HOW TO STAY RICH

 In Uncategorized

How to stay rich: 5 lessons from past 5 years 

“The years teach us much which the days never knew,” said Ralph Waldo Emerson in the 19th century. He may as well have been talking of the developments that shaped the financial world in the past five years.

Or, perhaps, of ET Wealth. As we complete five years this week, we look back at all the days that have sped past and bunched into years packed with learnings. There are lessons spawned by the events and changes in the past five years. Whether it was the Ulip guidelines or the new tax rules for debt funds, the Modi wave in the stock markets or the commodity crash, every development forced us to look anew at the time-worn principles of investing. Every jolt offered a lesson for investors.

Gold was always considered a safe investment, but the past two years have changed that perception forever. Real estate, for long perceived as a stable and wise investment, is anything but that now. Amid these changes, some immutable canons of investing have remained unaltered. We also look at these financial tenets, and explain why investors should follow them in all circumstances. They will protect your finances against uncertainty and ensure that you reach your financial goals in fine fettle.

We realise that this is easier said than done. Many small investors learn investing lessons the hard way, burning their fingers before realising where they are going wrong. ET Wealth reached out to four such investors to know the financial follies they have committed and what they would do if they could turn the clock back. The common refrain: unavailability of objective and useful financial advice that could have prevented them from the financial mistakes they made in life.

This is where ET Wealth comes into the picture. In the past five years, besides explaining how every trend in the financial markets affects investments in general, we have also examined the finances of more than 20 dozen households through the hugely popular Family Finances section. We reached out to five families who had been featured in ET Wealth to know how they have fared.

The anniversary special issue also features guest columns by leading experts on what investors and consumers can expect in the coming years. We are sure you will enjoy reading our special issue as much as we enjoyed putting it together.

1) Don’t lean too much on one asset class

The past five years amply demonstrate the virtues of diversification. Investors obsessed with physical assets like gold and real estate have been squarely punished.

Inline image 1

A three-year rally in gold had buttressed the belief that the yellow metal would shine on. Fund houses latched on by launching gold funds. Gold ETFs garnered thousands of crores in assets in a short time.

As many as 10 gold funds were launched in 2011 alone. Between December 2010 and 2012, gold ETF assets jumped from Rs 3,516 crore to Rs 11,992 crore. But prices fell dramatically from a high of around Rs 33,000 per 10 grams in mid-2013 to a four-year-low of around Rs 24,000 this year amid a global gold rout. Gold ETF assets nearly halved to Rs 6,226 crore. A similar story played out in real estate.

Galloping property prices led investors to pour large sums into real estate. However, prices have not moved much in the past 2-3 years. “With a chunk of savings in physical assets, investors have taken on high degree of liquidity risk,” says Feroze Azeez, Deputy CEO, Anand Rathi Private Wealth Management.

Meanwhile, as the stock market began to take wings after the 2014 elections, investors were quick to jump on to the bandwagon. The same investors who shunned equities when prices were low, lapped up the high-flying stocks. Now, with uncertainty back, they are questioning the logic of those investments.

“This habit of chasing returns and siding with the most popular asset class has to change,” says Neeraj Chauhan, CEO, Financial Mall. “One must have diversified exposure to the major asset classes and invest according to goals,” he adds. Suresh Sadagopan, Founder, Ladder 7 Financial Services, says, “Stick with the asset allocation plan and do not wing from one asset class to another opportunistically.”

2) An investment strategy won’t always work

This period also saw several regulatory and taxation changes that altered the investment landscape in India. In 2014, the Budget removed the tax advantage that non-equity funds enjoyed. The minimum holding period to qualify for long-term gains was increased from one year to three years.

Inline image 2

Also, these gains will be taxed at 20% with indexation, scrapping the earlier option of 10% without indexation. This took away the tax arbitrage that debt funds enjoyed over bank FDs and gold ETFs enjoyed over physical gold. Fixed maturity plans (FMPs) were the worst hit. A favourite among investors looking for lower tax, one and two-year FMPs suddenly became as tax inefficient as FDs.

Investors who had put in money to escape high tax, were stuck with products that no longer suited them. The emergence of arbitrage funds as a popular investment category is an outcome of these tax changes. For investors, the lesson is not to rely on a particular investment strategy to always deliver best results. Regulations can change, rendering certain products unsuitable. Or new instruments could make other investments obsolete. The launch of gold bonds has made gold ETFs less attractive as an invetsment option. On the other hand, policy changes can also make an investment an attractive option.

In 2010, the insurance regulator clamped down on Ulips, which were notorious for their high charges and poor coverage. The regulator enhanced the minimum life cover, rationalised the cost structure and capped the commissions. However, even though Ulips have become very customer-friendly, investors still look at them with suspicion and sales are tardy. Instead of looking at Ulips through the same prism of high charges, investors need to assess them in the light of the changes. Some of the uber cheap online Ulips cost less than even direct plans of mutual funds.

3) Stock markets reward quality and discipline

The stock market has not been kind to the fainthearted. Sluggish economic recovery, uncertain corporate earnings, global concerns, etc have all contributed to heightened volatility in stocks. Benchmark indices have remained muted over this period. But a section of investors have made money in this time.

Inline image 3

The market has rewarded those who have sided with quality businesses and have shown the discipline to stay invested during this time. Fundamentally strong companies—ones that boast of good management, strong pricing power, stable cash flows and negligible debt—have been rewarded with premium valuations on bourses. Pharma and FMCG stocks in particular have been favoured by investors, despite concerns over rich valuations.

Vaibhav Agrawal, VP, Research, Angel Broking, says, “The move towards quality has been the biggest learning of the past five years. It has shown that while valuation is important, it must be accompanied by stable earnings, strong entry barriers and good governance, among other things.”

While the euphoria surrounding the 2014 elections propelled stocks of economy-linked businesses, it was a brief dalliance. The markets quickly took refuge in so-called quality stocks as investors realised that recovery would be slower than anticipated. “One cannot ignore the quality of the business even in an improving demand environment,” asserts Agrawal. These five years have also rewarded investors who have stuck to the regular, systematic investments through the SIP route.

Consider these numbers: A one-time investment in Birla Sun Life Frontline Equity 5 years ago yielded 10.95% CAGR. An SIP with the same fund has yielded 16.88% CAGR during this period. Similarly, an SIP with Mirae Asset Emerging Bluechip has clocked 31.46% return compared to 22.49% under a one-time investment 5 years ago. Clearly, this mode of investment has proven its worth for those who more comfortable shelling out small sums on a regular basis.

4) DIY approach can be very rewarding

Investors have long relied on advisers and agents to hand-hold them through the processes of purchasing financial products. This paradigm has undergone a radical shift over the past few years. The emergence of online platforms and self-service facilities have armed investors with the ability to go it alone rather than depend on somebody else.

Inline image 4
This do-it-yourself approach has not only made life easier but also proven rewarding for investors. The emergence of online investment portals like FundsIndia, Scripbox and MyUniverse have given individuals the power to build their own investment portfolio, suited to their specific needs. Sadagopan believes such platforms are a huge enabler. “These are a wonderful fit for the younger, tech-savvy lot with basic goals and requirements.” Hemant Rustagi, CEO, Wiseinvest Advisors, advises investors to latch on to the trend. “It is important to change with times.

Investors should adopt these platforms to get more control over investments.” The launch of direct plans of mutual funds in January 2013 was another game changer. The ‘direct’ route allowed investors to purchase mutual funds from the manufacturer itself. Direct plans have a lower expense ratio as there is no upfront brokerage or trail commission to be paid to distributors. Investors can save anywhere between 50 to 80 bps on every rupee invested in an equity fund each year.

Over 10-15 years, investors using direct plans could save as much as 10-12%. The launch of online term plans has been another boon. These have emerged the preferred medium for buying pure protection term insurance. Pricing is the key differentiator, apart from ease of buying. Online term policies are 30-40% cheaper than their off line counterparts.

5) Don’t ignore risks in debt instruments

For those who prefer to park money with debt-related investments for reasons of safety, not all debt investments are devoid of risk. Rustagi points out, “There are risks in debt funds as well, since these are market-linked instruments.”

Inline image 5
In July 2013, after RBI effected a string of measures to rein in the rupee’s slide against the dollar, NAVs of debt funds plummeted 6-7% in a month. Investors in liquid funds and ultra-short term debt funds were particularly spooked as one never really associates loss of principal in these ultra-safe investments. The large-scale redemptions that followed caused the AUMs of liquid funds to fall 21% in one month. More recently, two short-term debt funds of a prominent fund house were hit badly. These funds had taken large exposure to bonds issued by a financially stressed firm.

Even worse, the fund house introduced restrictions on redemptions to 1% of investor’s holdings per day, implying investors could not immediately exit if they wanted to. Several other funds were also found to be invested in low quality bonds in high proportions. Investors should not ignore the risks associated with debt funds, though experts say they are sound investments because of the diversification of holdings in a mutual fund scheme. The loss would be far greater had investors put money directly in the company’s fixed deposit or shares.

Recent Posts

Leave a Comment