Author: Sanjeev Govila

13 May 2022

Do-It-Yourself (DIY) – Saving pennies or squandering dollars?

‘What? Are you still doing your mutual funds through a financial advisor? Do you know how much extra will you pay over the next 15-20 years by paying that extra 1% per year commission or fees to him?’
How many of us have heard similar arguments in person, in whatsapp or Telegram groups, in various articles written on websites or articles in magazines and newspapers.

What would you save by going DIY way?

To put it in money perspective, let us see what would you save if you were to do it all by yourself or by following the tips that keep coming in print, TV channels, SMS and the social media groups.

Say you invest Rs 10 Lakhs initially and a SIP of Rs 10,000 per month in an equity MF. Since you’re doing it yourself, you do not have to pay those 1% extra charges to a mutual fund distributor (MFD) as commission or a SEBI Registered Investment Advisor (RIA) as fees. Assuming an average annualised growth of 12% in your portfolio over the long term, you would save approximately Rs 3.04 Lakhs of commission/fees in 10 years, Rs 7.17 Lakhs in 15 years and Rs 14.86 Lakhs in 20 years in commission/fee.

During this period, you would’ve made a profit of Rs 32.6 Lakhs, 76.8 Lakh and 1.59 Crores respectively. Thus, the fees paid out to the advisor amounts to about 9.33% of your profits.
Please note that this is a very simplistic, straightforward model depicted for the sake of clarity in this article.

What also would’ve happened in those long years?

Going by the past trends, the following too would’ve taken place in those 10-20 years:-

1) During this period, for more than 90% of the trading days, Sensex would’ve traded:

  • Below 10% of its peak more than half the time.
  • Below 20% of the peak 30% of the time.
  • Below 30% of the peak 17% of the time.
2) Temporary Market Declines of 30% – 60% (whoa!!) would have occurred once every 7-10 years.

3) Every 10 years would’ve seen 1 or 2 sharp declines of more than 30%.
(Source: Funds India) 

What would a retail investor do during such ‘scary’ times if there’s nobody to hand-hold?
When a Profit of Rs 76.8 Lakhs dwindles to say, Rs 30-40 Lakhs, or if the decline happens when one has just invested and the principal investment itself has gone down from Rs 10 Lakhs to 5-6 Lakhs, it is difficult to continue with all-will-be-well spirit for most investors.

The normal response of almost all the DIY investors is to take the earliest exit and either vow never to get into equities ever again or promise own self to get in when markets start going up again. Latter is what has happened in the markets for most investors since mid-Jan 2022 when markets have trended down or been too volatile after a stellar 21 months’ run up.

What do you lose if you stay out of the markets for a few days?

What happens if you get out with the aim of getting in again ‘when the time is right’ but market volatilities – markets shooting up for a few days and trending down for few days – make it difficult for you to decide when to enter?
The past data has shown that, over a period of past 17 years (2005 – 2022) of investing:-
  • If you miss just 5 best days in those 17 years, your CAGR (Compounded Annual Growth Rate) reduces by 3%. Over a period of 2005 till beginning-2022, it meant overall average annualised returns reduced from 14.4% to 11.5%.
  • Missing 10 best days further brought it down by another about 2% to 9.6%.
  • Missing just 30 best days in 17 years, hold your breath, brought it down by a total of 11% to just 3.3%.
  • Missing 50 best days in 17 years meant your returns would be down to a NEGATIVE 1.1%.
(Source: Funds India
And remember, many of these best days could happen in the middle of a market crash too!

In the meantime, what would you be thinking as an investor?

In addition, the following cycle of ‘Greed and Fear’ play on an investor’s mind when she does not get a counsel from an experienced hand like a competent financial advisor:-
  • This time it’s different – markets will not recover from this crash for a long time. Better to get out.
  • This time it’s different – markets are at All-time Highs (ATH), they will surely go down from here big time. Better to get out.
  • Markets are going down. Better to get out now and I will get back in when they are low enough.
  • Markets are high. Everybody is saying they will go down now. I will get in at lower prices – let me take out my profits. Better to get out.
It is well known that most of the retail investors rarely ever make long-term wealth in stock markets. It has nothing to do with their ability or inability to pick the right stocks or MFs. The problem lies in their emotional, jerky responses to adverse situations which an experienced investor or advisor sees as an opportunity.

Every crisis in the past has been followed by a recovery and most such recoveries have taken the markets typically higher than before the crisis.

But ‘dil hai ke manta nahin’! 
The emotional backlash and the fear of being on the verge of losing hard-earned money overpowers every other emotion and logic as past statistics indicate.

There’s also a feeling that ‘I can always get out now and enter the markets once it has reached the bottom…’. Everybody knows that nobody is ever able to do this timing, irrespective of how easy or logical it may sound when the emotions are asking you to take this decision. So, the only logical path is to stay put …. but still most people cannot stay put.

This article is not for educating you about the role of an advisor or her utility to you. It is more about analysing your own behaviour – what would you do if situations like March 2020 come up again?

If you are steel-willed – and a few retail investors are of this variety – you could be fit for being a Do-it-Yourself (DIY) investor. Throw in knowing the importance of correct asset allocation and how to do it, logically analysing data to come to financial investment conclusions, having control over your emotions, monitoring and rebalancing portfolio if required and lastly, also realising that sometimes doing nothing could be a great strategy too!

And some Commandments for a DIY Investor…
Also remember the following points when you’re finally making the decision of going or not going ahead with being a DIY investor:-

  1. If you go in for passive investments like Index Funds or ETFs, remember they still are 100% equity products and will face the very same market volatility as the markets themselves. Many new investors have started looking at Index funds as the ‘safe’ funds to invest because of mis-directed media noises and Whatsapp group conversations!
  2. As the time passes, more and more sophisticated (read, complex) passive products will come into the markets. Analysing them and making a portfolio using them would turn out to be as difficult a task as with current mutual funds (MFs) or stocks, if not more. Marketing pitches could seriously sway final decisions.
  3. ‘Passive is all good and Active is all bad’ is a wrong notion to have. Typically Index ETFs and MFs have given a very good competition to the Large Cap MFs and stock portfolios in the recent years. The reason primarily is the large domestic and foreign institutional buying in big capitalisation stocks, and subsequently the Index ETF and MFs momentum which got generated as a consequence of this.

However, the above has not been reflected in India in mid and small cap stocks and funds yet since the universe of stocks is much larger and more diverse where individual stock analysis has been the winner so far. Also, due to their low capitalisation, such stocks do not offer a viable-enough play to institutional purchases.

So, what is our final take?

  • If you can manage all the nuances associated with managing a portfolio as also your emotions, you could be a person who should be a DIY investor.
  • If you are going to depend on others’ help (aka tips) to do investments, not familiar with the concept of asset allocation, monitoring or rebalancing as also not sure of your emotions if the worst happens in the markets, have a rethink. Remember, it doesn’t matter how fast are you going if you’re in the wrong train!!
  • Also, if you decide to be a DIY investor in Mutual Funds, be careful and check if you’re investing through a genuine direct platform. Eg, platforms like ICICI Direct, HDFC Securities, other banks trading platforms and many other online platforms are all giving Regular plans of MFs, though it may seem to you otherwise. So, while you’re being charged the same commission as with a financial advisor, there is no customised advice available to you. You’d be better off switching to a financial advisor where you pay no additional charges but have customised advice available as suiting to your needs and portfolio, and you have a real person to talk to, hand-hold, discuss and of course, hold accountable.
29 Mar 2022

Smart money moves in time for the New Financial Year 2022-23

Haven’t executed your New Year Resolutions made on 1st Jan yet? No issues. Financial Year is about to begin from April 1 onwards. You still have time to start, in time for another ‘auspicious’ financial day!

In fact why to wait till April 1 too? जब जागो, तभी सवेरा 😊

Plan well and execute well from today onwards only. Here are some smart moves that you can take to give a new direction to your financial life and make it truly stress-free.

Here come easy 8 financial To-Dos for Financial Year 2022-23:

1. Update your Nominees: First things first. Please update your nominee details with immediate effect in all your existing investments – Bank Accounts, FDs, Mutual Funds, Equity Shares, Post Office Schemes, Insurance and whatever else you can think of.

2. Look at your health coverage: Fortunately, it’s not a headache for Indian armed forces personnel as they and their family members are well covered by the Govt all through their lives. But if your children are serving in the corporate world, then they must take their own health insurance policy and a critical illness policy too. A corporate employee should not stay dependent upon their employer’s health insurance policy only.

3. Term Life Insurance: Our lives are exposed to uncertainty. We must ensure that this uncertainty should not make our critical life goals – children’s education, children’s marriage, house etc – uncertain. LIC has a very good tagline ‘जिंदगी के साथ भी, जिंदगी के बाद भी’ but do get a reality check of insurance cover that an insurance agent is offering you. LIC and similar other policies offered by other service providers too. Most of such policies are mixed products, insurance + investments, which are not suitable to anybody at all except the insurance company and the agent selling it. Pure ‘Term Plan’ is the only policy to take. If in doubt, consult an ethical financial planning for the right advice.

A general thumb rule is:
Insurance Cover Required = (7-10 times X Annual Income) + (Loans, Liabilities, Responsibilities & Obligations balance)

If you wish to be doubly sure, get an Assets, Liabilities and Net Worth Analysis done by a competent financial advisor to know a more exact idea of the correct insurance cover required by you.

4. Hedge your portfolio against downturn: Diversify your investments to the right extent. Too much of diversification is as bad as too less.
Why diversify? Take an example – when equity markets perform well, gold value goes down and vice versa. Same way, real estate, interest cycles which impact FD and PF returns, Silver, Oil, grains, international equity – they all have their own cycles, correlations and ups-and-downs. Nobody knows in advance exactly what will perform when. When you are adequately diversified, you shield yourself from poor performance of a few investment avenues while taking advantage of some avenues which perform during that time.

5. Take risks for your long-term requirements: Blind investments with no goals/objectives will always fluctuate your blood pressure along with market fluctuations. Mental peace is the first casualty in such investments. Bifurcate your short term and long term goals and invest accordingly. While one should play safe with short term goals, calculated risk for long term goals is the need of the hour lest the termite named ‘inflation’ eat up your corpus surreptitiously and you not able to achieve your life goals.

6. Review your portfolio: Just like an annual health check-up, and car/AC service, your investment portfolio also needs a regular check-up. If you have not reviewed your investment portfolio in the last one year, it’s the right time to do it. It will help you to get rid of the weeds from your portfolio.

7. Write your will: Will is somethings which gives you complete control over who receives your assets, and how much, after you’re gone. Will ensures that there is no dispute and relationships remains good within the family as earlier.

8. Don’t get tempted by bitcoin-type frenzies: Everyone is tempted with prospects of instant painless wealth, and tend to ignore the downsides and dark alleys of investing. There are two clear-cut golden rules to go by:
If it is too good to be true, it is certainly not true.
If you do not understand it at least 90%, stay away from it.
Follow the above two rules to the hilt, and you’re on the way to good wealth creation.

Hope that these Eight financial moves would help to make your money grow and help you live happily ever after..!!

(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

12 Mar 2022

Do good to your parents – Help them Manage their Money

You are learning to ride a bicycle. You lose your balance and fall down. Your father sees this, comes, dusts you up, gives you a pat and guides you to try again and not lose hope.

There comes a stage in life when the parents become children and we need to help them out like parents with things that may actually be routine to us. It could be physically helping them with their daily routine, taking them to doctor, taking them along for vacations, or even helping them with the new age financial products which can make their life better and smoother.

There are many parents who are still invested into traditional savings and investment avenues like insurance policies, FDs, or Post office schemes, little realising how they can erode the net value of their investments. In most of the cases, it is an ‘inheritance’ from their own parents which withstood the test of time in their era and has now eventually become a part of their DNA. Not being very financially savvy, they do not realise that a bank FD giving them 6% (with Senior Citizen additional rate) is also actually giving them -2.0% returns counting tax and inflation! So, they’re continuously losing the actual purchasing power of their money.

One plausible reason for continuing to invest in unproductive assets and financial products could be that they had burnt their fingers in the past while investing in some investment avenues involving some risk, which has created a ‘safety only’ phobia among them now.

Our parents are too proud to take financial help from us and hence, will suffer silently when their quality of life suffers if their pension – in whatever form it comes – is not able to meet their requirements.

Actually, herein comes our role as a responsible child now. We are tech friendly and can help them overcome those handicaps and biases. But please remember not to lose patience while guiding them learn the new things like using fintech apps, exploring new investment avenues and many more such things. Helping them could involve the below:

1) Adequate Health insurance: It is a must have if your parents do not have an employer-provided health cover, like the ECHS. Some parents consider health insurance premium as waste of money because they consider themselves to be in good health. However, fortunately, COVID 19 has changed the mind set of most of the people thinking earlier on the same lines. Inadequate health insurance could be an invitation to heavy expenditure at a later stage and any inability of doing so could be a risk of life too.

2) Adequate Life Insurance: In case your parents have responsibilities to look after and liabilities to service like Children’s education and marriages, post retirement expenses, loan obligations etc, life insurance is a must have.

3) Diversifying across various investment products as per one’s goals: Parents should not take the risk of investing all the moneys in one or two asset classes. It should be well diversified across multiple investment avenues so that all eggs are not kept in the same basket. Inflation is high and old traditional products are unable to compete with it, which eventually eats the value of their money. Taxation is an additional burden there. Bank FDs are also not secure beyond the limit of Rs 5 lacs. Taking a calculated risk with some part of the portfolio in market related products is the need of the hour. It can provide them inflation-beating and tax efficient returns.

4) Life Insurance is not an investment product: Almost all the Insurance policies sold by agents are investment-cum-insurance products which don’t serve the purpose of either of them. Neither will they earn good returns nor will they get any worthwhile life cover.

5) Keeping the nominees updated in all investments: It will help in easy transition of their hard-earned money in case of any mishappening you. Easy to make, it has far-reaching consequences.

6) Preparing a WILL: LIC is sitting on unclaimed funds to the tune of ₹ 21,539 crore. And same is true of other financial institutions too. A proper WILL help will again help in dispute free transfer of assets to their loved ones.

7) Professional advice: Just like one approaches a doctor for health related problems, a professional financial planner too acts as a financial doctor for personal finances. A good personal financial planner is what most of the aged people need.

8) Reverse Mortgage: Reverse mortgage is a custom-made arrangement designed to fulfil the funding needs of senior citizens. Home owners above 60 yrs of age can utilise the value of their residential property to avail funds via this loan facility. There are some easy terms and conditions to this, but for those who are likely to fall short of money in their later years, harnessing the value of their self-owned property is a good alternative.

Convince yourself that you can convince your parents and thus assist them in taking right financial decisions for a great retired life.

We hope the above article has been useful to start a thought process in your mind to help your parents live an enriching and money-tension-free life.

(Contributed by Sumit, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

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