Volume 2, Issue 3 July 2013

Chasing Returns: Is it the right way to invest?

Many a times we come across people who want products that give the best returns. Is it the right way to choose your investment options? What can be the pitfalls that come along with such a strategy? Best return is a relative term. How do you define best? There would be parameters in place to benchmark the performance of the product in its own universe. But what about benchmarking it to suitability in your own life situation? Without this you will end up with a basketful of products which might not be amenable to wealth creation. Sometime back Gold was performing extremely well and equity has not been the best. So do you put all your money into Gold? What happens when the cycle turns? At that time if you decide to move to equity, you will probably exit gold at a loss and enter equity at higher valuations. So you end up with the worst of both. Another factor that is sometimes overlooked is the risk associated with chasing the best returns product. Each product has a risk-reward equation. Is that suitable to your temperaInside this issue:
Financial Plan Let a million advisors bloom Detoxify your Investment Portfolio Detoxify your Investment Portfolio- continued Money Matters in Life About Us.. 2 3 4 5 6

Financial Life Planning

ARK FINANCIAL PLANNERSNEWSLETTER

ment? You might enter a bond fund seeing that it has been giving good returns over the recent past. But what does the portfolio hold. If it holds higher proportion of long dated government securities, it is going to be extremely sensitive to interest rate fluctuations. That will cause huge volatility. Hence it is a debt fund, but still has substantial risk. The current top performer might not be so tomorrow. Choosing the current top performers might have you buying flavour of the season products. In equity people pour in money when the markets are at high levels. But the actual profits are made much earlier when the markets were down. People who invested at lower levels will reap rich returns for their foresight. People who follow returns will end up entering at the wrong time and exiting at a loss in search of the next performer. Statistics can be conveniently used to create a picture that the seller wishes you to see. Showing data for

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Every financial plan is a custom made creation for client taking into consideration his life aspirations, current financial position and last but not the least his money beliefs.
Hemant Beniwal, CFPCM

Let a million advisors bloom

India is a land of savers. We have all been inculcated the virtues of thrift and not living beyond our means. We put aside money to take care of our every requirement in future, however modest our incomes may be. We save. However, most of us dont want to spend time knowing about the products in which we invest in; or in the alternatives available. Why not then ask someone who knows? That has been the classic problem. There is no one to turn to. Most people offering advice are product sellers, which makes them an involved party. Hence, we can never be sure that the advice tendered is right or not. A problem can be addressed well only after understanding the complete situation of a person, which only a qualified advisor can do.

Where are the advisors?

The problem today is that, there are far too few advisors to go around. If we look at advisors for investment purposes, the number may be somewhat decent. But even among them, those who only offer advice, is far and few between. Most of them are offering advice and side by side, selling products too; nothing wrong with that. To remove any bias, it would be far better for the client to get advice alone from the advisor and invest through a different distributor. Now, finding this kind of advisor is going to be a challenge, as most offer advice and sell too. Then, there are Financial Planners. They go through the goals and finances of a person and come out with a blueprint of what needs to be done to secure their future. Financial Planners who are into full-time practice, are even more difficult to find. All across the country, there are an estimated 200 of them who are practicing. Even within this group, many are mainly distributors and also do financial planning. Plus, there is another problem. Anyone today can call themselves a Financial Planner and several insurance agents are calling themselves precisely that. Some are calling themselves Professional Financial Planners, without any specific qualification in this area ! The general public is none the wiser about this. We desperately need more advisors, for a country as massive and diverse as ours. Our people should also change their mindsets and be ready to pay for unbiased advice, from the right kind of advisors. This is a bit of a chicken and egg situation, right now. Educating the general public is important, at the moment. Advisories are the future. Those who realize that are entering the profession now. We need more of them, many more. Let a million advisors bloom!
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Sellers as advisors?
Since the product sellers have been the ones offering advice, they dont charge for it. Their advice is tailored to making the client buy their product. So, the understanding among the public is that, financial advice comes free. No one wants to pay. But, they are actually paying through their noses in terms of wrong, high-cost, illiquid products. Also, they wont know if they would meet their goals. Sometimes, the product could be right but there could be even better, more suitable products. But the seller wont suggest it as he does not deal in that.

Dont fall for free advice.

Firstly, people need to realize that they have a problem, if they have to start addressing it. These days there are so many articles being written on personal finance and so many query coland TV We desperately need umns shows, that the more advisors, for a awareness is building up. But asking a country as massive query in a magazine or on TV and getand diverse as ours. ting an answer, is a sub-optimal way of solving a problem.
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Detoxify your Investment Portfolio

In the process of detoxification of body the blood gets cleaned and toxins are processed for elimination. Similarly, detoxification of investment portfolio can be defined as a process of identifying and eliminating unsuitable elements in the portfolio, which may damage your overall returns, thus affecting the achievement goals. After all, good health is always a necessity be it physical or financial. easily veered towards decisions made by our various peer groups. These behavioural biases lead us to a bad unsuitable investment portfolio, which if not acted upon and detoxified soon may lead to big trouble in personal finances in the long run.

Some steps to detoxify your investment portfolio

1. Investment Objectives: This is the first and foremost step which helps you to understand the reason behind your investments. I have met many people who after investing in a particular

Why the need to detoxify your investment portfolio?

We are emotional: We are always ready to help people near us like our friends, relatives, bankers in achieving

If while purchasing a product you have clear vision in mind you will

their job targets, by purchasing invest-

instrument either under obligation or ignorance gives reason to that Chalobaccho ki shaadi mein kaam aa jaenge (It will be useful for children's marriage) and in this manner, keep on accumulating many unwanted investment products in the portfolio. If while purchasing a product you have clear vision in mind you will be able to select the right vehicle, right product for a defined goal. Check if all your investments match with your goals. If there is no match then it means you are continuing with them to justify your decisions which actually were bad ones.

ment products preby them,

be able to select the right sented a defined goal.

cial lives.

vehicle, right product for without understanding the impact of these in our finan-

We are greedy: Tell us where we can make loads of easy money, we are always ready to buy that product. We are irrational: We have various behavioural biases. We value reward more than risk. We tend to take decisions on the basis of recent events/experiences. We are
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Cont. Page 4 Detoxify

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Cont. Page 3 Detoxify your Investment Portfolio

2. Asset Allocation: After setting your objectives you know what amount you require and when. Now is the time to understand the asset classes, their risk-return parameters and selecting amongst them for your goals. There are commonly four asset classes in India which you can invest in- Equity, Debt, Gold and Real estate. Equity and Real estate are the most risky but have the potential to deliver good returns in long term. Gold and debt are comparatively the safer asset classes. The time frame of your investments, your risk taking ability and your current financial ability will help you select a suitable mix of asset class. Your investments should be balanced between these assets keeping in mind the risks, returns and objectives. Now for detoxification purpose, find out the exact asset allocation of your current portfolio. Look at your equity exposure through ULIPs, equity mutual funds etc. , debt deeper into such portfolio one finds that all the funds are almost same. A very common example of this is a portfolio having investment in both HDFC Top 200 Fund and HDFC Equity Fund. Both the funds are almost the same, in investment style and objective and even in have the same fund manager. Besides equity, diversification plays important role in debt too. It is not wise to keep all your investments in the fixed interest bearing instruments. You should also have exposure to tradable NCDs, open ended debt mutual funds which trade in the debt securities and are very advantageous in the falling interest rate scenario. 4. Move out of your insurance linked investment plans Investments portfolio should consist of only investment instruments. There is no scope of bringing insurance

exposure through FDs, FMPs, NSCs, PPF, EPF etc. , gold through jewellery, ETFs and real estate through physical holding and PMS vehicle. Then see whether it is tilted towards any particular risky or safe category. The allocations should be suited your objective, not only to your emotional satisfaction. 3. Diversify your investments: Once you have decided the asset classes, it is the time to select an investment vehicle. While selecting the same you should understand the value of diversification. To diversify, in its true sense means bringing in variety. Invest in different sectors and industries which dont relate to each other. Distribute investments among different companies or securities in order to limit losses in the event of a fall in a particular market or industry. Many people invest in large number of equity mutual funds without understanding the investment objective and style of fund and think of it as diversification. But going a bit
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into it. Insurance, even though very important, is an expense. From financial planning point every individual should get adequate risk coverage. But once adequately insured no other expense related to it directly or indirectly should be borne by you. Insurance linked investment products are very bad for your investment portfolio as these are expensive products. If you feel you have bought any such products, ask you financial planner to assist you to understand the suitability of these in your portfolio. Understand the value of money and its opportunity cost and surrender all the not required plans to cleanse your portfolio completely. The above steps can also be followed by the first timers to design the suitable investment portfolio. Repeat this exercise once every year to ensure that your investment portfolio is well positioned to meet your long term investments objectives.

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Money Matters in Life

Its Rahuls 10th birthday and he is all excited about gifts he is going to get, specially the Blackberry Curve his father has promised followed by a lavish dinner at a five star hotel!! Prasad wants to go abroad for higher studies but his family cannot bear the expenses. Prasad has always compromised his wishes about new cloths, books due to scarcity at home. His wish is to earn lots of money when he grows up. How will Rahul treat his money when he grows up? How Prasad considers importance of money in his life? What will be spending nature of each of them? These and many such outcomes are defined by our interactions with money throughout our life. In our subconscious, a money mind relationship begins. Some people find it extremely difficult to hold on to big money. They feel guilty about their wealth. Where as there are others who never feel content with how much ever wealth they accumulate. There are people who can not stop lending money to same friends inspite bitter experiences in the past. We find these behaviors irrational and illogical as the logic, the facts go totally against. The science of investing is treated as a logical process. It is believed that investing is about good research and analysis of underlying assets. We as planners are expected to provide client with best asset allocation strategies by understanding the mathematical side of investing. However, our experience during financial plan reviews shows that most of the time while taking financial decisions, clients emotion wins this ever-going arm wrestle between emotion and logic. So, from where do these emotions arise? How is the money-mind relationship formed?

Society: Man is a social animal. The acceptance in society, the recognition or the status one gets in society are crucial to all of us. These factors define how a wealthy man is treated in society versus a not so rich one.

Formation of The money-mind relationship : Money Beliefs

These stimuli give rise to our beliefs about money. The way we think about money, the way we like to hold it, pass it on to others. The level of comfort with taking risk with money, letting others know how much money you hold, talking about money with you family all these actions are strongly governed by beliefs. The beliefs we hold about life, ourselves and people is whats responsible for who we are, how we behave and who we will become. Positive beliefs about money can help one trust ones abilities, achieve dreams and reach the success one ever wanted to achieve.

Financial Life Planning

Every financial plan is a custom made creation for client taking into consideration his life aspirations, current financial position and last but not the least his money beliefs. Financial coaches have to facilitate the self introspection by client about his own money beliefs. They have to provide him with various tools and techniques so as to help him perform an analysis about his past money experiences, his spending and saving habits. This will lead him to self realization of areas of improvement and he will get a fresh perspective about money-mind relationship. Financial life planners should endeavour to nurture a positive and healthy relationship towards money in the minds of their clients. They have to play the role of a financial coach, philosopher and a good friend to accomplish this. As we all agree, MONEY MATTERS IN LIFE.
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The Stimuli
Stimuli are events in the environment that influence behavior. When we try to analyse the stimuli which have their strong influence on money-mind relationships, we come across three important factors. Family values: We all have families and we all have values. These values are passed from one generation to next by experiences, interactions and reactions to various situations. The way our parents have handled money situations can define our beliefs as well. Religion: Religion teaches us great values of life. Views about materialistic happiness versus spiritual happiness are fundamental to these learnings. The firm belief that our fortune and after death experiences will have impact of our deeds towards fellow humans defines how we treat accumulation and distribution of wealth.
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Cont Page 1 Chasing Returns...

only good years can present a rosy picture when the actual situation might not be really good. Huge volatility in a fund performance present a good average return, but the volatility might not be palatable to all. Will you have the time, understanding and the inclination to look at the details of the statistics being presented to you? Chasing of returns will bring to your table all sorts of financial products which might be currently offering fantastic returns. This can even be ponzi schemes that promise fabulous returns in short times frames. What looks too good to be true might actually be so. You might lose your principal if you fall for the performance of such schemes/companies. Moving between products/schemes in search of the best returns comes with transactional costs. There might be a cost attached in form of exit load if you exit one mutual fund scheme before a certain time period. Even for other products there are generally in-built costs for exit before a pre-defined time interval. There might be tax implications for entering and exiting schemes at different times. You might end up paying short-term capital gains tax, or end up in a product which has a higher dividend distribution tax which is not suitable to your personal tax slab. To avoid all the problems associated with chasing returns, it is better to have a goal based investment plan in place. You can use various products like mutual

funds-including debt and equity, other fixed income products like bank and company fixed deposits, PPF, postal products etc. Again, goal based investing might not be the best solution but the benefits are many: 1. You will be more disciplined in your investing as the investment will lead to fulfilment of a particular goal. Your focus will move from returns to achieving your goals, which definitely has more importance. 2. You will be regular in your investments as you would be aware that missed instalments can lead to a smaller kitty at the end of it. 3. You will be able to restrain impulsive purchases or spend on frivolous things, as the funds will already be allocated for goals, which you would not want to compromise. 4. There will be lesser chances of you being mis-sold a product or you mis-buying a product because of the greed factor of chasing returns will be eliminated. 5. You will have peace of mind. So the conclusion is that, chasing returns is not a very good idea. Yes, look for products that offer good returns, but do not make that the primary criteria to choose between your investment options. There are many other factors that need to be looked into before creating an investment portfolio.

Hemant Beniwal, CFP Professional

E-mail: hemant@tflguide.com Phone: 0141-4007474/2609818 Web: www.arkfp.in Blog: www.tflguide.com

What should you expect from Financial Planning?

On its most fundamental level, Planning acts to eliminate your financial fear: what would happen if you become unemployed, become disabled, or passed away? Planning can't prevent those things from happening, but it can, within certain tolerances, prevent them from turning into financial disasters. On the upside, I think planning gives you the best possible chance to grow and protect your earnings and assets so that you can live, as nearly as possible, financially worry-free. And so that you can do the things you want for the people you care about & achieving your goals. Financial Planning takes into account the inter-related nature of the goals that one has & helps in deploying the finances so that the high priority goals are given precedence & are met. It takes away the uncertainty out of life and brings in peace of mind.

CERTIFIED FINANCIAL PLANNER and CFP are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning Standards Board India is the marks licensing auCM thority for the CFP marks in India, through agreement with FPSB.
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This newsletter is published by The Financial Planners Guild, India & distributed by its members. Newsletter is designed to provide general useful information on Financial Planning & Personal Finance. It is not intended as specific investment, financial, legal, or tax advice for any individual. While the information contained herein was obtained from reliable sources, it cannot be guaranteed as to completeness or accuracy. Before acting on any of the information provided, consult the planner. FPGI

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