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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Managing our fears while investing our money

Managing our fears while investing our money

“Planning is bringing the future into the present so that you can do something about it now.” – Alan Lakein

While we have always lived in uncertain times (is there any other kind?), none of us actually welcome uncertainty, especially in our personal lives. As human beings, we avoid uncertainty – just evidence the popularity of daily horoscopes or the rush for numerologists and astrologers.

While we are fearful of uncertainty, we are generally good at managing it. One of the ways one can manage uncertainty is by preparing for it. One way to prepare well for uncertainty is to plan for the probable outcomes.

In many facets of our life, we manage uncertainty very well. A person catching a regular train to work keeps a buffer of a couple of minutes to reach the station to account for a sudden traffic jam. He will also have an alternate plan to reach work in time, just in case the train is missed (eg. take a cab). While this may seem a very basic example, this principle is employed everywhere by us.

Also, when we plan for uncertainty, we plan suitably keeping in mind the “risk”. We make sure that we don’t take more than an acceptable amount of risk for a given event, depending on the severity of the uncertainty and the opportunity cost of failure. We use a “margin of safety” to manage uncertainty and the higher the uncertainty or the higher the stakes (probable losses), higher is the margin of safety. The whole objective is to try and make sure that the plan doesn’t fail, except in extremely unforeseen circumstances.

Eg. in the above case, in order to catch a local train, one would be comfortable reaching the station about a few minutes before the departure time. But in case of an airplane journey, one generally reaches the airport nearly 1.5-2 hours before the journey. This is despite knowing that the check-in counter closes only 45 minutes prior to departure. In this case, we keep a higher buffer because the “cost” of a missed flight here is much higher than the cost of the missed local train.

So how is this relevant to Investing? When we invest our hard-earned money, we wish to reduce uncertainty. Hence, we seek surety in returns. We also fear the risk of capital loss, even if it temporary. So, how does one handle these fears? Let us attempt to answer this in light of what we learnt from the above quoted examples.

One lesson is to choose the appropriate asset class depending on the time-horizon of the investment. When you do that well, time is the “buffer” that ensures that “risk” (eg. market volatility) gets evened out and generates the necessary return over the long term. Going back to our example – when we have enough time on our hand to reach the airport in time, does an unforeseen traffic jam (or a punctured tire) worry us? The answer is no, because we know that this is temporary, and we have enough time to reach our destination comfortably.

Another lesson is to have a “margin of safety”. As a retail investor, not following the herd to jump in when markets are booming would ensure that “margin of safety” is not compromised. Making sure that your asset selection is in the right products and in the hands of accomplished managers also helps manage this risk fairly successfully. After all, trying to catch a flight with 30 minutes left (before counter closes) versus 5 minutes, would make your journey so much more worry-free in terms of experience, even with the unplanned traffic jams and punctured tires, wouldn’t it?

Having fears while investing your money is natural. They cannot be wished away. But they can be managed and overcome by implementing these lessons. Having a plan for your financial goals, which identifies the right asset classes and investments to meet them, can make your investing journey a far more peaceful one, despite volatilities that will be faced along the way. And having a good financial planner to hold your hand through the planning journey, while keeping in mind your needs and risk appetites, will make sure that you will enjoy your present, secure in the knowledge that your future is also in safe hands.

Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: Gino Crescoli, Pixabay.com