Key to investing-by-yourself

An Investor’s dilemma: She is an aware professional and executive. In the global turmoil of the past few years, her experience with advisors and distributors hasn’t been great and now she wants to take charge to look at options of how she can do this herself. However, there are a few hurdles. Primarily, what to invest in, how to invest and most importantly, how to manage that investment.

In India, the most common problem which we do not deal with is India’s risk -- most financial portfolios are skewed towards (almost exclusively) fixed income (bonds, debt, etc.) and equities (shares, equity mutual funds, etc). The problem with these is, in fair weather, they offer diversification benefits but in extreme financial market conditions, bonds and equities often display correlation spikes -- they move together in the same direction.

Enter traditional diversification like Gold and International Funds (ETFs for all asset classes). For most investors, it is simpler to invest in such instruments in India rather than a foreign market through RBI’s Liberalised Remittance Scheme as Taxation in India is more favourable and managing a portfolio (or a part of it) in another time zone can be a daunting task. A word of caution –- there is no such thing as a 100% risk-free investment. Therefore the objective of any portfolio is to dampen volatility (or risk) through diversified component selection.

With regards to instruments, ETFs are more efficient than Index funds (much lower tracking error) for a variety of reasons. However, they do require her to open a trading and broking account (usually together) through which she can execute her trades. The alternative is Index Funds which also replicate indices like the Nifty, Sensex, Bankex, etc, and do not require a trading account. Passive Investments (ETFs and Index Funds) do not carry fund manager risk and are there, therefore, more suitable to such exercise.

How to invest? A simple way of Investing is the ubiquitous SIP. The problem with SIPs is she’s investing in a fixed proportion which will, over a period, start to skew towards the one asset class which has the highest growth, forcing her to buy into an expensive market. An alternative would be for her to accumulate sums of monies in short term deposits or liquid funds/ETFs and then flip the lump sum into the portfolio, in the desired proportion. Further ‘top-ups’ can then be invested in such a way that the portfolio gets rebalanced. Once this portfolio is deployed, she can then, once in a few months (or even quarters) carry out the rebalancing exercise by giving buy/sell orders to your broker or subscribe/redeem Index fund units on platforms such as MFU, MyCams (some limitations here) and many others for direct plans investment.

For the investor, work, personal commitments, philanthropy, and other factors may render her time unavailable to carry out the exercise and she may just be looking for a middle path – she would like to control over her investments and have ready entry/exit options. Also, all this needs to be online with no forms or running around (Bengaluru/Mumbai Traffic notwithstanding). Fortunately, we now have full-fledged platforms solving these problems. Companies are providing a marketplace where she can choose portfolios in their entirety or many baskets (of funds/ETFs) to fulfill her requirements.

A few riders: the investor must read and educate herself first – informed decisions are always better than ‘trust’. A good point to start off with are ‘Financial Evangelists’- neutral parties who give educate her through a building block approach to financial education. Secondly, for a few extra rupees, you can have the best of both worlds – an advisor who works with a platform.

As always - Read the offer document before investing.