For today’s podcast, we have got a risk expert who is going to tell you how your risk appetite shapes your portfolio.
Hrishi K: Hello listeners, and welcome to another episode of NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. I am your host Hrishi K and this podcast is all about getting your money to make better investments for you in the new financial year.
You know I was reading some statistics the other day. In 2017, 98 helmetless two-wheeler riders died every day in India. That’s right: 98 people died everyday because they didn’t want to wear helmets. Riding a two-wheeler without a helmet, I mean that’s incredibly risky, not to mention careless. What makes people take such a risk? Yeah, I get it that people think bad things won’t happen to them but what if it does? Are you willing to put your family through that pain of losing a loved one because of something so careless? Just because you can take a risk doesn’t mean you should take the risk.
That’s the topic I want to talk about today: Risk and personal finance. A lot of us invest in financial products without knowing the hit we will take if the product fails or the markets are shaky. We take financial risks because our friends and colleagues are taking them or because we are following a trend.
Not all of us are capable of handling the same level of risk. Some of us have a higher risk appetite while some of us don’t. This means we should not blindly invest into something if we can’t handle a loss in our bank balance. For today’s podcast, we have got a risk expert who is going to tell you how your risk appetite shapes your portfolio.
National Stock Exchange (NSE) with the help of Invest – O- Cast (An exclusive investor podcast) Powered by Moneycontrol is committed to break the limitations of geographical boundaries and reach investors across the country. Today’s podcast deals with risk appetite and what are the financial products and investments one should make based on one’s risk appetite.
Let’s welcome our guest for the day. You have met him before on this podcast. Let’s welcome Harsh Roongta, co-founder of apnaloan.com. Harsh is a SEBI registered independent financial advisor who regularly writes for leading business newspapers in the country. He is an expert in matters of personal finance who understands risk and its implications when it comes to individual investors. Its great having you on the show again Harsh how you doing?
Harsh Roongta: I am doing fine; it is always a pleasure to talk to you Hrishi.
Hrishi K: Let’s get started with my barrage of questions Harsh.
Harsh Roongta: Sure.
Hrishi K: It’s all very well to talk about risk appetite. But how does one calculate their risk appetite? What are the factors one takes into consideration?
Harsh Roongta: So you know risk is a rather sophisticated word like, it sort of simplify this. In the context on investment essentially risk means the possibility or the chance that the value of your investment will dip below what you had invested in it. If I was to give an even simpler analogy let us take cricket it would mean losing a match. Now in any team your batsman who play attackingly, you have steadier batsman, you have part-time batsman then you have tail enders and between all of them to put together there is some kind of an average run rate ok That they are comfortable scoring and this average run rate let us compare it to your risk appetite. Now you would like to obviously play in matches where you can win by scoring at this average run rate that you as a team are comfortable with but that is not the only thing right? External conditions such as nature of the pitch, the opposite teams, bowling attack, the score put up by the opposite team, weather conditions, I mean all these decides whether you need to score at a much faster rate than what you are comfortable with and therefore whether those risk appetite what you have VS what you need to do might be higher or reverse is also possible. Might the opposite team may collapse, so you need not even have to score at your run rate and therefore you can play far more comfortably then what you are comfortable with. Let me bring that now back to investments, I think in investments I would define the risk appetite as an ability to see capital loss in the portfolio and still continue waking investments. I think that is how people see risk as far as investments are concerned. Do you have the ability to stomach a capital loss; if you don’t your risk appetite is low. If you have the ability to stomach a capital loss you can say that your risk appetite is high. Obviously the other important factor just like cricket your weather, your opposing team, bowling etc. the other important thing is when is the money needed, what are the resources you have, how much amount you are investing, when is the money needed, how much money is needed I think all this put together we decide your overall investment strategy but your ability to take a risk is very very integral to that whole thing and that is why they say that when you invest in equity, when you do that systematic investment in equity for long periods of say 10 years it will give you good returns and thus hopefully take you towards your objectives whatever be your objectives but you need to be able to stomach inevitable loss of capital that is going to happen during those 7-8 years. It’s only after 7 and 8 years that the chances of a capital loss become quite slim.
Hrishi K: I quite like the fact that you are likening investment to cricket; it goes with the flavor of the season. Just on a lighter note, were your cricket playing abilities on the pitch in your younger days as good as your investment advice abilities?
Harsh Roongta: Absolutely! Absolutely and you wit it on the head Hrishi.
Hrishi K: What is the difference between risk appetite and risk tolerance Harsh? That is an area a lot of people are unsure about I would like you to remove all the cobwebs.
Harsh Roongta: So I mean these are terminology and many people use them interchangeably, there is no legal definition for risk appetite and risk tolerance. I would like to put it as the ability to take the risk V/S the willingness to take the risk. Again let me use the cricketing analogy since people understand that better. Think of a steady player like Cheteshwar Pujara ok, when he is at the crease his normal strategy to cut out the raise play in the V, play all around the ground but if only one over is left in the match and 20 runs are to be scored and he is batting even a Cheteshwar Pujara will have to try a lofted shot V/S let us take a reverse situation only 10 runs are needed 5 overs are left then even an attacking player like Virat Kohli will play steadily to make sure that the match is won. So the ultimate objective that the match should be won is important obviously you have to work with what you have which is natural style, your natural style of investment and the resources you have so I think I hope that sort of explains the difference between your natural style steady or slightly risk taking V/S the resources available that allows you to do something different. So ability and willingness.
Hrishi K: Can you give us a break-up of the kind of investments investors with different risk appetites should enter into? Let’s say for example what should a high risk taker invest into compared to a medium risk taker and a low risk taker Harsh?
Harsh Roongta: So you know Hrishi what you have done is, you have only taken one side of what should be taken and what should be the matrix ok? The one side is obviously your risk taking your high risk, moderate risk and a low risk. On the other side also I would say and this is assuming resources are enough ok, is your period right. So let us say the rows or the columns let us say your risk taking ability the low, moderate and high and the rows and the periods and short terms which means up to 3 years, medium term, between 3 and 9 years, long terms 10 years and above. Now let’s say this is the matrix, in each cell in this matrix so for example short term low risk very clearly fixed income securities which have to be things like bank deposits, liquid funds, arbitrage funds those kinds of things would be there and so on. I mean I think it is a continuum where you will see it going towards equity till when you have long term and high risk that can be pure equity 100% equity. So I mean this will be a matrix structure and there is no absolute one answer to the question that you asked.
Hrishi K: You are listening to National Stock Exchange (NSE) presents Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl we are committed to break the limitations of geographical boundaries and reach investors across the country. Harsh Roongta, personal finance expert, is on the show with us today educating us on risk and how does risk appetite shape an individual’s portfolio. You know, in India, a lot of people have to be taken into consideration before you invest into anything. It’s a given in India that as an individual you will take care of your parents, child’s education, siblings on occasion extended family members as well. Harsh How much of a say do dependents have in deciding an Indian investor’s risk appetite? And does the number of dependents explain India’s love for fixed deposits and insurance, for example because you know that is something we still seem to believe in our country?
Harsh Roongta: Your natural style is your natural style, so it is possible that your dependents share your natural style and then they influence to a certain extent but I think your natural style, your risk taking ability remains your risk taking ability but let’s come to the second interesting question you asked, does this explain, does low risk appetite in India does that explains the love for fixed deposits and insurance? So I think that’s not really true because Indians don’t really have a low risk appetite. I mean the manner in which we have small number of people but the number of people who invest in equity and that’s a growing number of people now clearly the ability to take risk is high. And think of the people who used to sort of give money as advance to builders, without knowing really when the buildings are going to come up that tells you the amount of risk that Indian investors are willing to take. But coming back to fixed deposits and insurance, I think the love for deposits and insurance is more a matter of a mixture of ignorance, inertia, mis-selling, rather than the number of dependents. First fixed deposits they have always been around, very comfortable to deal with and on the surface, on the surface it doesn’t affect your invested capital. You will always see a nice little increment year after year but in the long run remember because the return, net of taxes is almost always lower than inflation; you are actually eating into your wealth. It is guaranteed to eat into your wealth; it is a sure shot risk I would say if your investment horizon is wrong, is very long. So the second part the insurance cum investment products that I think is a simple matter of high pressure mis-selling tactics obviously driven by the high commissions that agents make and the bad habit that all of us typically have of investing only for tax break, not investing for gold investing only for tax break and that too doing it at the last minute. So I think it is the mixture of all these reasons why insurance is such insurance and fixed deposits are such a big deal still.
Hrishi K: The correct time to throw in the towel, the correct stage at which one should call quits on an investment or a financial product that itself is an art I feel Harsh. At what point should we say, no this strategy isn’t working for me? Can you explain this to us with an example please?
Harsh Roongta: So you know the best time to get out of investment is when you need the money. So I would like to sort of again talk about my favorite subject which is gold based investments. When you are doing gold based investment there is no real reason for you to quit the investment unless that investment has done badly in comparison to its peers. Very very badly in comparison to its peers, just because an investment is in a loss you don’t quit because especially if it is an equity investment because equity investment is bound to be in a loss when you invest for 8-10 years there is bound to be periods to which it will be below your capital, the chances that it will be below your capital is very very high but in the long run the chances that it will give you a great return is very high and by long run I have already defined long run is 10 years and more. So I think if you are aware of what you are getting into, if you have done gold based investing, you are aware of what you are getting into, so all of this you would have thought through before you would have invested. Now comes to you know all these investments in shares with these top loss etc etc being put in, my advice to individual investors have been stay away from direct investments and shares, unless you have a specific expertise in a sector or a company in which case you don’t really need to ask me when to sell, your expertise should tell you when you should be selling.
Hrishi K: Very well put, so people have different horizons for different investment goals Harsh. Does it make sense to take a higher risk for short-term goals? What do we keep under consideration then?
Harsh Roongta: So short term again the definition as I said is anything up to 3 years is short term, so even for somebody who is a high risk taker and even for him where you are at the larger end of the horizon which is say 3 years you might put in a bit of equity, something like an equity saving funds for a 3 year horizon for a very high risk taker, otherwise for a lower period say 1 or 2 years then for any kind of risk taker and for low and moderate risk takers even up to 3 years I would define fixed income instruments only. Fixed income instruments can be mutual funds they can be bank instruments they could be debentures, government securities, anything that is applicable to the individual.
Hrishi K: So this has been a very enlightening podcast. Harsh with his words of wisdom has really prompted us to think. I am sure all of you now have an idea of how to calculate your risk appetites and how to invest in products that are right for you. Remember; do not bite off so much that you can’t swallow.It’s now time for ‘Wisdom in the Bank’, the segment on this show that does a quick recap of all the points that our guest in this case Harsh Roongta has spoken about.
- In investments think of the risk appetite as the ability to see a capital loss in your portfolio and still continue making investments.
- If you don’t have the ability to stomach a capital loss your risk appetite can be deemed to be low.
- The main factor is to objective of your seeking to obtain and the amount of time and resources you have for achieving that objective. If the resources or time are limited and the objective is still difficult to achieve then even a normally steady investor will try to make more risk, converse is also true.
- Assuming sufficient resources are also available you can work out a matrix like structure, where the columns could be risk taking ability low moderate high and the rows could be the time available. Short term up to 3 years and medium terms up to 3 and 9 years and the long term 10 years and above and work out a mix of equity and fixed income accordingly.
- Mixing of investment and insurance is simply a matter of high pressure mis-selling tactics because of high commissions. And the bad habit of investing only for tax breaks at the last minutes.
- For a lay investor one doesn’t recommend the direct investment in shares, unless he or she has specific expertise in a sector or company. In which case you should sell when your expertise is telling you to sell.
- Even for a high risk taker if the goal is only 1 or 2 years away, you should invest in fixed income instruments only.
Harsh it’s been a pleasure having you on the show. Thank you once again for coming on the conversation has been full of learning, and I am sure our listeners have made extensive notes on the pointers you have given us.
Harsh Roongta: Thank you! Thank you Hrishi.
And that is a wrap on our show NSE presents Invest-o-cast! My name is Hrishi K and I am your host for NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. To know more about our podcast, log on to moneycontrol.com and visit the podcast section. In case you would like us to address any of your investment queries on our show do write into us at: email@example.com , that’s firstname.lastname@example.org you can also reach out to us on Twitter @moneycontrolcom or Facebook @moneycontrol.com, do remember to use #nseinvestocastThank you for listening!