By Ashish Tyagi, Senior Equity Strategist, Divitas Capital

Equities though perceived by the masses as the riskiest instrument has its own good attached to its intangible risk. As rightly said by Socrates “Diversification is the key to wealth creation”, and one cannot imagine a diversified portfolio without an equity instrument; equities do play a major role in wealth creation.

In any portfolio, debt is the tool of balancing the risk and volatility whereas equity finds its role in enhancing the return. Though equities come in hand with a relatively higher risk, the incentives do come in hand. As volatility is inherent to equity markets, the risk management approach minimizes the volatility. One should invest regularly and diversify across securities and mutual funds with a long term horizon for investments.

With time on your side, equities inevitably translate into higher gains over long term periods. When invested in a right manner coupled with the power of compounding, equities can result in stellar returns. Several studies have shown that equities, when held over a long term period, aren’t that risky, it’s only on the horizon of 1-3 years that equities show a wide variance and showcases a gloomy future ahead to the investor. The basis of growth of an equity instrument is highly dependent upon the growth of the market index of a country. India has been one of the fastest growing economies of the world showcasing a stellar growth rate of 7%, a similar trend is replicated in case of Nifty which is the index of National Stock Exchange showcasing growth rates much higher than the bank’s fixed deposit rates.

In equities, the risks over a long term period are not that high as perceived by the majority of people. In case of several listed equity shares, the annual growth rates have been exponentially higher than the index growth rate; such equities have proven to be the excellent medium of wealth creation for their shareholders. Apart from an appreciably high growth rate, there are several other advantages which equities offer such as entitlement to dividends, bonus, rights issue and liquidity benefit. Additionally, long term capital gains on any equity instrument are tax-free.

Despite the huge potential for long term wealth creation, most people end up losing money in stocks as they invest their money based on information or tips received from friends and relatives. Lured by the short-term gains, they keep speculating as to what will happen next and they pick wrong stocks that lead to large losses and eventually they start avoiding markets. Thus, the role of an Independent Financial Advisor becomes important. A good advisor helps you develop realistic expectations about the risks and rewards of each investment by avoiding the common pitfalls that are the cause of losses for most investors who invest on their own.

Like all the good things in life, even wealth creation takes its own sweet time. The sooner you begin, the better.

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RBI announced cut in repo rate by 25 basis points to 6% on 2nd August. Recently HDFC Bank, ICICI Bank, PNB, and SBI have cut their savings rate by 50 basis points to 3.5% from 4.0%, the lowest in six years. The cut seemed imminent on the back of large inflows in savings and current accounts during demonetization period in November & December 2016.

Effective return on FD has become nil!
As the fixed deposit rates fall, retirees and other investors who rely heavily on the bank fixed deposits as their income/savings avenue have been hit the most. Bank FD returns are fully taxable too. An investor in the highest income slab, a 7.25 percent return translates into a 5 percent post-tax return. Since inflation is hovering around the same figure, the real return is almost zero. Fixed income products, at best, are merely capital preserving in nature and not meant for wealth creation.

Mutual funds have superior risk-return portfolio
Mutual funds offer a large basket of products for both the risk-averse and risk-seeking investors. For a marginally higher risk, a risk-averse investor can earn significantly higher returns in Debt Mutual Funds (Read more: www.divitascapital.com/debt-mutual-funds). Similarly, Equity Mutual Funds can generate a higher marginal rate of return on a marginal increase of risk. Historically well-managed equity mutual funds have generated an annual return in mid-to-high double digits over a long time horizon. While investors face re-investment challenge in fixed deposit instruments, with mutual funds, the money stays invested as long as it gets redeemed.

Choice of products and continuous appraisal is critical to successful wealth planning
There are hundreds of schemes to invest into but there are 3 critical factors that go into the choice of products: 1: Risk appetite, 2: Financial goals and 3: Time horizon. A prudent investment advisor will regularly monitor your portfolio and suggest adjustments according to the changes in the economy and market conditions or to any new developments in your personal life.

Refer to the following illustration as a guide to a risk-return matrix for Equity Mutual Funds:

Only for illustration purposes and not to be construed as indicative yields/returns of any MF schemes.

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There are a large number of instruments that an investor can choose to invest in. Many factors go into determining the right product but primary considerations are investor’s risk appetite and time to payout. Debt Mutual Funds are a good choice of investment for individuals who want medium return at low risk.

Debt mutual funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. For the risk-averse investors debt mutual funds are better alternatives to fixed deposits due to following reasons:

HIGHER LIQUIDITY AND FLEXIBILITY THAN FD
Debt mutual funds have higher liquidity – you can withdraw your investment in part or in full and the money will be credited to your account the next day. Debt funds are also more flexible than fixed deposits since you can invest small amounts every month by way of an SIP or whenever you have surplus cash. Opening a fixed deposit every time you have some extra cash in your bank account is impractical. Additionally by moving your money into debt funds, you don’t lose a day’s growth.

TAX EFFICIENT
In the long term, debt funds are far more tax efficient than fixed deposits. Income from investment above one year is treated as a long-term capital gain and is taxed at either 10% or at 20% after indexation. Income from fixed deposits is taxed on an annual basis whereas in debt funds, the tax is deferred indefinitely till the units are redeemed.

RETURNS CAN BE HIGHER
The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. Short-term debt funds are not affected too much by interest rate changes in the economy and investors continue to gain from the accrual of interest. But funds that invest in long-term bonds are more sensitive to changes in interest rates. If interest rates decline, the value of the bonds in their portfolio shoots up, leading to capital gains for the investor.

If you wish to discuss more about investment opportunities in Debt Mutual Funds, please write to us at gurmeet@divitascapital.com

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Published in Silicon India Consultants Magazine, Jan 2017 issue

By Ashish Tyagi, Senior Equity Strategist, Divitas Capital

With increasing number of savvy investors willing to take opportunistic bets and taking the initiative to manage their financial future along with rising globalization, the years ahead will be a game changer for the Wealth Management industry. If you believe there’s a chance of particular stock or mutual fund doing well, you would like to put money in it and take advantage. But how do you find that right stock or the mutual fund and take the investment call? What is needed are sophisticated research tools with financial need analysis along with planning and execution capabilities or a good financial advisor who is committed to manage your financial affairs.

While most Wealth Management firms currently use fairly simple analysis to deliver the key advice, we expect the firms to develop more descriptive and predictive analysis. As wealth grows, particularly in emerging markets like India, there’s a compelling need for a paradigm shift in the business models of long-established advisory firms. The emergence of new avenues for growth coupled with disruption caused by cyclical headwinds, robo-advisory and uncertainty over the regulatory changes has led to the change in landscape of Wealth Management industry. Thin margins, significant pressure on revenues and cut-throat competition is raising concerns for the small advisors who have large part of their business tied to retail commissions.

We see an opportunity in emerging markets driven by explosion of wealth to cater the complex needs of High Net-Worth Individuals (HNIs) by serving the mass affluent and HNIs in lower wealth brackets. The enhanced use of technology by the younger generation and young professionals to manage their own investments makes it inevitable for wealth management firms to invest in utility-based models, digital solutions, advice tools and self-service capable websites. The rise of automated advisors, aware and informed investor and willingness of advisors to serve affluent mass segment will result in further consolidation in the industry. The share of unorganized players (typically independent advisors, small brokers/agents) has shrunk considerably over the last few years, primarily due to the increased presence of organized players. Given the nascent stage of the Indian wealth management industry, firms face a shortage of trained advisors. This problem is further aggravated by the mis-selling and wrong advice to churn more and earn higher commissions thereby resulting into an unsatisfied investor. Hence, it is critical for organizations to develop and retain highly qualified team that will be the key differentiator for them.

As rightly said by Bill Gates, “I believe that if you show people the problems and you show them the solutions they will be moved to act”, this holds true for our wealth management industry as well. Though the landscape is changing, as an advisor, we need to work on our client’s problems and come up with best possible solution as small efforts produce big results.

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