‘Mere accumulation will not help wealth creation but investing wisely would’


Financial freedom is an essential pre-requisite to realize the other freedoms in life, and also to make life more effective and meaningful to the society and the fellow beings. This constitutes the freedom to save, invest, create wealth, and enjoy its fruits, which embodies access to markets, products, appropriate government policies etc. Any deficiency in any one of these important parameters or components makes financial freedom obviously incomplete or dysfunctional.

One of the areas that we need to focus is investments. As a people we are good savers but poor investors. This divergence in the saving and investment behaviour could be due to various factors like, inherent distrust of investment products, lack of financial literacy among a large section of the population, fear of making losses, higher returns obtained from informal arrangements etc.

But the landscape is changing gradually with the spread of literacy, better organization of markets and improved regulation of manufacturers and products. This may help in channelizing savings better to the desired sectors and activities in the economy. A host of investment products are available today in the domestic markets with many attractive features for investors to choose from. This has created access to investors to the markets, in a more effective and efficient way.

Mere accumulation will not help wealth creation but investing wisely would. The other accompanying objectives should be preservation and transmission. It is important that wealth is accumulated, but after a certain stage in life the preservation of the accumulated wealth becomes more significant. Something that many ignore is the need to put in place a mechanism or process that would ensure a smooth transmission of the wealth that is accumulated.

In the light of the pandemic and the lockdown there are a few things that we need to be careful about. At the very beginning of the pandemic we had seen the markets falling and the value of investments coming down, though the markets have reclaimed a lot of the lost ground by now.

One principle to follow always is to avoid too much of news and reports which may be amplifying the market developments and may be presenting an exaggerated presentation of realities. It is better to avoid that. Do not attach too much importance to news items and related developments. At all times you should be taking the advice of a professional advisor who has a good track record and who understands your finances quite well. Reliance on a good advisor will resolve many issues.

Apart from the two points mentioned above, there is a very important aspect of investing that needs to be taken care of, that is investing based on risk profile, and grounded in your goals and objectives.

While scientifically organizing the investment portfolio, one should insist on risk profiling so that the portfolio reflects one’s risk profile with an asset allocation, which in turn conforms to the risk profile. This is relevant as risk profiling is based on three major parameters, like the capacity to invest, the awareness of financial markets and products, and the psychological disposition towards events like a portfolio depreciation or loss.

Generally, while risk profiling and asset allocation is done, an attempt is made to facilitate planning the goals like children’s education, retirement and lifestyle planning, travel, major family functions like weddings etc. In times of turbulence like the one that we have been going through, the only thing one needs to do is to see whether we are on track to attain our long-term objectives.

If the portfolio is doing justice to the long-term objectives set by you at the time of starting the journey, comfort can be drawn from this that the investments are serving the purpose that they are intended to.

During times of volatility and turbulence, the preferred mode of investing is phased investments or what we call the systematic investment plans. In such plans, investments are made in a phased manner over a period of time. This would also help capture the price advantages of a fall in the markets and also the gradual rise in the prices. Economic phenomena or economic events happen in cycles and the adverse portfolio impact of such cyclicality can be moderated to a large extent by the mode of investment that is chosen.

Diversification is important for a portfolio. The standard diversification is between asset classes like equity, fixed income or debt, gold etc. These are some of the asset classes into which investments are made. This allocation is based on the risk profile of the investor.

This diversification helps enhancement of returns on the overall portfolio while moderating the risk. There is also the aspect of correlation between the movements and returns in these asset classes, the weaker the correlation the better it is from value preservation point of view. Now, there is also a diversification within each asset class. One may invest into short term products or short maturity bonds or may take exposure to long term products.

The choice between short term products and long-term products would be based on the potential behaviour of the interest rates for these maturities. In debt there are also other products like floating rate products, tax free bonds, perpetuals etc. Coming to equities there is a spectrum of products – large cap funds to mid cap funds and small cap funds, sectoral funds etc. So, under each asset class again there is a significant amount of diversification possible. The choices that one makes in the diversification at these two levels would determine to a large extent the performance of the portfolio.

This may require professional help for most of the investors. Make sure that one does not respond based on hearsay and messages that are passed through phone messages when it comes to the serious business of investing one’s hard earned money. But a word of caution here. Over-diversification and diversification for its own sake may dilute the performance of the portfolio. To cite an example, the performance of a portfolio is quite often coming from a few instruments in the portfolio.

Therefore, in relatively larger portfolios, the gains made from the better performers may be diluted by the others. Therefore, very measured diversification, to the extent it is essential, should be resorted to.

In the case of an investor having soke debt obligations, which need to be liquidated over a period time, a clear plan should be laid down for this purpose. Liquidating debt would require debt with high costs to be brought down first, and also negotiating with banks to bring down the cost of funds progressively over time.

It is possible to look at alternate lenders from the banking system to restructure the loans and make them more portfolio friendly. Another thing to be taken care of is related to employment. The pandemic has thrown out of employment millions people in the US, Europe and India too. It is imperative that we plan for contingencies in case of job losses, or due to some planned or unplanned break in career. As a rule of thumb, an amount equivalent to three month’s salary should be kept as a contingent reserve, especially by those who are in urban employment.