Informed Investor: Start the journey of wealth mgmt early

The last few years have seen a marked absence of the retail investor from financial markets, and it was common fear of the markets that was keeping investors at bay.

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. _PAGEBREAK_ Below is an edited transcript of questions asked by BPO executives across the country about their investments. Q: Every fund that you come across comes with a tag line which says ‘your investments are subject to market risk.’ How much certainty should be there in this uncertainty, because risk cannot be indefinite, there should be some quantification into it? Diwan: The way mutual funds work traditionally is that a fund manager builds a portfolio, and dynamically manages it depending on the anticipation of the changes in the market and the economy. But the reason why investors lose out, even in a well performing fund, is because we usually don’t set targets at what levels you should be exiting, at what levels you should be booking your profits. Now what happens is we have seen market cycles where we have seen peaks being attained and then the trough is again there and again the markets tends to move upwards. So unless you have a targeted goal, say 25% CAGR or when the NAV touches a particular level, I need to book my profits. If your advisor does not help you facilitate that, you are going to miss out on the bus. In the last 12 years, the market has given a tremendous amount of returns and opportunities, but you need to take those opportunities. If you are going to sit on the portfolio and wait for only 25 years, you could probably be very marginally up. Dynamic investing is all about taking away profits once your goals are attained and everybody has to set those goals. When you start investing, please define the kind of return you are expecting. Unfortunately, when your return is attained, especially when it happens very soon, we tend to change our goals and that is exactly when things go bad. So essentially it is about the discipline that is also required while investing. Q: I have invested in ULIPs and the NAV has decreased significantly since January. Should I liquidate now and switch to something else? Joshi: ULIP as a product requires minimum five years of investment. I don’t know how long he has been invested, but the way market has been, possibly he will have to give it a couple of more years. But I think that was precisely one of the problems that a lot of investors faced with ULIPs, which is why we had all the restrictions on how they are advertised etc. What we saw in couple of years was that people sold ULIPs like hot cakes and where things went wrong for investors was precisely that. I don’t know how many years it is since he has invested in ULIP, but you have to give it at least five years. Q: I am Aparup Sengupta and I am the managing director and global CEO of Aegis. I traditionally look at a reasonably good mix of safe investments in debt, and a little bit on equities. But primarily I am a very strong debt person in terms of ensuring that your principle and capital is protected. First question I would like to have answered is largely what should be the mix of debt versus equity and what’s the kind of position one should take? I understand it’s a function of the risk profile, but generally what is recommendation for people who are post-40s. The other question is given the global unrest, given the volatility that is there in the marketplace, should one just focus on Indian rupee investment because currently with the foreign exchange rules one is permitted to use capital for capital appreciation into a global market. So what’s the currency one should focus? Let’s say this is for a long term view, say a decade from now? Joshi: Obviously I think investment in equity is linked to your risk and I think that looking at the position that he is in as well as his age, he can take a fairly good amount of risk. So I would say about 50-60% of whatever he invests can be in equity or equity related and that will give him the slightly better beta return. Coming to the second part of the question, as far as currencies go, I think what you are allowed at this point in time is really to take exposure to the dollar. I don’t think the other currencies are allowed if I am not mistaken. With a decade’s kind of expectation in mind, I would say rupee is the currency to invest in, at least that’s what I would like to believe. But yes, I think dollar is the only thing that’s allowed so that’s the investment option that’s open. Q: How do you actually go about selecting the fund house, the fund manager or even the broker to help you? Is there anything that you need to look out for when you are selecting the person you would be doing investments with? Joshi: Unfortunately the thing that you have to go by is the track record. I say unfortunately because markets are dynamic and things could go wrong. But the one way of looking at it is to find a reputed broking house and see the past performance of the fund manager. See how funds that he has managed have performed with maybe three-four year kind of horizon, because that takes away uncertainties. Even if things start going badly, there are things that an actively managed fund can do to kind of get back on track. As far as brokers go, I think things are a lot simpler because there is a lot of paperwork in place. So if you have done your KYC and all your paperwork properly, there is very little actually that a broker can do to cheat you. For the trades that you do, you can get the full details on the NSE site. Also your note should give you the details, so you can type in and you can get all the details that you want. So you know that the rate is right and things like that. What can go wrong with a broker is the advice, and I think there you need to practice a little of your own judgement and caution and when you use the advice given to you. Diwan: Let me just sum it up. The way it works is selecting a fund manager is like selecting a physician. You will go by the track record, the credentials, word of mouth, and referrals. Selecting a broker is like selecting a chemist; it really doesn’t make a big difference. As long as your prescription is right you could just go ahead and execute it anyways. _PAGEBREAK_ Gajanan Saranjame, Oracle India: Q: Do you think one should buy, hold or sell shares in aviation sector with news of a possible FDI? What investment option a 30-years old married person should look whether in term of equity or mutual funds if expecting an annaulised return of 10-12% with the investment capacity of Rs 20,000-25,000 per month? Joshi: Things are still not clear as to when the aviation sector will get the FDI kick. FDI would be a truly welcome move considering the amount of debt on books of 2-3 airlines. However, FDI is not the only answer to solve the problem of this sector. Why would a foreign investor invest in a sector where local investors and institutions are facing a problem. However, allowing foreign airline participation would be a good move.  Worldwide this sector has not done well and India is no exception. Globally, very few companies have given decent return. More than FDI, policy changes is a need of an hour for this sector. It is better to avoid investments in this sector right now. Diwan: Considering the profile and the amount of return on investment expected, I would suggest him to invest in any balanced or hybrid fund which could cover the returns. As he is already married at the age of 30, he has already achieved one milestone which involves lot of expenditure. Ideally, he should also consider investing part of his allocation to the equities, of the investable Rs 25,000, Rs 18,000 should be invested in monthly income plan (MIP) and Rs 7,000 in pure equities. Q: In today's market scenario, world over all markets are facing rough weather, in India every India is facing recessionary pressures, So if I decide to invest ‘x’ amount in equity what can be the balanced portfolio for me to invest industry wise and percentage wise? Joshi: Ideally, this is the best time to invest with a cautious approach. One should invest incrementally, don’t put everything that you have at one time but allow for the draw downs in the market that we get. Going ahead things would be volatile. It is best to invest in bits and pieces and not everything in one go.  From India prospective, sectors which are attractive are banking, capital good, pharma and FMCG related stocks. _PAGEBREAK_ Let's see what is the finance mantra of a man who pioneered the BPO revolution in India, Raman Roy, CMD, Quatrro Global. 
 
Q: You are a trail blazer when we talk about the BPO industry in India, What was your first experiment and how much money did you spend? Roy: I come from a very humble background. Twenty years back, when I got my first job as a qualified chartered accountant, I first went to the Central Bank of India and opened a fixed deposit which is still there and I keep renewing it. I did not had the ability to be able to encash that money because at that time it was very important for me to save money. Q: How would you describe yourself in terms of what your risk profile is? Roy: As far as personal investments are concerned, business in itself is an investment that is high risk and then I tend to moderate that with the low risk investments as far as contributing towards balancing that risk is concerned. Q: What's your preferred mode of investment and what is that that you really like? Roy: I prefer a mix between government securities and the corporate debt. Mutual funds have a mix of both. Q: You travel a lot, how do you manage to find the time to track your portfolio and what advice would you give? Roy: I manage my portfolio online. Irrespective of where I am in the world, I make a point to long on to net and track my investments. Q: Is there any investment that went bad and when you look back at it now is there anything that you would like to have done differently? Roy: Yes, at times bet goes wrong be it equities, companies or a bet on a portfolio that has a larger weight of a particular segment or a sector. There are times when I have stuck with it. I have a large part of my equity investments in the IT sector and it is not at the all-time high that it used to be. But, I will not divest this sector as this sector still has the capabilities to bounce back. Q: Many experts advise that retail investors should invest in companies they understand well or an area where they work. Do you think IT or IT services companies would be a good bet for young people in the BPO industry to invest in? Roy: In my opinion investing in sectors that you understand is a double-edged sword because you will never know what is happening in the boardroom of that company if it is a listed company and with the limited information and the knowledge you have you may think the company is taking some erroneous decisions. I have lived that. At times you get a lot of heartburn because you think that they are destroying a valuable brand or some things that they are doing. So it is a double-edged sword. It is not that the knowledge of the sector is only an asset. It can also be a liability. Q: The BPO industry has the highest number of people in their early 20s and 30s. What's the most common investment mistake that you have seen many of them make? What's the advice that you could offer them? Roy: Honestly. I see a bit of arrogance in them. I see them thinking that they can do no wrong and then picking on the equity market rather than balancing the risk which is very scary. The risk profile of people in their 20s is very, very different. Mostly, I have seen them taking the equity head-on without spreading their risk. I have seen many people depressed during bad days in stock market because they did not manage their portfolio well. _PAGEBREAK_ Q: I am Sonia Kohi, team leader at Serco Global Services. I have been making a few investments like mutual funds, recurring deposits, national saving certificate, and provident fund. I have not been getting the correct amount of returns that I am expecting from the investments that I have been making, so can I get some better tax saving plans where I can get better returns. In Reliance Mutual fund I do not have any guarantee returns even after a lock in period of three years and my recurring deposit is just 7-8% and from my provident fund it is 16 years of lock in period of the amount that I have been investing? Diwan: To being with you need to avail of guaranteed returns to some extent that is available from a tax saving angle. She is just getting started with the investments, and in the beginning you will tend to feel that the investments don’t yield as much as you would wish. Most tax savers, baring ELSS, don’t have an equity component, so the moment you go in for an assured return you would have to compromise on the quantum. Guarantee and quantum don’t go differently, they are invested proportional. If I want guaranteed returns I would pick it at a particular lower quantum. Equities is the only way you could out perform or you could beat inflation. So beyond NSC, PPF and maybe some ELSS, she should start looking at an SIP into equity schemes. Joshi: Also to add to this, this is a big misconception people harbour that they are going to make their returns by investing in tax saving schemes or schemes where returns are guaranteed. Just three-four years back, the government allowed even investment in equity up to Rs 1 lakh to be tax free, so you are allowed to do that. So if you want to make a return which beats the real inflation, not the reported inflation, then equity is the way to go. Q: I am Partha Sarathi, director at Touchstone Transmedia. My first question is about aviation stocks. Stocks are affordable, but looking at the current situation with Kingfisher and other airlines I am concerned about the future of the stocks, I need your advice on this. Abidi: There is a news flow in aviation, so when you are picking stocks should you go by the news that you are hearing or should it be a little more fundamental than that. Joshi: I don’t think that can be answered with yes or no because the news is there for a reason, so you also have to look at the reason why the news is there. Again if you are trader then you have to go by what is news based because those are the stocks that are going to move on a daily basis. If you are an investor, then I think you have to cut the noise of the news from where the stocks are and what you should do. Abidi: I want to explain for the benefit of our audience there could be news flow of FDI in aviation. There were also related sectors that had run up because of the news in the primary sector, so how can retail investors benefit from that? How do they access the ancillary sectors that will also be benefited because of the tailwind that the primary sector has? Diwan: You need to be very clear of how you interpret the news. There is something which I normally do when any piece of news comes, especially a breaking news, you do a mind map in terms of what all its going to impact in the next one week, one month, one year and the next three years. So if FDI in aviation happens, first decide if it is a short term thing, is it a long term thing. If it is a long term thing I need to take cognizance of that as a long term investor. Look at the oil marketing companies; it is again linked to the airlines. Today you see the newspapers flashing that petrol prices are going to be cut by Rs 2, all OMCs are doing well. The next day morning it says this is not going to happen, the OMCs again lose ground. So Rs 2 at this point impacts OMCs only temporarily, but that is exactly why their behaviour is also going to be temporary. Going by that, don’t get carried away by news that you hear; analyse it in terms of its potential impact. You don’t data, you don’t need too much of balance sheet reading, you need to figure out what difference will it make. If aviation is coming, see if we have enough airports. Let us say FDI in aviation happens, foreign airlines are brought in, I would not buy some of these airline companies, I would go and buy the airport builders. It is so obvious that they will need more facilities and you just have two players in the business, so it is very clear that there is more opportunity there. It is very critical for investors to do that and not just go by news as it is. You need to interpret that, that is where specialization comes in. Q: I am Valentine Fernandes, collection advisor at JP Morgan Chase BPO. I invest in fixed deposit, mutual funds, LIC and property. Due to the volatile market, when is the best time to invest is? Abidi: For a first time investor, where does the person begin, what are the first few steps that you need to take when you are entering the equity markets? Joshi: One of the things that you need to do is get your financial planning in place and once you have that I think the requisites; the insurance policies, the health insurance all that needs to be taken care of. Then if you have requirement of a house, an EMI has to be factored in. Then you have to start with mutual funds, that is when you start planning. If you are young then the kind of risk that you can take on equity is bigger. So somewhere at that point in time you need to make up your mind whether you are going to invest directly into equities or you want to go via the mutual fund route depending on the kind of time and interests that you are willing to devote to the activity. So if you are willing to spend some amount of time reading papers, reading about stocks, then I would recommend direct equity. So it is a good time for the investor to start looking at equity seriously. Q: Considering the global scenario, where do you see the markets going in a couple of years time? I am a long-term investor, so apart from IT and pharma which are the sectors I should focus upon? Diwan: We are so well integrated to the global economy, what seems more likely to do well is going to be a lot of consumption related companies and banking. We are under banked; as a country lot of people still don’t have savings account. So this whole thing about letting the banking sector reach out to the last mile is something which involves a lot of expansion, a lot of opportunity. The other sector that could possibly do well is infrastructure because India is poorly stacked up as far as infrastructure is concerned. But a lot depends on government policy, the pace of reforms. So to say this is the right time in terms of best time then probably not, but this is the optimal time because we are seeing that improvements happen. The move towards power, infrastructure, capital goods all of them start doing well. So I think one would have to look at this more broadly and look at company specific performances rather than just a sector because you cannot buy into the whole sector. Q: How does a retail investor who does not have a fund manager, how will he decide whether it is the right price to get in or get out of shares even if he is looking at it on a daily or on weekly basis? Diwan: The simple answer is you need a mutual fund. In India the cost of subscribing through mutual fund is the lowest in the world and SEBI has made it even lower. So if you subscribe to a mutual fund, you actually hire indirectly the services of a fund manager and a professional set up that helps you to do all that. So you don’t need to have the skills and capabilities yourself because for a small amount it doesn’t pay to build those capabilities. Q: You mentioned the best time to invest is when the economy is in a trough. How does one decide on the risk portfolio? As a person should I be risk averse, high risk, low risk or medium risk? Diwan: It is very difficult to get it perfectly timed, so most of the time you are going to get it closer to the trough. There is no bell that rings saying this is the bottom and start buying. So you would have to start factoring in anticipation on what are the progressive steps that are going to be made in the sector, what changes will be brought in which could change the sector, what are the changing dynamics. And if you do the calculation very clearly, you will make out trends. For example infrastructure in India would have to do well is we want to lead a decent life. There would have to be more roads, airports, bridges etc all of that has to come. So it’s a question of when it happens, right now the needs is most, so it probably should happen now. As far as risk is concerned it is all personal, what risk one person can carry and second person can carry depends on our age profile, income profiles, our goals. So go into that rather than what is the risk prevalent in the world.