What to do NOW?

       Stock Markets the world over have corrected in the range of 3% to 8 % over the past week and with a good portion of correction coming on Friday… India has also participated in the downfall and corrected by approx. 2% on Friday and 4 to 5% over the past week.… 

As if this was not enough, today (Sat), the premier credit rating agency S&P downgraded the United States from a credit rating of AAA (which is the best rating in the world and that the US had been enjoying for the past 70 years) to AA+ (which is a notch lower than AAA). It is still not a junk status and should not send an alarm bell to the hoarders of US treasury but it definitely raises concern in the financial markets across the world. That is because, till now, the US Govt Bonds or treasuries were considered the safest place to park funds by international investors as they enjoyed AAA, the safest credit rating. With a downgrade, things might not change drastically but it does raise a shadow of doubt on the US economy and also it signals a shift in thinking. 

 The economic situation in Europe is not something that gives confidence either. As if the financial woes of Greece and Ireland economies were not enough, Italy and Spain are also giving signals of financial turbulence. And unlike Greece and Ireland that in terms of relative size are not that big, Italy and Spain are very large economies and if they are in trouble then the unity & strength of the European Union can be in trouble and hence the future of the Euro. Japan, over the past two decades has had its own set of problems with the recent earthquake followed by tsunami and the resultant economic damage adding to its woes… 

The Middle Eastern economies have had their own share of financial and political turbulence… Thus with US, major part of Europe, and even the middle eastern economies fighting with their own financial woes, the only cloud with a silver lining in the world map today are the emerging market economies like India, China , Brazil & Russia. 

 The last year or two has been a very turbulent year for the Indian economy with record number of scams getting unearthed of unthinkable amounts and proportion. 


While this causes some amount of frustration in our minds followed by lack of trust and anger in our democratic system, at the same time we can see a silver lining to this cloud too. Never before have so many top politicians, bureaucrats and business tycoons gone to jail in such short period of time. While I fully agree that there are still many culprits roaming freely out there who deserve to be behind bars, yet, at least some action has been taken by our otherwise sleepy Govt. We can only hope that all of this unearthing of various scams acts as an eye-opener for the current and all future Governments. And that they will be more diligent and uncompromising in the future. However, just visualize this scenario. In spite of all these scams (CWG, 2G, Mining, why do the biggest scams end with g) our economy has managed to grow at a healthy 7.50% to 8.50% per annum over the past many years, the time period during which these scams were actually taking place. This makes India the 2nd fastest growing large economy in the world over the past many years. And this has happened in spite of all the above scams. Imagine what would have been our GDP growth rate had these scams not happened. So, I am not justifying these scams but what I am saying is that they have not dampened our economic machinery yet. Yes, if the Congress still fails to wake up and remains lethargic, then God save them, God save India and god help the world because now, besides Indians, even the world is counting and dependent on India’s economic growth… 

Having put things into perspective and hopefully having laid to rest some of your concerns, let me now approach to the main topic on what to do with your investments in these volatile times… 

 What to do now with my Investments ?

I firmly believe that for an Indian INVESTOR, every correction in our stock market gives a wonderful opportunity to accumulate equity for your medium to long term goals… 

For your short term money ( 1 month to 1.5 years), prefer deb mutual funds that are giving returns in the range of 9.50 to 10.50% per annum. 

For your medium to long term investments, nothing beats equity. But remember, buy for the long run and have staying power… You make money in the Stock Market by going against the crowd and not by being with the crowd… 

However, you should place your bets very very carefully…that is, be very careful while choosing the Stocks that you bet on…there are fraud companies out there, there are good companies that have fallen into bad times because the sector to which they belong has fallen into bad times and there are great companies with great management but who have borrowed lot more than what they should have and are having difficulty in coping with the exorbitant interest rates on their loans. All the above category companies should be avoided for the time being… So how should you play the current downfall in the markets. 

Stagger your equity investments, whether directly in stocks or indirectly via equity diversified Mutual Funds (which I believe should be a preferred route) over the next 6 months…. However, the best option is to invest in well chosen equity diversified mutual funds (preferably with professional help) via the Systematic Investment Plan or the SIP route… if you already have SIPs running in well chosen Equity Diversified Mutual Funds, then, subject to availability of surplus, you should INCREASE your SIP investment in Equity Diversified Mutual Funds (double your SIP investment, if possible). 

If you have still not started SIP investment in Mutual Funds (and I really do not understand why that is the case), Monday morning fix up a meeting with a Financial Planner or Mutual Fund Expert. 

The underlying assumption here is that you are an INVESTOR and not a TRADER or SPECULATOR, that you are investing with a medium-term (3 to 5 years) or long-term (5 to 7 years and beyond) goal in mind, ie you are Investing in equity for either your children or for your retirement or for some long term goal in mind. If that is true, then the present market levels and the correction is a wonderful opportunity and a blessing in disguise. If you have the staying power, buy with both hands… 

The Pitfalls to avoid:

While I firmly believe that any long term investor should accumulate equity , however avoid the following pitfalls: 

1. Avoid penny stocks or small cap stocks unless you have done thorough research on the company’s fundamentals and promoters and are very sure about the company’s future potential. Even then, these should not form more than 15 to 20% of your equity portfolio. 

 2. Avoid taking sectoral bets ie Invest in Equity Diversified Mutual Funds only rather than investing in sectoral or thematic mutual funds. Time has shown that even the experts have gone wrong more often than they have gone right on which sectors will perform in the future. Let your fund manager take the call as he is more well informed then most of us.

 3. Prefer the Mutual Funds route to equity rather than investing directly in shares unless you have done your research and are thorough with the company’s fundamentals. 

4. Avoid buying stocks solely on the basis of TIPS. Tips rarely work and even if they do, you should know when to exit, else you might end up burning your fingers. Also, TIPS might work in a bull run when thinks are fine but are very dangerous in volatile times like these. 

5. If your investment horizon is less than 2.5 to 3 years, then avoid investing in the stock market in these volatile times. Enter stick market only if your investment horizon is 3 to 5 years and beyond. 

6. Never borrow and invest, especially not in equity or stock market…because the stock market may take time to recover but your interest clock keeps ticking day and night right from day one. 

7. Do not put all your money at one go, stagger your investments over the next few weeks if not months 

8. Invest a little in GOLD but do not go overboard with it ie; not more than 10 to 15% of your investment portfolio should be in Gold. You can now start a SIP of as little as Rs. 500 a month in Gold Mutual Funds too and you do not need a demat account for doing that. 

9. Avoid investing too much in commodities. 

10. Last and the most important. I am not very comfortable with F&O Investing. (even though I am a CA & MBA with 10 years of industry experience) . Neither should you be comfortable with F&O. 


My Investment Guru, Mr. Warren Buffett (have you read my article on my interaction with Mr. Buffett http://niravpanchmatia.blogspot.com/search/label/Warren%20Buffett ) rightly calls F&O and derivatives, weapons of mass destruction. Need I say more… 

What to do NOW???

Where to invest depends on the following 3 main factors, besides a host of other factors: 

1. Your age and number of your financial dependents 

 2. Your risk profile (which in turn depends on your current Net Worth and your liquidity situation) 

3. Your financial GOALS 

Based on the above, you should follow the following investment strategy: 

1. If it is your short term-money (meaning if you need money within 1 to 2 years) then invest in 1 to 2 year Bank FDs if you are in the lower tax bracket or if you are in the higher tax bracket then invest in Debt-based Mutual Funds as they give a percentage return more than 1 year bank FDs and are taxed at a lower rate. But please take professional help in choosing which Debt Mutual Funds to invest your money in. 

2. The money that you can let go for 1 to 3 years can be parked in MIPs or Monthly Income Plans of Mutual Funds where you can expect 10 to 11% return and which invest 15 to 20% only in equity or the stock market and the rest in debt markets. 

3. Any money that you want to invest for the medium to long-term (3 to 5 years and beyond) should be used to accumulate equity (preferably in equity diversified mutual funds) over the next few months. 

4. SIP mode of investing in Equity Diversified Mutual Funds is your best bet in these volatile times… 

5. Please take professional help to design your Investment Portfolio… 

Remember, it took India 60 years to become a 1 trillion dollar economy and it is expected that over the next decade, India would become a 4.5 to 5 trillion dollar economy… 

Imagine this, it took India 60 years or 6 decades to grow to 1 trillion dollars and it is expected that we shall grow from 1 trillion dollars to 4.5 to 5.0 trillion dollars in a single decade. If this happens, immense amount of wealth is expected to be created in our country over the next decade and the best way to participate in this wealth creation is to participate in the equity markets by buying stocks of good companies with excellent track record and great management. Still better, since it is easier said than done to choose good companies, use the Mutual Funds route to equity by doing SIPs in Equity Diversified Mutual Funds. Anybody who intends to become wealthy cannot afford to ignore stocks and/or equity mutual funds… 

HAPPY INVESTING!!!

Have you checked your ADVISOR’s credentials?

       Every now and then one comes across a media article that talks about innocent investors being taken for a ride by shrewd, scheming agents or advisors. It is so very unfortunate that because of a few bad apples in the financial services industry, the entire industry gets tainted. But I believe that at some level, even the Investor is to be blamed?

The principle of “BUYERS BEWARE” applies as much to the financial services industry as it applies to any other industry, if not more…

One cannot expect all advisors to be unbiased, free from any wrong intentions. One or two black sheep will always find its way amongst a flock of white sheep’s. It is for the investor to be alert & sharp enough to identify the black sheep amongst a flock of sheep’s.

As I said earlier, partial blame lies with the Investor himself. Why does he/she not do a background check before he/she trusts the agent/advisor with his/her hard earned money?

Yes. I am a financial advisor too. Yet I am asking you to do the following check on your Advisor before you allow him to render any financial advice to you?

Ask following questions with respect to your Financial Advisor...

1.      Is he QUALIFIED enough to give you financial advice?

In the times in which we are living, even the most qualified person finds it difficult to sail through the turbulent world of Investing. In such a scenario, the minimum that one can expect from his/her advisor is that he should have the requisite educational qualification to understand the intricacies of the financial world. A post-graduate degree in finance is a must. Thus, your financial advisor should at least be a CA, MBA (Finance)from a reputed college, a CFP or should hold some other post graduate degree in finance or economics, to say the least. Does holding a post-graduate degree in finance guarantee that your financial advisor is qualified enough to render you financial advice? No. But, if he does not have the bare minimum qualification, then there is a very high chance that he is not fit enough to render financial advice.

By the way, are you aware what is the minimum qualification required to start selling either an Insurance product or a mutual fund product or for that matter any other financial product in India? It is 12^th standard pass and a small exam with unlimited attempts. Yes, believe it or not, one need not be a graduate to become an insurance agent or a mutual fund agent? I have always believed that one’s financial advisor should be equally, if not more qualified than oneself. Imagine a non-graduate, recommending you buy a financial product, which even experts take time to understand….

2.      Is he EXPERIENCED enough to give you financial advice?

The 2^nd most important credential, besides education, is your Advisors’ work experience. This carries equal weight. What is his career background? How long has he been working in this field? Is it a mere family business that has been handed over to him? Has he had any corporate experience working in a well known financial institution?

I once came across a client who was previously being advised by an insurance agent cum Mutual Fund distributor who was previously a commission agent dealing in food grains. Yes, believe it or not, this guy used to trade in food grains before he started selling insurance and mutual funds, as he found them more remunerative (this was before Aug 1, 2009 when there used to be commissions in Mutual Funds and still fatter commissions in Insurance, although selling insurance products is still highly remunerative). And trust me; he has clientele who are highly qualified and rich businessman. This beats logic, but it’s true. Look around you and you will found more jaw dropping examples of agents with a background that hardly has any co-relation with the financial services industry but are still able to convince people into buying financial products from them, so that the agent can earn hefty commissions.

3.      Is he NEUTRAL enough to offer you advice free from biases?

Let us assume that I am an agent of a particular company, say ABC Insurance Ltd. Now imagine that my company ABC Insurance Ltd comes out with a new insurance product, which though not a very attractive proposition for my clients, yet it offers a great incentive to me to sell it as my company intends to sell it aggressively. Now there is a XYZ Insurance company, my competitor, which has a much better product in existence. Now what is the chance that I will push my company's product? 100%. What is the chance that I will even mention XYZ Insurance Cos. product to my prospect? Almost Nil! Do you get the point here? 

Financial Advisors are supposed to be like doctors writing you a prescription (designing your Investment Strategy) … You are then supposed to buy the medicines (Investment products) from a shop of your choice… now turn this around and imagine you asking the medicine shop owner to write you a prescription and suggest you which medicine to buy…which medicine will he recommend? The ones on which he gets a bigger cut, right…

Look, I have nothing against agents per se. They have worked hard to increase the reach of financial products and to bring them to our door-step . And one does not say that all of them have malafide intentions at all times. However, what one is questioning is their ability to write prescriptions for all patients...

4.      Is he a financial advisor or a mere distributor of a financial product?

Now we are living in times when we suffer from the problem of plenty & not scarcity. 22+ Insurance companies with each offering 10 to 15 different insurance plans, 40+ Mutual Fund companies together offering 1000+ mutual fund schemes, 7000+ listed stocks and not to forget a whole host of traditional financial products offered by the banks & post offices. One needs unbiased, fair & specific advice to help one choose the best, value for money financial product that money can buy. A typical agent, representing a particular organization, and who is driven by his remuneration, will hardly be able to offer a free from bias, best in class advice that fits the investor’s profile.

Today, when there are enough financial products to suit all pockets, age & risk profile, one needs to be extremely choosy while buying a financial product and from whom we are buying that particular product. A wrong advice can land you in trouble. So beware from whom you are taking that financial advice?

5.      Does he do his own research or does he rely on 3

    Well, imagine you being advised by an agent who does not take pains to update himself/herself on the latest happenings in the financial market in particular and economy in general.

     

     It’s a very dynamic investment environment out there, changing at break-neck speed. An investment advice that is proper today might require a re-look tomorrow as circumstances change. Your financial advisor must be a voracious reader and a thorough research oriented personality otherwise he does not stand a chance in today’s volatile investing environment.

6.      Is your advisor transparent enough about his compensation?

It is your right to know what your agent &/or advisor is earning from you and there is absolutely nothing wrong in asking him about his earnings whether in the form of commissions or in any other way. And the agent &/or advisor should be frank enough about his earnings. If you suspect that your agent is hiding any part of his/her earnings from you, then consider changing your agent/advisor as he/she is not being transparent enough.  

7.      Is he here to stay?

How often do you come across an RM/agent who is more than 5 year old with his/her employer? Now imagine buying a financial product that calls for a 10 or even a 15 year commitment from your side and you buying it from an RM who in all likelihood is not expected to remain with his/her employer for even half that tenure. Now, I am not saying that stop buying financial products from them but be aware that in all probabilities, the guy who sold you that product might not be there to service it  a few years down the line. the Institution will stay and you should be taking call on the institution and not the agent.

By the way, do visit this previous article titled “The Citibank fraud and the curse of the RM”, http://niravpanchmatia.blogspot.com/2011/02/citibank-fraud-and-curse-of-rm.html (in case you have not read it earlier)...

8.      Check his integrity?

Well, all the above qualities are not enough if your financial agents/advisors’ integrity is in doubt.  Don’t you think so too?  There is nothing wrong with your financial advisor making some income from you. How will he earn his bread & butter otherwise? However, his income should not be at your expense. No way…

I have always believed that a financial advisor-client relationship should be a WIN-WIN situation for both parties.  The nature of the relationship should be symbiotic and not parasitic.

One cannot earn at the expense of another. If that is the case then the relationship will in all probabilities end in a painful death in which both parties eventually tend to loose from the relationship.

I also believe that an Advisor's job starts and does not end with the money coming in. Unfortunately, for many so called agents, once they have received the investment chq from a prospect & earned their commissions on the same, they are least bothered with what happens to the client’s money. I believe a true financial advisors responsibility increases many-fold after the client has written a cheque and product recommendation is only a first step in the entire wealth management process.

To conclude, if we do as much research while buying a financial product and/or choosing a financial advisor as we do while buying soaps or a White good like a TV or a Laptop or even a mobile phone, we would be much better off. After all, a mobile phone can be replaced in 6 months but one usually gets penalised if one does a premature exit from a financial product that was wrongly bought ….

As always, HAPPY INVESTING…