A lot of us probably find ourselves yearning for the simpler times gone by. And more so when it comes to our investments. We are being besieged with many new investment options and giddy promises of returns. And we are surrounded by expert voices that raise our enthusiasm while also warning us of hidden costs, burst bubbles, and cyclical falls.
Unfortunately, there is no way back to the period when a few solid papers guaranteed a peaceful financial future. That’s because our financial lives today are no longer simple, or linear. We’re often chasing multiple goals at the same time. Loans and credit are a part of our lives, often from the time we start earning. Life expectancy has increased, and we’re being forced to think about a whole new set of scenarios involving life but no income—with or without medical expenses.
Investment opportunities have changed as well. The national economy has opened up, with even basic bank rates dependent on global and macroeconomic trends that are difficult to understand. And with more and more of us investing in the capital markets, there is a lot of money chasing limited opportunities; ergo, making exceptional returns has become that much more difficult.
As retail investors, it is into this complex scenario that we pour our hard-earned money. Denying this complexity or insisting on following age-old maxims when investing can only get us limited success.
Even as we start investing, most of us are exposed to more ‘asset classes’ and ‘products’ than we realise. For example, when asked, you would say that you only invest in two mutual funds by way of SIP(systematic investment plan). A fuller look, though, will reveal exposure to multiple asset classes, products and managers. Let’s see how.
Each mutual fund (product 1) you invest in is managed by a different manager, using a different objective and strategy. If you are a working professional, you are likely allocating funds to your employee provident fund (product 2), an annuity scheme (product 3), and possibly receiving stock options from your company (product 4), all of which earn and compound differently. You probably also have a home loan (product 5), some fixed deposits (product 6), and some endowment insurance plans (product 7). Underlying all of these are the different asset classes you are being exposed to, namely, equity, fixed income, real estate and cash.
It is only when we realise our complete exposure that we can start to ask the right questions, which are: will my investments work together to meet my financial goals? Am I putting money in a product or manager that can earn better somewhere else? Am I exposed to more risk than I am currently aware of?
Only advisers who are qualified to give advice across multiple asset classes, multiple products and multiple managers can answer your questions knowledgeably and recommend the next course of action.
Three Layers of Strategy
Let’s see how investment advisers use the available asset classes, products and managers to define a unique strategy and portfolio composition for each of their clients.
Asset Classes: Experts around the world agree that asset allocation is the first and most important step in investment management. Advisers decide your exposure to classes such as equity, fixed income and cash to build in wealth generation, wealth preservation and liquidity in the right proportion. Other asset classes such as real estate, gold and commodities may also be considered.
Products: The choice of a product under each asset class is made considering the term of investment, need for liquidity, costs of investment, tax implications, and ease of entry and exit. For example, if you wish to invest in real estate to create a second income stream, should you invest in a residential property, commercial property, or opt for a real estate investment trust (REIT)? REITs require lesser investment, distribute rental incomes as earnings, and are easier to exit than physical property. However, the upside is limited as compared to full ownership of a property, and it may not be as tax efficient.
Managers: Most products, including mutual funds, ETFs, REITs, etc., are available in variants of sub-asset classes, investment themes and investment objectives to cover all possible investment strategies. For example, equity mutual funds can be large-cap or multi-cap schemes (large, mid and small-cap); or, sector funds that invest in different themes. Different fund management teams also bring their own styles and pedigrees to mutual funds, creating a fair bit of difference in performance even in similar fund categories. This is the most tactical level of management, and advisers need to be constantly clued in to the market, study performances and portfolios of each fund, and perform ongoing analysis to ensure that only the best managers find their way into your portfolio.
The good news is that while such level of personalised advice and service was earlier only available to high net worth and institutional investors, today retail investors can access it too if they go to the right kind of adviser.