Parikh further says that there would definitely be some money moving out of debt funds and going into FDs and stuff like that but he still feels debt funds have some advantages over FDs and similar products.
How do you read this uncertainty majorly triggered by global markets?
: First of all, we have gotten a little spoiled in the last few years because we have seen markets just go one way. Even during Covid years, it corrected sharply and then we were just going up one way. A lot of investors came in the last two-three years.
Today, I find some people think that it is their right to get returns in the stock market or with investing. But markets are supposed to be volatile, they are supposed to go up and down. So, this is a normal market. The only thing is that the expectations have gone up too much and normalisation will come in handy.
So, uncertainty will continue. We have seen one year of flattish markets. It could continue for some more time, six months to a year or two. It will definitely test investors’ patience. But I also want to say that in order to see good times, these are the times one has to invest and keep the SIPs running and stay the course because equity is a long-term product. It is a five-year plus product. So, do not let one or two years of no returns scare you because there are returns to be made going forward.
Also, what we have noticed is that people always recommend that first-time investors should start with a passive approach or maybe an index fund. But before all of this, we need to do our homework. One needs to have a time horizon of five or five years plus and line up the goals. What factors should one identify if starting on an investment journey?
One of the mistakes I saw recently was that a lot of people started investing by looking at just shorter-term past returns, last three months, six months, one year kind of returns. Also, a lot of people buy on just tips or they hear about some fund that their friend has bought or somebody randomly recommended to them and they go and buy that without even thinking about why they are investing in such a fund or anything.
So one should not do that. Do not work on tips or hearsay or even by looking at recent past returns of funds and invest. One thing people need to realise is that investing is a plan and a procedure. It is a proper plan you need to make for yourself depending on your short-term goals, medium-term goals and long-term goals. I feel that emergency funds are very necessary today. Covid has taught us that having some money just put out for any unforeseen situation is a must. So the first thing is to have some safety money; then decide your goals. Are they medium-term goals or long-term goals?By long-term goals I mean five plus years. If your goals are five plus years, then invest that in equity. Anything less than five years should be in debt and other products. Even before that, one needs to sit down and get your asset allocation done. Your asset allocation will be done by looking at your risk profile. So, this is quite a tedious process.
If you do not have the time or the effort to do it, go find a good financial advisor who will help you out with these things. Once asset allocation is done, then just stick to that. I do not think it is a rocket science, people try to do too much after that. Once your asset allocation is set, you stick to your asset allocation, let it continue. So, for a first-time investor, it is necessary to make a plan, get an asset allocation in place and also to know your risk profile.
With all these things kept in mind, will the strategy differ for someone who is starting out at maybe at 25 and someone who is doing the same thing when 40 years old?
It will differ from person to person. We call it personal finance because it is very personal. So, what a 25-year-old’s goal would be compared to a 40-year-old’s goal and their risk profile will also be very different. We have to cater individually to each person. I do not think there is a universal plan that goes for everyone. Each person will need to figure that out by themselves.
Talking about the risk profiling, how can one identify what kind of a risk profile they have?. One thing is knowing what kind of risk appetite you have. In the last one year, people who invested through SIPs or started investing through SIPs might not have seen good returns. How can one alter their understanding of equity markets and their own risk profiling?
A couple of things here. One is to figure out the risk profile or how much risk they can take. There are a lot of tools available online also and a financial advisor can sit down and figure out how much risk they can take. That is one part of it.
Obviously, it is good in theory but I know a lot of people who said that they could take a lot of risk and were not afraid of volatility. But in a year’s time, if they do not see any returns, then they get scared or if they see the market going up and down too much, their blood pressure goes up. That means that person is not that capable of taking risks though they might think they are.
The theoretical part can work but honestly only once you invest in the markets will you realise that only experience teaches us how good you are at taking risk. Secondly, I have been telling people that it is important to learn about behavioural biases that can help you a lot in these markets or in the market in general. Know about your own behaviour and that of other people.
So, having a certain behavioural bias, can help you understand what is going on. For example, there is something called a representative bias. A couple of weeks back, we had the Silicon Valley Bank collapse. There were problems in that and suddenly all banks started going down. Now Silicon Valley is one bank, but in our mind, we represent all other banks as another Silicon Valley Bank though those banks might not have similar problems.
If you know all these things, then you can say okay this is representative bias going on, I might get a good opportunity to buy at some point because this does not make any rational sense because this bank actually does not have those problems.
Then there is availability bias or recency bias. You extrapolate what is going on in the recent past to the future. If markets are only going up like during Covid, then people will think it will go up forever and once you know such biases, then you make better financial and money decisions. I urge people to learn about behavioural biases as that helps in markets which are volatile and helps us make better decisions to stay the course when it comes to investments.
Since you mentioned asset allocation and diversification, what about someone starting out with a debt investment? What kind of debt instrument would you recommend one should pick considering the changes in the LTCG and the indexation benefit which would not be there on any of the debt mutual funds from April 1?
In debt, there are a lot of products which are short term, medium term and long term. I do not think people should really look at investments from a tax angle as such. Yes, tax angle is important but that should not be the starting point. The starting point should be your goals, what goals you have and how long they are for you instead of just the taxation part of it.
There would definitely be some money moving out of probably debt funds and going into FDs and stuff like that but again I see that debt funds still have some advantages. In debt funds, you pay taxes only when you redeem and so if you redeem even after four-five years, you will pay tax only that one time whereas in FDs or some of those products, you have to pay tax on an annual basis.
Also, the advantage of debt funds is that you can remove some part of your money without any penalty or any of that stuff and so you can defer the tax and take out part payment of the debt fund.
Obviously the indexation benefit was a huge plus and that has gone, but I still think debt funds have a part to play in peoples’ portfolios. Now because indexation is gone, there will be three categories of funds; one is funds which have less than 35% of equity which would be counted as the debt fund; these will not have any benefits of indexation.
Second would be funds which will have between 35% and 65% equity for which there will be indexation benefits and the last thing will be about 65% equity which we will have a equity fund portfolio or equity fund taxation.
So some people might move out from the pure debt funds and get into the hybrid funds as we call it between 35% and 65% to save tax, but again it will all depend on peoples’ goal where they would want to invest in but the hybrid funds might make more sense going forward. now.
Any idea when the international investment limit will go up for your flexicap fund?
I wish I knew. There is nothing that has come right now. We had the restriction on remitting money overseas and buying international stocks last February and nothing so far has come out on that front in the sense of opening the limits. What the regulator has said is that if you had seen redemptions in your international fund, you can top up to the Feb 28th limit that was there or what your fund was at that time.
We have not seen any redemptions in our flexicap fund and so we do not have any leeway to invest more money overseas. Like me, everyone in the industry, is hoping that these limits open up and we can take advantage of overseas investing
