Being Market Smart

INDIA IS TODAY ON THE cusp of great change. The country’s ascent and economic position on the global stage is visible everywhere—be it our economic resilience in the aftermath of the pandemic, the leadership positions that Indians hold in global conglomerates, or the large number of homebred unicorns that India is churning out. However, a factor that holds disproportionate appeal is the number of Indians joining the ranks of both the global and the domestic wealthy.

As per the IIFL Wealth Hurun India Rich List 2022, India today has 1,103 individuals with a net worth of ₹1,000 crore or above. This indicates a 62 per cent increase over the last five years. Further, for the first time since the launch of the list, the cumulative wealth of the individuals on it has surpassed the ₹100 lakh crore mark—more than the combined GDPs of Singapore, the UAE and Saudi Arabia. The high intensity of economic activity coupled with an enabling policy and regulatory environment that encourages innovation has not only increased the wealth in hand but also given birth to a new tribe of wealthy. Today, we are seeing wealth in the hands of first-generation entrepreneurs, the younger generation comprising the Xs and the Zs, families and individuals from diverse parts of the country, and of course the next generation of wealthy families. These individuals are shaped by their own varying experiences which also impact the way they perceive and manage their wealth. At the same time, the changing investment landscape, increasing digitalisation, and focus on customisation have compelled people to rethink their relationship with wealth. This means wealth management firms must optimally cater to the requirements of the phygital world by leveraging technology solutions and accelerating the pace of innovation. Having said that, it is important to understand that while we embrace the imperatives of the future, we must also stay tethered to time-tested tenets that have helped to both preserve and grow wealth through generations and retain the values that have historically held us in good stead.

The imperatives for the future are clear—optimally leverage technology to create customised solutions and deliver services in an efficient and effective manner. At the same time, the values of the past continue to steer wealth managers on their journey ahead. The following tenets are a fine amalgamation of both:

– Avoid operating in silos: When it comes to creating an optimal investment portfolio, it is important to adopt a holistic view. This means that you must not assess an investment in silos. Rather, you must evaluate an investment from a portfolio perspective, that is, will it add value to your overall portfolio. To achieve this, you must ensure goal congruence, which entails putting down all your multiple goals along with the expected timeframes and then making investment decisions that are designed to help you achieve these goals. Further, it is important to understand that the performance of one investment could have a cascading effect on your portfolio and impact your ability to achieve your goals. This makes it even more important for you to view your portfolio holistically and across timeframes.

– Always know your risk profile: As human beings, we are tuned to avoid risk. This is perhaps one of the biggest reasons why investors tend to avoid equity investments. However, when it comes to optimally managing your investment portfolio, you must focus on managing risk rather than avoiding it. The first step in that direction is to know your own risk profile, which is influenced by a range of factors, including but not limited to your income or wealth, your investments, your current and future liabilities and the investment timeframe among others. Both, your willingness as well as your ability to assume risk, will determine your risk profile. This, in turn, will help you create an investment portfolio that is well-aligned with the risk that you can take, thereby ensuring that you stay disciplined while optimally leveraging investment opportunities across asset classes.

– Create and adhere to your asset allocation strategy: Diversification is one of the best ways of creating a robust long-term portfolio that can weather investment-related volatility while also optimally leveraging intermittent opportunities. To achieve optimal diversification, you must create and follow a customised asset allocation strategy. The basic premise of an asset allocation strategy is that it allows you to create a well-diversified investment portfolio that can generate the required returns while remaining within your risk constraints. Since every individual is different, it is important that your asset allocation strategy accurately captures your unique circumstances and requirements. The right asset allocation strategy will ensure that you are disciplined in your investment process and are able to keep behavioural biases at bay. At the same time, it will ensure that sharp negative movements in any one asset class or investment do not have an inordinately large impact on the overall returns of your portfolio.

– Remain agile: In a shape-shifting landscape, it is important that even as you remain tethered to the core tenets of portfolio-building, you maintain the agility to embrace emerging opportunities. Today, we see unique and innovative investment options emerging across the board. For example, it has now become easier to invest in private companies through structures like co-investments or enhance portfolio yields through structured debt products. You must ensure that you are able to assess the potential risk return of such investments and include them in your portfolios, if suitable. Another reason why agility is important is that your risk profile and wealth goals will also change over time. You should be able to incorporate these changes in circumstances into your portfolio with ease and in a timely manner.

It is said that investing is both an art and a science. Thus, when you are looking to grow and preserve your wealth for posterity, you must think from your heart and your head.

About The Author

Anirudha Tiparia

Anirudha Taparia is Co-Founder and Joint CEO of the wealth management business at IIFL Wealth