some portion in the US equities.
The important factors to be considered before investing in overseas funds are the following:
Prefer Passive strategies:
Developed markets such as the US have much higher information efficiency than emerging markets such as India. This means that for a US fund manager, it is extremely difficult to generate a sustainable long term alpha over the benchmark index.
Hence, for investment in US equities, it would be preferable to invest in passive strategies such as index funds.
Market Valuations:
The US market (S&P500) has seen a significant rally over the last 2 years, and hence valuations, in terms of Market Cap / GDP are far more expensive than domestic equity markets.
Hence, it would be preferable to stagger the investments over a 6-12 month period.
Long term horizon & taxation:
Domestic Funds that invest in global equities are taxed as debt funds, i.e. 20% with indexation if held for more than 3 years, else taxed at the maximum marginal rate for less than 3 years.
Hence, an investor in such funds needs to have a long term horizon of at least 3 years, to also navigate through any heightened interim volatility.
Q) Gold surpassed $2000/ounce just last week. Equity markets are also up by about 50% from the March lows, but will still beat Equity Asset Class hands down in 2020. Do you think investors should tweak their portfolio allocation strategy?
A) One of the common mistakes made by investors is shifting investments from beaten-down asset classes to those where prices are elevated.
Such behaviour leads to investors not participating in any upside once the dust settles. The recovery of equity markets from the March lows is extremely narrow and led by very few stocks, even within large caps.
The broader markets viz. the mid & small-cap indices have still a long way from the levels seen at beginning CY18. Hence, it is imperative to stay invested and to adhere to your long term asset allocation.
Q) Someone who is already invested or long in the market since March, what would you advise – book profits or hold for more potential gains?
A) While valuations of the Large Cap index, Nifty50, are slightly above long-term averages post the recovery since March, the broader markets remain attractive.
Moreover, Corporate profits as % to GDP is at 3.1 percent, which is at decadal lows. Hence, there is a higher probability of better earnings growth going forward.
Therefore, we suggest holding on to equity investments.
Q) What is your target for the yellow metal for the year 2020, and how can investors leverage the share momentum which this asset class is seeing?
A) Gold has historically performed well in periods where global economies are running high fiscal deficits and low real rates, which is also true of the current global scenario.
Rather than having any target price, we maintain that investors should invest around 5-15 percent of their portfolio in Gold.
Investors can participate through Sovereign Gold Bonds, Gold ETFs/FoFs, or through electronic platforms.
Q) Which are you re-rating themes in markets and why? Or sectors which could get rerated as economic normalizes?
A) We believe that businesses which have strong moats, where demand continues to remain resilient, where they can continue to charge a reasonable price for their services, which generate free cash flows, and which are run by quality management, will be the leaders going forward.
Such businesses are available across market caps and various sectors such as Pharmaceuticals, Insurance, Manufacturing, Consumer Staples / Discretionary & niche lenders.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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