Asset Control

Vittal and Rana were close buddies. As they were enjoying the sea breeze on a beach, the topic veered towards investments. This was an area where they had never agreed.

Vittal was contemplative, with a patient demeanour; that showed in his investments too. He weighs everything he does and carefully considers the pros and cons. He had put together his invest­ments meticulously over the years; but over time, had found managing his portfolio difficult with the explosion of options available and the complex­ity that had permeated the personal finance area. That was when he engaged a financial adviser. He claims to be more at peace now and relieved that a profes­sional is handling his finances.

Rana has been the mercurial kind. He is quick to get excited and invests money based on what he has heard, seen on TV, or read about finances. He also follows the asset cycles and redirects investments to those that are firing up at a certain point. For instance, he had moved a fair portion of his portfolio to crypto assets about two years back. He now was contemplating investing in the property sector, which he feels holds a lot of potential.

“I am going to look at a property coming up in Kandivli. This is a marquee property from a reputed builder. At launch, he is giving a great deal to inves­tors. Would you like to come tomorrow? It could be a great investment opportu­nity,” asked Rana.

“But you are already fully invested. Where will you get the money for the downpayment?” asked Vittal.

“They are just asking for 5 per cent on booking. They have a scheme where the payments will start after 24 months only. By that time, if the property appreciates, we can even exit,” said Rana.

Vittal just pursed his lips but did not say anything. Rana saw him and knew what he was thinking.

“You are always a sceptic, Vittal. You need to take calculated risks if you want to make money. You are far too conserva­tive,” Rana piped.

“Don’t you think you are investing somewhat randomly and making the portfolio bloated and unmanageable?” queried Vittal.

“This is the problem with you. You are always thinking and never taking any action. How will you ever make money?” retorted Rana.

“Is the purpose of your investment only to make money?” Vittal queried. Rana was amazed by the question and gave him a look that held a mixture of incredulity and annoyance.

Many people are like Rana. For them, investment returns are every­thing. They want to be invested in assets that are performing well at that point. They want to ride the crest all the time. But that is impossible as that assumes that one can correctly predict the bot­tom and top of the asset cycles. It is the alchemy that everyone is chasing.

Getting market timing right is very difficult. Let me give an example. Equity markets in India crashed to some of their lowest levels at the end of March 2020. The Wuhan virus struck and Covid-19 lockdowns were imposed. It looked like the market would crash further from there. No one predicted that it would rise the way it did.

As they say, if someone says they can predict the markets, they are either God or a fraud. And we seldom find God on earth.

Hence, focusing on timing the mar­kets or trying to ride the crest of any asset wave is like chasing a mirage.

Financial success is not about choos­ing the right product to invest in. That should be an outcome of careful consideration of what we intend to achieve.

For that, we need to start with a plan. We do that in every other area—birth­days, outings, home decoration, mar­riage, etc, but ignore it when it comes to our finances. This is very ironic consider­ing that we spend the prime of our lives, almost 40 years, earning that money.

Financial planning is very important. We need a blueprint before we start any important project. Most normal investors will find it difficult to come up with a holistic financial plan as they do not have the knowl­edge, skills, inclination, and time. That is why they need to seek professional help.

Financial advisers need to under­stand their clients’ needs and goals, their life situations and aspirations, their finances, etc. They would then assess the feasibility of achieving all their life goals and also create alternate scenarios to help their clients understand their options and make their decisions.

Achieving the agreed goals is sacro­sanct for an adviser. Hence, they focus on putting together a portfolio that achieves this. Within this larger objective, the advisor would optimise and choose the right products that would offer good, consistent returns.

Sorting out the financial aspects, be it insurance, loans, optimising invest­ments, and making them manageable is a vital function of the financial advisor. To arrive at the ideal portfolio to achieve their client’s goals, the financial adviser needs to consider the risk profile of the family members, the number of years to retirement, when the goals are coming up, liquidity, tenure, taxation, income needs, etc.

Financial advisers play the role of financial architects who craft a custom-built structure especially suited to their clients after understanding their position completely. In the process, products are like bricks, cement, and door/window panels that can be sourced from various vendors to give shape to the edifice.

Financial advisers themselves need not manage the underlying investment, such as equity. They can instead invest in a suitable managed product (like an equity MF scheme/PMS, etc) that is helmed by a competent fund manager. This is true of most investment assets.

Investment recom­mendations come at the end of the financial plan as an outcome of the planning exercise. Finally, the portfolio and the plan have to be reviewed at regular intervals to course-correct and make appropriate changes.

It is very important to get the asset allocation right as research has shown that 90 per cent of the portfolio returns can be attributed to the right asset alloca­tion choices and only 10 per cent can be attributed to product selection. This instantly rubbishes the extreme focus on choosing the products that purportedly give the best returns.

Products should be chosen so that there is good diversification and it helps lower overall risk in the portfolio. For in­stance, gold as an asset class is negatively correlated with equity and the dollar and can balance the risk in a portfolio. Gold and other such products should be consid­ered on merits based on the portfolio size and the risk mitigation needs.

There are various other assets like crypto assets, alternative asset classes and peer-to-peer lending products, apart from traditional products like PPF, small savings schemes, fixed deposits, bonds, NCDs, etc. An adviser must carefully ex­amine their client’s situation and choose the right product mix for their client.

Financial advisory is a specialised area. Managing finances is not just a matter of identifying the product and investing in it. It is not even about flip­ping from one to another based on what is doing well at a certain point, which is what Rana seems to think. It is an area that needs knowledge, skills, experience, and maturity—the reason why Vittal chose a financial adviser for himself even though he is a well-informed, patient, meticulous person.

A financial adviser brings expertise and a non-emotional perspective to the decisions, which would be invaluable for the client. Consider the adviser as a coach; even Sachin Tendulkar and Roger Federer had coaches at all points to ensure great, consistent performances. We need to learn from these greats and recognise the need for one.

We cannot wing it with our finances today; we are far too busy with our ca­reers and lives, and finances have become far too complex to do it by ourselves.

Asset Controlfinancial secretshigh returnsinvestmentWealth Issue 2023