Certified Financial Planner Lovaii Navlakhi talks about risk appetite and what are the financial products and investments one should make based on one’s risk appetite.
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.
“All investments are subject to market risk. Please read the offer document carefully before investing.” This one line always gets my goat. It’s so infuriating, you know. All these ads for financial products show us this great dream. Invest money, you’ll get rich. Invest more money, you’ll get richer. Then I see myself in the ad. Having a nice big house, a big car and taking vacations abroad. And then, this line comes in. Please invest at your own risk. Why do you let me dream so big if you have to bring me down to earth with a thud!
And is a big house and a big car really worth the risk of losing my money compared to my small house and small car that I have right now? How do I know that the reward of bigger and beautiful things is worth the risk that I take now? Are there financial risks that will not cripple me but can let me enjoy the finer things in life?
You know who I turn to when I have so many questions? My producers at MoneyControl, of course! For today’s podcast we have a guest who can help us understand the risk-reward concept.
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 on our show before. Financial wizard, Certified Financial Planner, Author and a giver of great advice, let’s say hello to Lovaii Navlakhi. For those of you who didn’t tune in last time, here’s a little bit about Lovaii. He’s India’s first Certified Financial Planner. You can say he literally set the wheels of this vertical into motion. With almost 35 years of experience in finance, Lovaii is a great person to talk about anything related to money and how to handle it. Based out of Bengaluru, Lovaii is the Founder and CEO of International Money Matters Private Limited.
It’s so great to have you on air, Lovaii. Welcome to Invest-O-Cast (An exclusive investor podcast) Powered by Moneycontrol again. Let’s have some fun with risk and reward!
Lovaii Navlakhi: Looking forward to it Hrishi.
Hrishi K: So here’s my first question to you. If we had to rank investment products in the descending order of risk, how would that list look like?
Lovaii Navlakhi: Then the first product is very easy to put down its gambling. You know anything which is highly speculative would be the most risky sort of a product, then you would start getting down to Future and Options, leverage pay which is directly borrowing money on interest because then you may lose that investment and I had lost money not only on the investment but to repay that loan back. Then it’s equity day trading that I am trying to make money every day by getting in and getting out of stocks, then it stocks itself, then it is probably mutual funds and equity and then you start getting down to the bond products. And in the bond products the longer duration products are more risky than the shorter duration. The lower rated products are more risky than the higher rated. So if you get into triple ‘A’ rated bond then it is a shorter term bond. Your chances of default are much lower than if you were in the triple ‘A’ rated product with a longer duration maturity. Then you come to bank fixed deposits above 1 lakh of rupees because the bank is only sort of insuring you for 1 lakh and you probably come to liquid funds or mutual funds then bank fixed deposits are up to 1 lakhs and maybe the safest sort of investments would be Government of India guaranteed products.
Hrishi K: Great! Is there a simple formula to calculate risk-reward?
Lovaii Navlakhi: Oh! I wish it was there. I mean mathematically you can calculate risk reward by taking the net profit you make and divided by the maximum amount of risk. And of course there is no real easy way to calculate the maximum risk that you are taking on the product. The way I would look at risk would be A) what is the probability of losing money and B) if you lost money how much could you lose? So would you lose everything, is it only going to be 5%, 10%, 50% of the money and the obviously the probability based on that you would calculate what is the risk and typically you know logically everyone should be looking at returns or rewards as compared to risk but you know obviously there is no simple formula to calculate risk rewards everyone just looks at rewards just by themselves.
Hrishi K: What’s the relationship between risk and age Lovaii? And what are the levels of risk that investors of different ages should take?
Lovaii Navlakhi: So there are 2 ends you know you hear this a lot in insurance, at one end there is a risk of dying young and at the other end of the spectrum is the risk of living too long and everything else sort of falls in between. Typically I would imagine that the amount of risk that somebody needs to take is dependent on what’s the goals that they have, how much money they are putting in and how much time they have and also importantly calculating for themselves what is their capacity to risk or their risk tolerance. So scientifically designed risk profile questionnaires as might help you do that. The other thing you know you are talking about the risk at different ages, you do know that younger people are little more sort of what should I say hot blooded one do react very quickly, you know get enthusiastic very very easily and they have to be careful about that. The older people then have to be careful about the other side, that they don’t become so very conservative that they miss getting returns which help them to beat inflation over their longer sort of lifestyle.
Hrishi K: You are listening to National Stock Exchange (NSE) presents Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl it’s committed to break the limitations of geographical boundaries and reach investors across the country. We’re talking to Lovaii Navlakhi, the CEO of International Money Matters Private Limited. And he is explaining the relationship between risk and reward to us. So Lovaii, we have different investment goals at all stages of our lives that much is clear. How do we go about hitting those goals without losing our money? For example, if I have certain short-term goals, say around 1 or 2 years, how much risk should I take versus the kind of risk I can take with long-term goals?
Lovaii Navlakhi: So this is great that you know when I started my business short term meant 1 to 2 months you are now saying short term means 1 to 2 years and it is very very good positive movement that India has taken but typically what you need to do is have the ability to breakdown your investments into different buckets or put in the buckets which require liquidity saying that this is my money that I need in any point in time, so there my clear objective is liquidity and they are not really looking at great returns but the ability to draw out money whenever I need it. Then I have another bucket which is just helping me to beat inflation so there I am investing in products which will give me a good rate of return over inflation but after taxation. And then there is a third bucket which I am looking at where I am looking at getting wealth for myself or making sure that there will be a period of time where my rate of return on those fixed income Investments could be below rate of inflation a and at that stage I would want to sort of dip into the bucket where I have created wealth and use that money. So you need to sort of breakdown this so if you are looking at investing for a long term goal which is far far away and you invest in equities and you put it on a graph it will look pretty smooth. It will probably be sloping upwards but it won’t be very sort of jag it but as soon as I take a magnifying glass and look at the shorter term sort of investment horizons there I will see a lot of movement in that equity up and down. So it is just because the markets are up for 3 days in a row or 5 days in a row that doesn’t mean that if I have money for one day I will put it in the market but the past track record that is the type of returns. So I think it is very important to breakdown the goals from the time horizon point of view and therefore match your investment product accordingly.
Hrishi K: See most of us associate low return products with low risk. The flipside is that the reward doesn’t even cover the rate of inflation, Lovaii. Can you explain how the risk-reward concept works in this particular case?
Lovaii Navlakhi: Yes, I think the danger or the mistake people make is that they try to look at the product which is actually meant for a longer period of time over shorter duration. So typically let’s take a situation where we have had this in the past where suddenly you know the global oil prices hike up and India really has an economy is very much dependent on oil and as a result you find that oil is always going up, there is a negative for India in terms of whole bunch of things whether interest rates, currency all of that. And because of that now there is a sort of negative sort of mode and the equity markets also falls. So then people look at from a short period and say ok equity markets are negative, equity is supposed to consistently beat inflation over long periods of time but oil and that’s causing the inflation rate to be really really high. So I think the comparison of a long term product with short term inflation causes this mess. If you were to stretch this duration to 5, 7, 10 years and beyond you will always find that the equity asset class will typically be, comfortably well over the rate of inflation and then there is you know the concept of risk premium, so you will get that return as well in equities over long period of time. So if you match the right duration I think the risk reward will work well.
Hrishi K: So what’s a smart way to reduce risk in our portfolios while still getting those good returns?
Lovaii Navlakhi: Yes, I think that first and foremost you should avoid the temptation of getting rich quick but that doesn’t mean that you sort of put away the chance of getting rich slowly and I think equity is really an asset class which helps you to get rich slowly. The important thing to do is to go back to asset allocation, we spoke about buckets earlier so it is having different buckets for different purposes and making sure that you don't overfill a bucket that means you don't get tempted in trying to make excessive return and also at the same time you don't sort of ignore a buckets just because the recent sort of trends are negative so I will not fill the bucket at all. So as long as you are able to do that I think you will get the return that you require for your portfolio so I don't know what good maybe in it, it may mean different things to different people.
Hrishi K: Sure it does. Now how long should we tolerate risk? I mean we all know that our markets are prone to sudden ups and downs. So how do we know that this particular sudden drop isn’t just a temporary one? In other words let me ask you when should we hit the panic button? Is there a right time to hit that panic button?
Lovaii Navlakhi: Yes, when you cannot sleep well at night. I think that is the straight forward one and that means that you know you are even worrying about the markets when the markets are closed because you really don't know what will happen in the morning and you have sort of played your turn at night before, so the previous night and now you don't know what is going to happen. So I think that it is very very important for you to focus when you are saying markets I am assuming equity markets and you know you spoke about sudden drop so equity market is all about valuation. It is actually dependent on nothing other than how much is a profits of the companies that are listed going to grow over a period of time. Everything else is noise and combined with the noise then there is fear and greed. So it is not just you know knowing that the sudden drop is temporary or not. Sometimes the sudden drop is a you know long fall and that really tests everybody a lot more than sudden drops because sudden drops are something which is already done and I cannot do anything about it but if it is like a slow drift it sort of worries people a lot more, so at that time you go back to valuations and then you can determine for yourself that Oh! It is a good time to make an investment now or if you find that the valuation is far too high, don't get greedy actually cut out the profit that you have made.
Hrishi K: This has been a very very enlightening podcast. A very insightful session. And the perspective Lovaii has got on to the table has cleared up a lot of doubts we might have had. I think we have all got an excellent understanding of the risk-reward concept. It’s going to be of great help to us while making our financial investments.It’s now time for our ‘Wisdom in the Bank’, the segment on this show that does a quick recap of all the points that our guest has spoken about. The key pointer:
- Risky products in descending order of risk.
- Gambling futures, equity day trading, stocks, mutual funds, bond products, triple A products with shorter and Triple A products with longer time period, Bank FDs up to 1 lakh.
- The risk reward calculation is normally net profit divided by maximum risk but how do you calculate risk? If you lose, how much would you continue to loose, is the question you need to ask yourself.
- Maximum risk factors are young people dying young and old people living too long
- Taken to accounts your goals the money you have, time, capacity for risk, young people should avoid being too hot blooded, older people should avoid being too conscious.
- Break down investments into buckets. A liquidity bucket, an inflation bucket, a floating creating wealth bucket.
- Dangerous decision people make please don't look at long term products in the short term.
- Equity will beat inflation if you stretch your time period from 5 to 7 to 10 years.
- Avoid the temptation of getting rich quick. Get rich slowly with equities.
- Don't over fill your buckets or ignore your buckets when you can’t sleep at night you are hitting the panic button. You are up when the markets are closed.
Lovaii it’s been a pleasure having you on the show today. Thank you really once again for coming on to the show it has been an excellent podcast, we’ve really derived so much value from this chat with you. Lots of learning there.
Lovaii Navlakhi: Thank you so much.
Hrishi K: That is a wrap on our show NSE presents Invest-o-cast! I am your host Hrishi K 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: firstname.lastname@example.org. That’s email@example.com. You can also reach out to us on Twitter @moneycontrolcom or Facebook @moneycontrol.com; do remember to use #nseinvestocast.Thank you for listening!Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.