Event-based investing – Is it the right way to go?

Last week was Akshaya Tritiya -- an auspicious day for Hindus and Jains. Over time the significance of the day has got lost in the cacophony of gold marketing companies. Newspapers, magazines and television channels are full of advertisements mentioning the importance of buying gold on this day. 

Throughout the year, days like Akshaya Tritiya are hyped in the media to lure the unsuspecting investor. Another such day is Dhanteras (just before Diwali). Not that there is anything wrong in investing on these days. But investing has to be methodical, and not driven by festivals and marketing strategies. They should be the exception and not the rule.

Most investors invest erratically – such as on their children’s birthdays and during ‘JFM’ (January, February, March) to ensure some income tax deduction. The idea behind such haphazard investments maybe good. But then such investments start and end on that very day. There are no further investments till another auspicious day, or a birthday or the JFM period arrives.

There are several pitfalls of engaging in event-based investing are:

Firstly, what this results in is an ad hoc, unfocussed investing pattern which really does not get you anywhere. The amount of investment purely depends on availability of funds on that particular day. There is no fixed amount being invested. Such haphazard investment will not lead you to your goal.

Secondly, though there could be a goal mapped to a particular investment, generally such investments are not backed by any mathematical calculation. Investors don’t address questions  such as – how much do I need at the end of the term?; have I accounted for inflation while computing the goal?  It’s a simple exercise of stashing away funds.

Thirdly, in cases where the saving is forced (such as in tax-saving investments), there is obviously no goal. In most cases, there is focus on the product too. It’s a simple rush-job to meet the deadline. Most people are not even aware where they have dumped the money, let alone looking at returns.

Fourthly, there is quite obviously no analysis or research done on whether the product is suitable for you or not. Such investors neither do a risk analysis nor have look at their asset allocation. Their decisions are based on hearsay and tradition. This generally leads to a situation where they put all the eggs in one basket.

Fifthly, because of the demand pressure, the price (typically of gold) tends to move up. With a ‘single-day’ lump sum investment being made on these days, you tend to buy at the highest point with no chance of getting the benefit of ‘rupee cost averaging’. In the long run (of say 15-20 years), this generally does not give you the best possible returns.

 

People who engage in ‘event-based’ investing believe that they are ‘planning’. But in reality, they are only planning to fail. With little or no mind put to various critical issues, the end result can only be a disaster. So I would suggest that put away additional amounts on such events, but plan your investments across the year through proper financial planning. Achieve your goals in a planned and focussed manner, leading your family to financial wellness.

Financial Planning mantra #1

Always have your goals and objectives in place before making any investment.

Whether you are making the investment for tax-saving or from the point of capital growth, clarity on the objective is a must.

Most people purchase products without a real thought of the goal or objective. Simply put, I have invested in Y product because I want o make money. No time horizons are defined, no clear goal set. The result, either you sell it off too early or you invest in a long-term debt based product (where the optimistic returns are in the region of 5-6% p.a.). In either case you either end up losing money or not making enough to cover even inflation.

If one has these objectives always in mind, then one is neither affected by greed nor fear, either of which always leads to wrong decisions. There is a clear focus on achieving the pre-defined goal through a chalked out plan.

Making an investment without any goals or objectives in place, will only lead to ad hoc buying of investment products and will lead you nowhere. There will be quantity but little or no quality. A very dangerous thing to realize too late in life.

The annual ritual of tax-saving

It is that time of the year when the most mundane exercise of all - tax saving under Section 80C of the Income-Tax Act – needs to be undertaken. Most employees loathe the last four months of every financial year - December to March – when all employees get the ‘last reminder’ from the accounts department to submit proof of having invested in tax-saving instruments under Section 80C. There is a last minute scramble to meet the deadline.

People often confuse tax-saving with financial planning (or rather, saving for a financially secure future). In reality, the two are quite unrelated. Tax-saving should fit into your overall, larger scheme of ensuring a financially secure future for yourself and your family. Therefore, investments in tax-saving instruments should never be undertaken haphazardly. These investments need to fit into your overall financial plan. In order to accomplish that, we need to pick tax-saving instruments with care. People rarely share the same perspective on tax-saving.

Common mistakes

Here are some common perceptions and mistakes of investors:

I. 80C Limit - Current policy = New policy: The most common ‘mistake’ is to take the prescribed limit (Rs 1 lakh currently), subtract current investments and put the balance into another insurance policy.
II. Buying the product closest at hand: If there is an insurance agent at hand, then the ‘flavor-of-the-season’ insurance plan is purchased. If the bank is close by, then all the money goes into Public Provident Fund. The least ‘hassle’ product gets the maximum attention.
III. No investment required: If, for example, the annual PF deduction is more than the limit of Rs 1 lakh, then in most cases, no fresh investment/saving is made.
IV. Buying without a thought: In the rush to get over with this ritual, most people just pick up anything with little or no thought and move on.
V. Last minute stampede: This is where most of the investors are trapped. Instead of making the investment during the year, most choose or are reduced to making the investment at the fag-end or (even) on the ‘last day’.

Avoiding the mistakes

Have you ever asked yourself - ‘Why do I work?’ The answer to this question is likely to be one of the following:
i. To be gainfully employed
ii. In order to be economically stable and to provide yourself and your family a financially secure future

What is the point of working so hard and putting in such long hours if at the end of the day you can’t have a financially secure future? It is crucial that one spends some time with a financial planner to decide the way ahead in terms of the investments. What one sows now in terms of the kind of investment will one reap in future.

A careful and studied analysis needs to be done before making any investment. It is not sufficient to just buy a product for the sake of fulfilling a requirement. Tax saving has to fulfill your overall goal of ensuring a financially secure future for you and your family.

Some crucial questions that must be answered before making the investment:
a. Have you looked at what you have purchased? (Most people I know cannot even remember the name of the insurance company or mutual fund whose product they have bought; and yet others have no idea about the kind of policy that they have purchased.)
b. Is this what you really need? Or is this just another blind investment in the myriad investments that you have accumulated over the years?
c. Is the compulsory saving (within the limit of Rs 1 lakh) enough to meet your financial goals? Have you spoken to an (unbiased) financial planner (as opposed to an agent who is selling you a product) to figure out what kind of returns you may get after 10 to 20 years? Take a look at the table below to get an idea about what your investments would be like 15 years from now if all the saving you made are those under Section 80C:
i. Time horizon - 15 years
ii. Inflation @5% p.a.
iii. Annual investment - Rs 1,00,000
Type of investor Expected return End-corpus
Conservative @ 6% p.a. Rs 16.04 lakh
Aggressive @ 10% p.a. Rs 21.19 lakh

Assuming that your objective was to utilize the investments you made each year for your retirement, is 21 lakh enough for you to meet your post-retirement expenses? Do a quick back-of-the-envelope calculation and figure out how many months the money will last?

This clearly brings to the fore the fact that saving just the Rs 1,00,000 per annum cannot make you financially secure. It simply saves you some tax. In the above example, we have not taken any other milestone/event – such as your own marriage, buying a house, education of your children, their marriage, family contingencies, etc. into account. Setting aside Rs 1 lakh a year certainly cannot help you achieve all these goals.

Tax-saving vs. financial planning
Most people believe that buying a tax-saving product is equivalent to financial planning. Products are purchased by the name like ‘XYZ Children’s Plan’ or ‘ABC Retirement Plan’. The investor buys the product and thinks that all will be well in future. But there is much more to planning for the future than just buying a product. Just as in financial planning proper asset allocation and the dynamic management of the portfolio in tune with the changing of goals and objectives is a necessity, so it is in the case of tax-saving investments. In most cases, tax-saving products are haphazardly purchased every year or the entire limit is exhausted by putting the money in a single product. This is not a good approach since these are supposed to result in long-term benefits. But since the whole exercise is without any planning it is most likely not to give the desired results. Hence it is of utmost importance that there is a well-planned and analyzed decision before investments are made.

Where a Financial Planner can make a difference

Financial planning is still a nascent concept in India. Today most financial products – such as insurance, mutual funds, fixed deposits etc – are being bought and sold without the slightest of care and concern about the future. The presence of an agent with a glossy presentation and flashy numbers is enough to convince any investor, with scant regard for what these investments would actually fetch him/her 10-15 years from now.

This is where a financial planner can and should step in. He/she is there to sell a lifestyle and not a single product. His/her knowledge and acumen is bound to make a huge difference in approaching the subject of financial security and in providing an appropriate solution. His or her interest lies in providing proper long-term financial planning, thereby making the investor look at the ‘big picture’ instead of having a narrow and short-term outlook. A thorough analysis should be done of the current holdings and objectives that are to be met by making these investments. And based on these considerations, the financial planner must recommend a product that is suitable for his/her client.

In short, investments should be towards achieving a certain objective, with a tax-break thrown in. The goal should be to maximize your post-tax income since there is a limit to saving tax.

Recession, slowdown or an opportunity?

The current slowdown offers a huge opportunity to investors who feel they missed the bus during the stock market boom. The slowdown is your opportunity to catch the lows and reap benefits when the markets turnaround.

2008 will be remembered as the year when the R-word became a reality in the developed world. In fact, the current recession is being compared to the Great Depression of 1929, though the world may still be refraining from using the word “depression”.

The developing world (or rather, India and China) has been impacted by the recession – but in a different way. In these economies, growth has slowed down. Therefore, it’s more appropriate to use the term slowdown, in the Indian context. Our economy is still growing!

We have entered 2009 with all sectors reeling under the slowdown (thanks primarily to the US and other developed nations). The developed world, on the other hand, continues to grapple with the consequences of excessive greed and lack of checks and balances, as also commonsense. It will be a while before we are able to pick ourselves and move on, hopefully learning from mistakes (or rather, blunders).

Well, so much for looking at it negatively. I choose to look at the slowdown in a more optimistic and pragmatic manner. Looking at it from a pure financial planning point of view, I see this as an OPPORTUNITY!

An opportunity to learn, an opportunity to explore other products, an opportunity to make investments at much lower levels (as compared to those that were made in 2006 and 2007).

For investments that have a horizon of 5 to 10 years or more, there couldn’t be a more opportune time than TODAY. For those who continue to think that they missed out on the bull-run or joined in late, this is one opportunity they should not miss. Just when you thought you had missed the bus, the bus comes back. It has stopped for you so that you can get on. And believe me, it will certainly take you to where you want to be – your personal financial goal – provided you show the right patience and are guided by the right financial planner.

A slowdown is an opportunity to learn. The first lesson is - don’t put all your eggs in one basket – an oft-spoken adage that is more preached than practiced. The slowdown teaches you how important it is to have a proper financial plan in place and work according to it, rather invest in a haphazard manner (based mostly on what others have to say). In short, common sense and understanding of the basics is more important that a glossy presentation and flashy returns!

Till 2007 the only product everyone noticed was equity and equity-related instruments. There was no ‘apparent’ need of a financial planner as no matter where you were invested, humongous returns of 30% plus were almost ‘certain’. There was so much that existed, but was swept under the carpet, thanks to the mind-boggling returns from equity. Since early 2008 a number of options have come to the fore - liquid funds, fixed maturity plans (FMPs), fixed deposits (FDs), arbitrage funds, Nifty-linked debentures, gilt funds, income funds etc.

Since September last, I have been advising slow and steady investments after doing a proper analysis of what you have, what you want and how you can achieve it. The how, when and why of each product has to be analyzed and investments have to be made in the right perspective.

I reiterate – there is no better time than today to start your financial planning with the ‘big picture’ in mind.

Recently, someone asked me: “How can you be optimistic when markets keep falling every day?” I have a simple logic for this. Globally the developed nations are in a recession with zero to negative GDP growth forecast for the next year or so. Indian businesses have also been hit by the slowdown and the high interest rates (thanks to the spurt in oil prices last year). Despite this, the GDP growth in India has been forecast at 6% in FY10. This is phenomenal compared to that of US and Europe.

In 2008-09, there was a huge outflow of money by FIIs and hedge funds to their parent companies, to prevent bankruptcies back home. Once that goal is achieved, they have to invest the monies of their clients / investors to give them reasonable returns. The only places where they will see some glimmer of hope is in developing markets, such as India and China. So money will flow back to India.

There are two other things I want to point out. One, the crisis is not over yet and two, you can never catch the bottom of the market. The latter is more a matter of luck, than skill. In short, take proper advice before you invest and if you have already started investing then ensure that this is the time to continue those investments. And if for any reason you have stopped investing, then don’t delay restarting those investments now. Don’t miss this OPPORTUNITY!

Inflation and its impact on our investments

Price rise or inflation is a ‘silent killer’ of our investments. The return you get must be higher than the inflation rate for your investments to serve their real purpose.

Inflation is a hot topic of discussion these days. Newspapers and TV channels are full of reports that talk about how inflation, or price rise, is affecting the lives of Indians. Every week, the inflation numbers are more eagerly awaited and discussed than the Friday’s film release.

So what is inflation? And how does in impact us in the long run?

We have all heard stories of their good old days from our parents and grandparents tell us about how you could get a litre of milk in twenty five naya paisa and eat a meal out for Rs 5; how movie tickets used to cost 50 paise and more recently how with one hundred rupees of petrol in your car you could drive to office and back for a week.

“Look how times have changed. Things are so costly now,” they tell us. In layman language, this is inflation. It is nothing new. And yes, it is reflected in the prices of all items we buy.

But let’s look at it from another angle – inflation suggests that the purchasing power of money has come down. In short, for example the Rs 100 that could get us to office and back has probably become Rs 1000 today. In order to get the same service or product we have to pay 10 times more now.

This is one truth that most of us don’t budget for while planning for our future.

Inflation is a ‘silent killer’ of the investments that we are making today. A client of mine had purchased an insurance plan wherein after paying Rs 12,000 p.a. for 10 years, he was ‘promised’ a return of Rs 1,50,000 after 10 years. Looks good on the face of it? But look at the return that you are getting after an investment of 10 years – 6-odd percent per annum, which is lower than the inflation rate. So in reality your money at that time will not even allow you to purchase what it can, today. A sheer loss and a waste of time and opportunity!

Let’s take two examples and look into the future:

Assumption – you are 30 years old today and inflation rate is 10% p.a.

- If your monthly household expenses are Rs 30,000 today: at age 45 you would need Rs 1,25,000 to meet these same expenses.

- Rs 10,00,000 today would be worth Rs 2,05,000 by the time you are 45.

Whenever we buy products like insurance or invest in mutual funds or PPF, etc. with the purpose of achieving a financial goal, we must always take into account the impact of inflation on our end-corpus. It is definitely not going to be worth what the numbers today indicate. It is imperative that the return on our investments beats inflation in the long-run. Only then will we be able to meet our future requirements.

So the next time your ‘advisor’ tells you that so-and-so policy will get you Rs 1 crore in 25 years, do ask him what that Rs 1 crore will be worth then.

Caveat Emptor

Investors, beware of advisors who ‘guarantee’ you high returns on insurance policies. Though the fancy returns may or may not happen on maturity, your advisor will certainly be a satisfied person.

Around three months back, I met a young lad at a call centre - he wanted to invest in mutual funds that would give him at least 40% returns per annum. For a brief moment, I was stunned. When I tried to explain to him that it’s impossible to guarantee such a return, he told me that he had just bought a product from an advisor (from a well-known private insurance firm) who had told him that if he invests Rs 30,000 p.a. he could redeem double the money (i.e. around Rs 2 lakh) after 3 years. He showed him some numbers to convince him and clinched the deal.

It’s not just the educated who get taken in by such advisors. Last week, I got a call from my father’s ex-driver who said that someone from a bank was with him, who was promising him Rs 1 lakh after 5 years, if he deposits Rs 10,000 per annum for 3 years. I was shocked that someone from a reputed bank (coincidentally, I bank with them) was actually trying to dupe poor people of their hard-earned money.

I wonder when all this will stop. Will advisors stoop to any level to earn a living? These advisors are trying to make a living by ‘mis-selling’ insurance products - by guaranteeing returns these policies just won’t fetch. And since there is ignorance at the buyers’ (and in most cases the seller’s, too) end, these agents are getting away with it (and with fat commissions to boot).

What happens at the time of maturity – which maybe anywhere between 10 to 25 years away? I am sure the agent would probably have retired, thanks to the commissions he made during his ‘selling’ days. The agency manager would have moved on. While the insurance company would exist, they’d probably tell you that you didn’t read the fine-print.

Our friendly neighborhood advisors are getting away with making false and unrealistic promises. Unfortunately, the “sab chalta hai” culture has trickled down to even the personal finance industry. But it’s your hard-earned money, after all. It’s only you who will pay the price for your ignorance and not anyone else.

Shouldn’t there be a minimum qualification in finance / financial products before one is allowed to advise on such products? And no, I am not talking about the IRDA certification. Because almost everyone (even your neighborhood aunty or your office receptionist is now selling insurance) who has tried his hand at ‘clearing’ this exam has managed to do so and is now an ‘advisor’.

To pay or not to pay – is that your question?

Fee-based financial planning service is still new to this country. Though there are firms and individuals who charge for their advice, the number is still very small. Investors often wonder, as to why they should pay a fee when they can get the same advice for ‘free’. Is that really so? Is that ‘free’ advice in your interest?

Let me explain this point through an incident. Some time back, a senior executive of a BPO firm had called me to discuss his financial plans. When I told him that I charge a fee for my services, his facial expression changed. “I’ll get back to you.” He curtly told me. I realized what that meant and why he had said that.

I decided to try and reason it out with him. I pointed out to the two insurance policies that he had taken a year back. Till we started the discussion, he did not even know the name of the policies he had bought nor what kind of policies those were - whether it was a term plan, an endowment policy or a ULIP.

During our discussion, he realized that one of the policies (a ULIP) was not going to be of any use to him in the long-run since he needed the money after 4 years. His ‘advisor’ had told him that he could pay for 3 years and redeem the policy in the 4^th year. What he did not tell him was that in the first 3 years almost 40-50% of his premium paid would be charged as fees (for his advisor) and that out of the Rs 3 lakh that he was going to invest over 3 years only Rs 1.50-1.80 lakh was going to be actually invested. (Don’t read me wrong, I am not against ULIPs. ULIPs, as investment products, are suitable over long horizon -- of over 10 years -- but absolutely unsuitable if your investment tenure is going to be short.)

To cut a long story short, he was actually paying a fee of Rs 1.50 lakh over a three year period. Since he was unaware that he actually shelled out that kind of a fee, he didn’t seem to mind it. And just because I asked him for a fee upfront, he was upset about it. (Incidentally, he would be paying me a similar fee for almost 10 years of unbiased advice, for a host of financial products, not just insurance).

Isn’t it better to know upfront the fee you are paying for getting unbiased advice, as compared to paying a huge fee and not having a clue about it? The ‘free’ advice feeling is actually just a misconception. The reality is far divorced from that. As we all know – ‘there are no free lunches’ in life.

Why hesitate in paying up for financial advice? After all, the financial planner is spending considerable time with you to understand your needs, your lifestyle and a host of other parameters in trying to help achieve your financial dreams. He/she is sharing his/her knowledge and expertise.

It’s better to know what you are paying for. If you don’t, you too may get mislead and will have to pay for it quite dearly (both in terms of cash outflow and a wrong product). And you won’t even realize it…till it’s all too late.

An introduction to financial planning

Here’s a lowdown on financial planning and how it can help you lead a life of your dreams.

Welcome to my first blog. Let me begin by introducing myself, my firm - Knowledge Partners - and our philosophy. I am an Associate Financial Planner and have also done my PGCBM from XLRI, Jamshedpur. In 2005, I moved to Gurgaon after spending 14 years in equity research, media and marketing at various firms in Bombay & Calcutta. Numbers always intrigued me. So did various financial instruments. But I also saw how people all around me were getting mislead by so-called ‘advisors’ and ‘agents’. While everyone wants a financially secure future, most people were either unaware or confused as to where and how to start. The result - decisions got indefinitely postponed; or wrong products were bought based on misinformation.

That’s what reinforced my decision to start my own financial advisory. And in 2006, Knowledge Partners took shape.

Financial Planning, as a concept, is still quite new to India. Traditionally, financial advice in Indian homes (invariably) comes from a family elder - who is, more often than not, heavily under influence of an insurance agent or a family friend.

Often, agents and advisors give you an improper advice so that they can make a quick buck. They often sell you a insurance policy or a mutual fund that gives them the highest commission or brokerage.

At Knowledge Partners, we believe in having a long-term relationship with all our clients and advise them to buy financial products they actually need. Our endeavor is to be a partner of our clients till the time they achieve their financial goals.

Have you planned your financial future?

You can get answers to this question by answering these simple questions:

· Have you started planning for your retirement?

· Have you wondering how to plan for retirement, children’s education and marriage in the face of rising inflation?

· Do numbers boggle you?

· Are your savings fetching you sufficient returns?

· Have you ever thought as to how many years you can maintain your current lifestyle if you were to take a sabbatical / retire?

· Is your money lying ‘idle’ in your savings/current bank account – would you not like to earn more than the meager 3.5%?

· Most of us limit our investments to tax saving instruments – or the amount that is to be covered under section 80C. But is that enough to meet all your future expenses? Will that create a sufficient corpus?

If these are some of the questions that are bogging you down, Knowledge Partners could be of help. We are a Gurgaon-based firm offering fee-based services in the area of financial planning having a clientèle in the Delhi-NCR region, primarily, and also in Bombay and Calcutta.

How do we go about it?

Our investment process begins with you. We perform a careful assessment of your individual needs and aspirations, and our evaluation is based on:

· Goals and objectives,

· Investment time horizon,

· Liquidity needs,

· Desired rate of return, and

· Tolerance for risk

The result is a complete understanding of your personal profile that will serve as the foundation for defining a long-term investment strategy tailored to your specific needs and preferences and not just catering to your ‘tax planning’ requirements u/s 80C.

Our philosophy is designed to achieve long-term investment goals, and is based on the following core principles:

1. Identify Your Unique Needs, Goals and Objectives

2. Build an Asset Allocation Roadmap

3. Formulate a Plan & Portfolio Selection

4. Continuous Portfolio Monitoring

We educate our clients so that with time they are more focused to achieve their goals and objectives with the help of their financial advisor, rather than by relying blindly on the latter.

Our fee-based approach is designed to eliminate conflicts of interest and results in unbiased and honest advice.

Money isn’t everything, but having control and confidence about how you are managing it can allow you to concentrate on other things like your family, your career, and your future. We believe that all your dreams are achievable and we look to partnering you so that you can live your dreams!