Why discussing finances is mutually beneficial for spouses

Why discussing finances is mutually beneficial for spouses

I always wonder why it is so difficult to talk about money even with your spouse. You are comfortable talking about almost anything under the sun, but talking about money seem petty and crass. To my surprise some women refuse to do it even when they have a gun to their heads.

 

Why should you wait to be pushed against the wall to have a conversation? Marriages are meant to last a lifetime and it is impossible to traverse this journey without discussing money. At some point of time in a relationship one needs to move from Mine to Ours.

 

Read our latest article, published on Moneycontrol.com

https://www.moneycontrol.com/news/business/personal-finance/money-matters-why-discussing-finances-is-mutually-beneficial-for-spouses-4877221.html

 

Image credit: Moneycontrol.com

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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Protect your loved ones from lifelong guilt – have the conversation

Protect your loved ones from lifelong guilt – have the conversation

The last couple of weeks has seen a couple of friends go through unimaginable trauma. Can you imagine helplessly watching your parent slip away bit by bit? One would think what a terrible thing, there can be nothing worse than going through this. But there is! What if the decision of continuing further aggressive medication and lifesaving treatment (albeit with highly degraded quality of life) or letting your loved one go with basic treatment rests with you? Suddenly the situation is many times worse!

 

Huge dilemma, right? It is natural to wonder what the sick person would have wanted in such a situation. Why then, is it so difficult to have a conversation about death and disease with our loved ones? Somehow our culture forbids us from talking about these unpleasant situations. Even if you broach the topic, you are likely to the shooed away saying “yeh kya apshakun bol rahe ho?”. It is almost as if you are inviting death and disease just by talking about it.

 

A small minority does think of what happens to their material wealth post death and manages to make a will. While this is a very important step, and everyone must do so, is it not our responsibility to ease the guilt and emotional trauma for our loved ones? All one needs to do is to have a conversation on what you would like them to do in case you are to be put on life support or given aggressive treatment which will reduce the quality of life.

 

When you are sick, they may choose not to follow your wishes. If they do, they will live guilt-free that this is something you would have wanted for yourself had you had your mental faculties intact to decide. As against not knowing and doubting if they should pursue all means possible to keep you alive and living with the guilt of ‘not trying enough’ if they choose to relieve you of your suffering.

 

While we are on this topic, it would be good to dwell upon a document called “living will”. A living will is a document that sets out a patient’s wishes regarding how they want to be treated if they are seriously ill. It allows a person the right to die with dignity.

 

In March 2018, the Supreme Court of India passed a landmark judgement, where it recognised that a terminally ill patient or a person in a persistent vegetative state has the right to die with dignity, and to do this the person will have to have executed a living will.

 

The difference between having a conversation with your loved ones on what you would like them to do if you are seriously ill and have no scope of recovery and any treatment that would prolong your life is likely to compromise heavily on the quality of life versus making a living will is stark. In the first case, all that the loved ones can do is decide not to pursue aggressive treatment and let time take its course. Whereas in the case of a living will, subject to a lot of conditions, including having a board of doctors granting permission, among others, it is possible to end one’s life immediately without any suffering.

 

The concept of a living will is new to India, and while being a step in the right direction, it remains to be seen how it practically pans out. It is for you to evaluate whether it makes sense or not to go for a living will. However, having the crucial conversation with your immediate family (spouse, children, siblings, parents) is non-negotiable. Let’s put aside our inhibitions to do just that, this week.

 

Image Credit: Gerd Altmann, Pixabay

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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“What problem of mine can you help me solve?”

“What problem of mine can you help me solve?”

It is that time of the year, when everyone seems to be in a bit of a party mode. It is also that time of the year, when increasingly, school/college friends are meeting up for reunions! I was at one such reunion a couple of weeks back, and, as is oft the case, was meeting some friends after many many years. After many hugs and a few jugs of beer, during which time we reminisced about old times, discussions veered towards the serious stuff, including politics, the economy as well as catching up on each of us, both on the personal and professional front.

 

With everyone’s kids around similar age bands, there was some serious collective letting-off of steam about the pressures involved in being parents to children who preparing for their Std X or XII exams (Eg. don’t ever remember studying so much even for an engineering paper in our 3rd year as compared to what kids nowadays have to do for a Std X paper, OR how the current standard of Maths and Science in Std X is akin to what was done in 1st or 2nd year graduate courses in our generation!)

 

Things then moved on to what we were doing on the professional front and how we were coping with the pressures on the job, the state of the economy, and so on. I had left my corporate career to join my spouse in our small personal financial planning and advisory business and when I explained that I was a financial planner, there were the usual reactions – how exciting it must be to be on our own, how courageous we were to have taken such a step, some questions on how I was liking it, etc.

 

Of course, there were some who also wanted to know what exactly financial planning was, and what exactly it was that I do, which again is something that I am (by now) used to. I then (as usual, passionately) launched into a description of what we do as financial planners, how it helps people, and what our typical assignments are. Things took an interesting twist, when one of them asked a very interesting question – “What problem of mine can you help me solve?”

 

While I of course answered the question and the follow-ups that came post that, it set me thinking. As I have discovered over the past many months, over various interactions with customers and others, financial planning means different things to different people. Importantly, it actually is “solving different problems” for different people, as long as the problems related to money. In fact, it actually doesn’t matter what I say I do as a financial planner, as long as people, including my customers see that I am helping them solve some money problem of theirs, which for them becomes “their understanding” of financial planning.

 

So, what “money problems” can a good financial planner-adviser help you solve?

 

 

The “LIVING BEYOND MEANS” problem

A few people we meet are earning well and spending even better. No, it doesn’t mean that they don’t have any savings or assets, just that they underestimate the needs of the future while getting hooked onto today’s pleasures. For such a person, a financial planner acts as a quick wake-up call, who puts things in perspective, and is a catalyst for habit changes.

 

 

The “TOO BUSY TO GIVE TIME” problem

Quite a few people we see are financially prudent, but are successful individuals, so caught up in their day-to-day work and life that they are simply are unable to spend quality time on growing their money. Their investment decisions therefore are impulsive, driven by products that get sold to them or event-driven eg. taxation insurance. They end up collecting a disparate set of investments, lacking purpose and inefficient in performance. In such cases, a good financial planner can help become both the filter to weed out wrongly-sold or ill-intended products as well as the channel to invest their money in vehicles that are both risk-appropriate and goal-appropriate.

 

 

The “INCORRECT ASSET MIX” problem

Many customers in the middle years bracket (age 40-50, double incomes, good jobs) are reasonably secure on the wealth creation and savings front. Like most of their generation, they own multiple houses, and while these were popular investment avenues, they are not necessarily the right asset-mix for future goals like children’s education and retirement, due to their illiquidity, as well as the current question-mark on long-term appreciation prospects. For such customers, a good financial planner helps them restructure their portfolio, keeping their risk profile and goal horizons in mind.

 

 

The “WHERE TO INVEST” problem

Some customers we meet are both personal finance savvy and investment-aware, meaning they have a good handle on their financial position as well as understand most investment asset classes and their risk features. That said, they lack the time as well as inclination to identify the right products, which will give them the right performance metrics while keeping in mind their interests and their risk appetite. In such situations, a good financial advisor helps provide the right mix of adequately diversified high-quality products to meet their needs.

 

 

The “NEED PEACE OF MIND” problem

Lastly, a few are completely sorted and only need a bouncing board to help validate their approach as well as decisions. Some may be good on the financial investments front but are inadequately prepared to face unplanned challenges in their life in case of unforeseen events. For such people, a good financial planner provides peace of mind and a tangible improvement in quality of life by allowing them to outsource their worrying nature as well as the outside chances of having uncovered risks.

 

 

Whichever it is, suffice it to say that a good financial planner/advisor’s primary role is to “solve money problems”. So, rather than try and understand from prospective financial advisors what they do, ask them – “What problem of mine can you help solve?”

 

Credit: M, a good friend from college whose pertinent question not only made me pen this, but also helped hone our customer propositions.

 

Image credit: Mohd. Hasan, Pxhere

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

3 easy ways to know if your financial advisor is good for you

3 easy ways to know if your financial advisor is good for you

In a recent article, we shared 3 simple approaches that can help you determine whether you need a financial planner/advisor. But once you decide you need one (or already have one), how do you know whether he or she is giving you your money’s worth, if not more?

 

Personal Finance advisors who manage money range across a broad spectrum of names. A few of these are Financial Advisor, Investment Consultant, Wealth Advisor, Financial Planner, Relationship Manager, etc. Unfortunately, while there are certifications and qualifications* that can help customers determine whether the advisor is actually an “expert”, the awareness about these are very low and the average customer has no clue about these.

 

* Some (but not all) of these qualifications are CFP (Certified Financial Planner, issued by Financial Standards Planning Board, USA), CWM (Chartered Wealth Manager, issued by American Academy of Financial Management) and RIA (Registered Investment Advisor, issued by SEBI).

 

So, how can a customer determine whether the “advisor” is qualified to give him advice and is experienced enough to be able to manage his investments? Here are 3 easy ways for you to check whether the financial advisor is right for you.

 

 

  1. The advisor asks you “What’s the goal/purpose for the investment?”

 

In our experience, most retail investors start investing as and when they have savings, based on advice that they get from whoever they know. Many a times, they discover the need for an advisor when there is a “penny-drop” moment in their lives, usually due to some realization eg. need to plan for child’s education, lost a significant sum of money in some investment, etc.

  • In either case, a genuine advisor will try to understand your goals and aspirations. Money is usually itself never the purpose (for investing), it needs to be put to good use to achieve some personal milestone for you.
  • It’s the job of a good advisor to understand your current financial health, and where needed, suggest re-structuring for your existing investments to align with your goals
  • Lastly, a good advisor will prioritize your goals and create an overall financial plan for you, that will act as your financial road-map

 

  1. The advisor says “I need to know more about you to suggest the right investments”

 

While the phrase “every customer is unique” sounds cliched, it is something that definitely needs to be borne in mind when it comes to personal finances. Your personal experiences with money, along with your financial health determine your risk-profile which, when combined with your goals, makes you unique.

  • A good advisor will spend time understanding you and your personal experiences with money, so that over time, he is able to address your fears and concerns about money.
  • He will help you understand your risk capacity (your financial ability to take risk) and your risk tolerance (the risk you are willing to take basis your personal experiences/biases), which together form your risk appetite
  • He will then suggest the right “Asset Allocation” as per risk profile and accordingly invests across asset-classes, while keeping in mind your goals. He will also come back to tell you basis your risk profile if some goals are unachievable, unless you are willing to take some higher risks

 

  1. The advisor says “I charge a fee, my advice is not free”

 

For us as advisors, one key moment when we know that a customer may not be suitable for us, is when we talk about fees. Quite a few customers balk at the idea of paying a fee, understandably so, when there would be many so-called “financial advisors” who don’t charge.

  • A good financial advisor is as much a qualified professional as a respected doctor, lawyer or chartered accountant is. He therefore charges a fee for his time and advice
  • That said, a good financial advisor also clearly explains the value that he would be able to deliver for the fee that is getting charged, so that the customer understands clearly what he is getting
  • Lastly, a good financial advisor operates in a structured manner – recorded/documented conversations, in-writing recommendations along with rationales, periodic reporting and pre-planned financial reviews, all of which mean that the number of hours that the advisor puts in for you behind you is far more than the mere conversations that he has with you

 

So, next time you feel the need to hire a financial advisor, and are short-listing one, understand how many of the above boxes does he or she tick? Alternately, use the above to understand for yourself whether your current financial advisor meets the grade, or do you need to find a new one.

 

Image Credit: Tim Graf, Unsplash

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Dear woman: Take these 4 small steps to be on top of your money life from 2020

Dear woman: Take these 4 small steps to be on top of your money life from 2020

It is again that time of the year to work on New Year resolutions. The word has become a joke and it is now accepted that resolutions never work. We all know that a turning of the calendar is not going to weave its magic and get you started in the right direction.

 

What I have noticed is when we endeavour to make small changes rather than daunting makeovers which require a whole lot of change, we tend to stick to our resolutions. The same applies on the personal finance front – both whether to increase your financial awareness and to improve your financial situation.

 

As a woman if you wish to make your financial life better than what it has been thus far let us without much effort, here are four simple things you can do.

 

Read more about this in our latest article below, published on Moneycontrol.

 

https://www.moneycontrol.com/news/business/personal-finance/dear-woman-take-these-4-small-steps-to-be-on-top-of-your-money-life-from-2020-4763791.html

 

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image credit: Moneycontrol

3 ways to quickly check if you need a financial planner

3 ways to quickly check if you need a financial planner

Personal finance and investments related advice is omnipresent today. Open any regular newspaper and they have a daily page devoted to personal finance. Surf the TV and even normal entertainment and mainline news channels have programs which “help” customers on their personal finances and give product-related advice. On most infotainment portals, Personal Finance is a separate section and every few articles, one on personal finance advice pops up.

 

This surfeit of information has created a not-so-desirable impact for us though – easy access and availability of so much information makes us think that we now “know enough” and can even “do it ourselves”. That said, there is an information overdose even on the products side, so how does one be sure? That’s where financial planners and advisors come in. In our experience, hiring a financial planner is usually a big decision for people to make, and hence they end up delaying both this decision as well as their investment decisions, doing themselves more financial harm in the process.

 

So, how can you decide if you need a financial planner to help you with your personal finances? I am sharing below 3 simple thumb-rules which can help you decide. If your answer to even one of these is a NO, then you surely need one.

 

 

 

RULE 1 – THE SAVINGS RULE – Save at least “your Age %” of post-tax income

 

What – At age 25, you should be saving at least 25% of your post-tax income, and as you grow older, this % should increase beyond your age. Eg. at age 35 should be 40-45% and at age 45 should be 50-60%.

 

Why – Remember, for every year you work, you will live a year, possibly even more, post-retirement. Now, even assuming that your needs in retirement are more spartan than when you are young, unless you save an average of 40% of your income across your working life span, you may end up not having enough to fund your retirement.

 

 

RULE 2 – THE NET WORTH RULE – Your NW should be at least “(your Age * Pre-tax annual Income) / 10”

 

What – Your Net Worth is defined as your Assets minus your Liabilities. Do not include the house that you stay in, unless you are willing to liquidate it and move into a smaller one.

 

Why – This rule helps you assess 2 things – how much your savings have transformed into assets and how over-leveraged you are in terms of liabilities. Also, this is a “minimum” rule, to check whether you have “enough”. To understand whether you are “wealthy”, multiply this by 2 (or more). Eg. If you are 40 and your pre-tax income is Rs. 50 lakhs per year, then your minimum Net Worth should be (40 * 50 lakh) / 10 = Rs 2 Cr. Remember this is net of your liabilities and the house you are staying in.

 

 

RULE 3 – THE ROI (RETURN ON INVESTMENTS) RULE – Your investments should grow at minimum your country’s nominal GDP rate

 

What – Return on Investments is the rate at which your investments are growing on an annualized basis. Nominal GDP is Inflation + Real GDP. Your investments include both real and financial assets (excluding the house where you stay).

(NOTE: An easy rule to calculate your current ROI is the Rule of 72 – Divide 72 by the number of years it took you to double the value of your investments. Eg. If your investments were Rs 2 Cr in 2012 and today their value is Rs 4 Cr, ie. took approx. 7 years to double in value, the approx. ROI you have generated is 72/7 ~ 10%).

 

Why – In an Indian context, the nominal GDP over the next couple of decades can be conservatively estimated to be around 10% (4% Inflation + 6% real GDP growth). Preferably, add 1-2% to this, since lifestyle inflation is usually higher, and investment returns can be much more volatile than national Inflation/GDP, hence some buffers are needed so that you don’t fall short as you near financial goal horizons. So, a good number to plan for is 12%.

 

 

BONUS RULE – THE “PEACE OF MIND, NOT PIECE OF MIND” RULE

Benjamin Graham once said “The investor’s chief problem – and even his worst enemy – is likely to be himself”. And as if on cue, Jack Bogle said “An advisor serves as an emotional circuit-breaker, so you don’t abandon a well-thought-out plan”.

Frequent, sometimes even addictive perusal of “information” ends up making us over-reactive and take wrong decisions in the short-term, apart from stressing us out. A good financial planner allows you to forget about your money worries and gives you peace of mind, while also acting as a safety-net to prevent you from taking wrong money decisions.

 

 

So, use the above 3 rules to quickly check whether you need a financial planner to help you manage your finances. And use the bonus rule to assess whether your money is worrying you, rather than working for you.

 

 

Image Credit: TheDigitalWay, Pixabay

 

Rule 2 Credit: While the other 2 rules are commonly used thumb rule, Rule 2 is formulated by the authors of the book “The Millionaire Next Door”

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Saving for kids’ goals, no child’s play!

Saving for kids’ goals, no child’s play!

For a parent, if there is one thing that is paramount in her life and gives her the utmost happiness, it is ensuring that her children are given every opportunity to blossom into well rounded human beings, confident and capable of taking on the world. Sadly, there is usually a gap between desire and action, and most parents wake up to the task of planning for their children’s basic and higher education when there is not much time left.

 

Schools don’t prepare the children to handle finances and most families do not discuss money matters with their children, even in tehir teens. As a result, in many cases, they grow up with a large sense of entitlement, never realising the effort, planning and sacrifices which went into building enough wealth to fulfil their dreams.

 

So, apart from investing mindfully for them , it is a great idea to involve your children early in the personal finance journey. When we interact with customers, we often see how one could have benefitted by avoiding a few traps or being more conscious of the decisions made and we enumerate them here.

 

Pl read more in our latest article, published on Moneycontrol.com

 

https://www.moneycontrol.com/news/business/personal-finance/saving-for-kids-goals-no-childs-play-4683281.html

 

Image credit: Moneycontrol

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

How women should plan for their parents’ financial and other needs

How women should plan for their parents’ financial and other needs

Somehow in our society, while it is an understood thing that a man needs to take care of his parents, it is not such a given for the woman. It is strange when you think of it, since equal share in property post demise of parents is accepted by all, while equal share in responsibilities not so easily so.

 

However, a woman has the same instinct as a man’s and would like to be there for her parents, financially or otherwise. So how can you plan for such debts, which in a way, can never be fully repaid?

 

Read our latest article, published on Moneycontrol.com

https://www.moneycontrol.com/news/business/personal-finance/how-women-should-plan-for-their-parents-financial-and-medical-needs-4579881.html

 

Image credit: Benjamin Elliott, Unsplash.com

 

What role does your Financial Advisor play in your life?

What role does your Financial Advisor play in your life?

If you were asked to describe a good financial advisor, what would your response be? Based on our experiences over the years, let me go out on a limb here and say that the most popular responses are likely to be from among the below.

  • Someone who is trust-worthy, whom I can trust with my money
  • Someone who is available to me for advice when I need and has my interests at heart
  • Someone who will make my money grow at a decent pace while also ensuring that it is safe

 

Of course, there could be other responses, do add them in the comments section below. That said, if I am right till here, let me turn around and tell you that these expectations are rather basic and should describe any financial advisor worth his or her salt. I fact, these above “virtues” should be basic minimum expectations for anyone to qualify as a financial advisor. After all, why would you even consider using the services of someone who is not trustworthy or not available when you need or not competent?

 

So, what then actually makes a good, rather “really good” financial advisor? In my view, a truly good financial advisor will have the qualities of these professionals as well!

 

 

 

 

 

 

  1. Doctor

A doctor diagnoses ailments basis visible symptoms, necessary reports and probing, identifies them as chronic, acute or placebic (imaginary), and treats accordingly.

Similarly, a good financial advisor should be able to unpeel your personal finance onion layer by layer to identify your money problems so that the right approaches can be used to put them in order.

 

  1. Accountant

Just as an accountant helps you put and keep your books in order, as well as plan and stick to a budget, a financial advisor helps you understand your personal financial balance sheet and profit-loss statement, co-creates a plan with you to nurse them back to health and helps you execute a budget for your household.

 

  1. Designer-Architect

A designer-architect understands your personal desires and aspirations and helps you accordingly build a home that feels like yours and only yours.

In the same way, a financial advisor understands your personal financial goals, helps you prioritize them and works with you to construct your own castles.

 

  1. Policeman

A financial advisor is your personal money police and helps you stay on the right side of your plan and budget, while also reading you the riot act once in a while when you step out of line!

A financial advisor also is the person who you will run to in case of any doubtful or poor experience with your money, to seek advice on damage control as well as salvage.

 

  1. Lawyer

A lawyer helps you interpret the rules or the laws specific to your problem and finds a way to solve your problem for you within the available space to your best advantage.

Just like a good lawyer, a financial advisor always has your interests as paramount and protects them at all costs, even if you are at times being criminal with your money! Though at times she (or he) may not be civil about it!

 

  1. Psychologist

A psychologist studies people, their thoughts, feelings and behaviors, in an effort to understand the “why” behind people’s actions so that they can help plan appropriate corrective measures.

Likewise, a financial advisor understands you as a person, your relationship with money and your deeper motivations so that his advice is tailored to suit you as a person. At times he also gently corrects you when you are making common behavioral mistakes with your money.

 

  1. Teacher

Last but never the least, a teacher is someone who imparts knowledge and wisdom to her students, feels pride at their successes and then selflessly moves on to the next batch, ready to start the journey all over again.

A financial advisor too helps you move along the path of “personal financial wisdom” from safety to security to freedom, is there with you to celebrate your small wins at every step and when finally, your financial goals get achieved, feels proud to have helped make it happen.

 

So, if you have a financial advisor, how many of the above qualities does he or she have? And if you don’t have one as yet, use the above as benchmarks to set your expectations so that you select the right one!

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

 

Image credit: foreside.com

 

With even banks failing, which asset class is safe enough for me to invest?

With even banks failing, which asset class is safe enough for me to invest?

The last couple of years have not been kind to investors at all. Equities (the broader indices) have near-crashed, debt mutual funds have also sprung unpleasant surprises, real estate has languished. And if things couldn’t get any worse, the so-assumed last bastion of safety for investors – banks, has also been breached.

 

In the last few weeks, two specific pieces of bad news has hurt investors and further spooked markets which already were like a cat on a hot tin roof. The first relates to the NPA woes of Yes Bank, and despite the repeated assurances of the management, investors are panicking and not only are its shares being dumped by investors and employees, there are anecdotal stories of FDs and even basic accounts being moved.

 

The second piece of news is far more chilling to the retail investor. The RBI suddenly froze all accounts and transactions of PMC (Punjab & Maharashtra Cooperative) Bank, a medium-sized cooperative bank, throwing its depositors and customers into serious emotional turmoil and financial crisis. It turns out that nearly 3/4ths of its loans are NPA (non-performing asset, which in simple words means – unlikely to be paid back, at least in whole), having been advanced to a single customer (in brazen violations of existing regulations), which has gone bankrupt. What is sad is that there seems to be not much hope immediately in store for the thousands of retail investors who had deposited their hard-earned savings in the bank, and whose monies and access to liquidity has got stuck all of a sudden.

 

This leads me to the titular question – “As an investor, which asset class is safe enough to invest?” While I am sure this question is on many investor’s minds, this question is better answered by flipping it and instead asking oneself – “As an investor, how much do I understand the risks?”

 

Let me explain further. Most of the time, investors burn their fingers because they invest without fully understanding the products and the risks that they carry. Usually the only understanding of risk that they tend to have is volatility, which they then convert into a perception of capital protection. Ie. Equity is very volatile, and capital loss can be significant. Debt is not at all volatile and is like an FD, therefore capital protection is guaranteed.

 

Unfortunately, this is an incomplete picture of the risks that the products carry. At a recent seminar I attended, a speaker used the iceberg metaphor to depict the unseen factors behind results (success or failure) and it is apt here as well. Risk is also like an iceberg. While some part of it is seen, many parts of it remain unseen. And importantly, as an investor, while it may not be possible to identify all the risks (ie. many parts of it will remain unknown), it is necessary to understand and estimate it, to be able to manage it.

 

Eg, In the case of Equity, volatility is seen as the primary risk, but actually that’s not the risk investors should worry about, since over the medium to long term, the volatility subsides substantially. That said, business risk (how will the company perform) and concentration risk (% share of the company in the overall portfolio) are important risk factors that need to be managed.

 

In the case of debt, investors have some understanding about interest rate risk, since they know that FDs when renewed may be at a lower or higher rate, depending on the prevailing interest rate. On the other hand, the general investor belief about debt is that capital protection is guaranteed, and hence one sees a bee-line for some of these corporate deposits or debentures, which offer much higher rates vs the prevailing rate in the market. Key risks that investors ignore in the case of debt are credit risk (what if the company fails to pay either the interest, or worse, the principal as well) and business risk (what if the company you are putting your money in has bad lending practices and hence sinks eg. PMC Bank).

 

So, leading back to the question we asked originally, unfortunately, the answers aren’t black-or-white. Investors would be prudent not to chase so-called “safer” asset-classes basis their past experiences. They should instead spend time understanding the risks involved and managing them. Your investment is safe only if you have taken the necessary and right steps to manage the risks involved in those investments. Managing the risks involve having the right asset allocation basis your (the investor’s) investment time-horizons as well as appetite for risk, identifying the right investments within each asset class, as well as making sure that there is adequate diversification, both across and within asset-classes.

 

While the above is not rocket science, having both, the right expertise (analysis and research) and pain-staking effort (regular review and course-correction), is required. And importantly, the need to “unbias” yourself while evaluating your choices and taking your decisions is essential. If you are new or busy, then having access to a trusted advisor will help you manage your portfolio better in terms of both risk management as well as adapting the portfolio to best suit your needs and goals.

 

To summarize though, remember – understanding the risks is key to determining safety of your investments. Without adequate understanding, even the safest-seeming investment can turn out to be super-risky, while with some level of understanding and risk-management, investors can navigate their way safely through even seemingly high-risk investments.

 

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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