What has the financial crisis of 2008 taught investors?
The previous year has been a learning experience for everyone. During this time, investors realised that there is value in a proper advisory approach and that a systematic financial plan works; one should know one’s goals and work towards them. Investors tend to invest with the thought of moving out when the markets peak and moving in when they are low, but it is very difficult to time the market.
In the past three years, any equity fund would have given an average return of 50-60%. During this time, most Indian investors were skewed towards equities more than their risk profiles would have allowed. Then came 2008, which saw panic building up and we witnessed signs of consolidation. Had investors rebalanced their portfolios when the markets were going up, that is, booked profits and invested in a protection bucket to maintain their asset allocation, they could have cushioned their portfolios from the market fall. Having said this, the fall made investors take stock of where they were and what they were doing. It has given them an opportunity to review and reconstruct their portfolios all over again.
What, according to you, is the process of wealth management?
Start by understanding your objectives and defining your goals. Then redefine these goals in terms of milestones, that is, when you want to fulfil a particular goal—it could be your child’s education 10 years down the line or marriage 15 years later—and calculate your cash flow during this period. You then come to the stage of assessing your risk profile and can arrive at an asset allocation accordingly.
What we follow is a ‘PGA’ model, where, irrespective of your risk profile, you can put your money only in three buckets. Protection, which provides high liquidity and preservation of capital; at no point will there be any capital erosion in this. Growth, which provides high risk and high return; there will be periods where you could have capital erosion, but over a sustained long term, there will be growth. Aspiration, which provides high risk and high growth. These involve derivative products like structured products, private equity, etc. Each bucket has various products and once you have defined and understood your risk profile, you can decide how much money should go into each.
Between 2002 and 2009, various asset allocations performed differently across geographies. If it was bonds in 2008-9, it was commodities in 2002 and the Nasdaq in 2003. This makes it imperative to look at various asset options. In fact, we have six asset classes, which we monitor and recommend to investors. These are based on six risk profiles ranging from very conservative to very aggressive. These are debt, cash, Indian equities, emerging markets, commodities and alternate investments as part of aspirational assets. Each of these fits into various risk profiles and asset allocation strategies.
How often would you suggest reviewing and rebalancing a portfolio?
Reviewing and rebalancing your portfolio should be a constant and continuous process, especially due to the volatile times we live in. In fact, a portfolio should be reviewed every quarter to assess the asset allocation and should be tweaked accordingly.
If you have invested according to your risk profile, you should understand the expected risk and return. If your investment philosophy is right, you will improve the return slightly. But if you are doing way better in terms of return, chances are you have invested in instruments that are high on the risk spectrum. A qualitative analysis is required on why certain instruments have given the extra kicker and whether it is time to exit these.
The market seems to be in a correction mode. In this situation, what is your advice to investors?
In the past year, we have witnessed a classic V-shaped movement in the market. In the first six months, the markets fell by about 40%, and in the next six months, they were up by 100%. In the past two quarters, we have advised measured aggression to our clients by being overweight in Indian equities and gold. In fact, we still recommend an allocation to gold as there is an upside that remains. However, now is the time to be conservative in equities since valuations look stretched at 18-19 times the forward earnings and we could see some consolidation. It may be wise to skim any gains one has made and put them in protection assets; keep your principal invested. One should look at re-entering the market when earnings multiple are trading at 15-16 times the PE.
Clearly, there is a lot left in the economy. We are largely a consumption-led economy with little reliance on exports and boast one of the highest savings rates in the world, over 30%. These are some of the reasons our economy was stable during the crisis. Company results are also looking healthy, so they will be able to sustain the growth story.
What are the risks that one should be aware of while investing?
There are four types of risks that one should look at. Market risk, which is related to market movements; credit risk, which is due to the credit quality of the underlying paper; liquidity risk, or the ease with which the asset can be liquidated; and knowledge risk, which is the risk of investing in an instrument that you don’t understand.
What is your view on interest rates?
The regulator has given indications that there will be a hardening of interest rate sooner or later, which will have an impact on investments. In fact, for debt investments, we are recommending investments in the short end of the yield curve. One cannot take a call on longterm interest rates.
How important is estate planning and how does insurance fit into one’s asset allocation?
Estate planning is nothing but the process of protecting and preserving what you have and leaving behind something for your family in a way that there are no succession issues and there is clarity in legal holding. It doesn’t matter how big or small your wealth or estate is, you must carry out estate planning as it makes things more transparent and ensures a smooth transition when the person is not there.
People don’t perceive insurance as an asset class, but it is an efficient protection mechanism and a beneficial tool when you look at retirement planning. Data suggests that Indians are highly underinsured and many people don’t even have a cover to protect themselves when they have leveraged themselves on housing loans. Typically, people don’t even share their policy details with their families, but it is very important to let the family members know how you have planned for their future. There is a policy for every need and profile: one could take a pure insurance plan or an investmentlinked one as long as the purpose is understood.
How do you make your investments?
I follow a disciplined asset allocation approach and make my investments based on it. I review my insurance on a regular basis and strongly believe in systematic investment plans (SIPs); even a small amount grows into a large corpus over a period of time. There is science behind this entire process.
What is it that you like to spend on?
My biggest splurge is usually on family holidays. Typically, I like to take one domestic and one international holiday with my children every year.
Do you have favourite books or market gurus that/who you look up to?
The book, Execution: The Discipline of Getting Things Done, has been my all-time favourite. I also like War by Robert Green and the one I am currently reading is called The Snowball: Warren Buffett and the Business of Life.
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