The latest episode of ‘Smart Investing’ hosted Amit Trivedi & P V Subramanyam, noted authors, trainers, & bloggers and Suresh Sadagopan of Ladder7 Advisories. In conservation with K.S. Rao - Head Investor Education & Distribution Development, Aditya Birla Sun Life MF, the power trio touched upon various aspects of personal finance.
Here are the key highlights of the session.
- Beginners can make thumb rules - As the journey of thousand miles starts with the first step, investors can follow thumb rules to mark the start of their investment journey. However, they should customise the approach depending on their unique situation and needs. This is where the need of financial plan with expert advice arises.
- Controlling the controllable - Multiple variables impact the market and most are beyond control. Instead of worrying about these, investors should focus on controllable parameters like goals and expenses. Despite market volatility, financial goals remain unchanged and hence, asset allocation plays a crucial role. Ideally, an investment portfolio must account for emergencies and contingencies for meeting at least one-year expenses.
- Assessing risk profile - Financial management involves risk management and not return enhancement. Answering three simple questions can help investors understand their risk profile.
Q. How much is my need to take risk? - The need to achieve higher returns means there is a need to take higher risk. The need to earn more for meeting financial goals arises out of the current financial conditions and time to achieve those.
Q. Do I have the ability to take risk? - Ability is a function of income versus expenses. Higher the income in comparison to expenses, the ability goes up. Likewise, if assets are far more than liabilities then the ability increases.
Q. What is my willingness to take risk? - Many investors believe they are aggressive and can take risk. But an aggressive investor is somebody who is willing to see a drop in the value of investments.
- Refrain from fads - In the current crypto rage, there is increasing interest especially among young investors. However, cryptocurrency does not have a regulator. Further, it is too volatile to be called a store of value. Even if an investor wants explore a new product class, he should invest only the money that he can afford to lose
- Thoughtfully integrate international funds - Investors can opt for international funds for global diversification. Additionally, international investing allows geographic, currency and economic diversification. It also allows access to industries currently unavailable in the domestic public space like artificial intelligence, robotics, etc. International funds can be given a share of up to 25%/30% in the overall portfolio depending on investors’ profile.
- Choosing between actives and passives - Empirical evidence suggests it’s a good idea to opt for passive in the large cap space while it seems to be a better idea to go for actives in the mid and small cap space. The percentage allocation under each category depends on investor profile; for example, a retired person having 30% exposure in large cap could probably select passive funds as against an investor in early 30s, who could opt for a mix of both.
- Planning the retirement right - Investors must be mindful of the fact that expenses from the age of 85 onwards are beyond control. Medicines, nursing, etc. contribute to higher expenses. Young investors should begin by setting aside some amount of money and start creating a retirement corpus. It is difficult to quantify the retirement corpus that would suffice, however it is said that 30 times of annual expenses could be kept aside.
- Putting retirement corpus to use – Investors should invest their retirement corpus in fixed income products. They can look at withdrawing 5% of the total corpus annually to meet expenses. This rate may require revision in the future owing to changes in inflation and returns. Further, there must be adequate insurance coverage to avoid big leakages from the money bucket.
From using thumb rules to start investing to putting the retirement corpus to use, the three finance gurus covered almost the entire investment journey.
You can listen to the wisdom of the power trio, by clicking here.
