Source/Contribution by : NJ Publications
Nobody likes to take risk, but the irony is the lower the risk, the lower the gain. Risk and Rewards are directly related, some of your clients understand this paradox and are willing to take calculated risks, while others just do not want to get out of their comfort zones. Either they are too reluctant to invest, they want to keep their money safe in their cupboards or max in their saving accounts. Then there are others who stretch their limits max up till fixed deposits or other sovereign backed fixed income instruments, and few go for life insurance policies that offer fixed and poor returns.
Many of us have clients who form a part of the above league of conservative investors. Their portfolios are highly inclined towards traditional low risk investments and lack diversification.
In the short run, may be due to market volatility their conservative portfolio may fare better than mutual funds, but in the long run, when the volatility gets neutralized, the latter will supersede the former by generous margins.
This article is about the above genre of investors who need to know about how their investing habits are gnawing at their future goals bit by bit.
How much they have lost over the years: Conservative investors see the returns on an absolute basis, a lakh has tripled to 3 lakh in 15 years, what they generally don't see is the bigger and true picture, which you need to show to them. No doubt 1 lakh has increased to 3 lakh, but the market value of 3 lakh does not remain the same 15 years hence, it may or not be even worth the original 1 lakh. This happened because of inflation, prices of many consumer goods and services has more than quadrupled in the last 2 decades, hence these investors might have actually lost money. If in case the investor would have invested this lakh in a diversified equity fund, assuming a modest rate of return of 15%, his lakh would have translated into about 8 lakhs, more than double of what he got from his FD.
How much they will be loosing in the future: If the conservative investor continues to play safe for a long time, he would be hampering his future too. If this investor still invests in fixed income products (the returns for which are consistently falling in the recent past), then it may reciprocate to under fulfillment or non fulfillment of goals altogether. Let's say a 45 year old conservative investor has Rs 40 Lakhs and he wants to invest this money in a way that he has Rs 15 Lakhs for his daughter's wedding after 5 years and Rs 1.5 crore for his retirement after 15 years. Now being a traditional fixed income investor, he invests Rs 12 lakh in a five year 7% FD, and the remaining 28 lacs in a PPF account. This investor falls under the 30% tax slab, and after 5 years he gets Rs 15.25 lakhs for his daughter's wedding (after deducting taxes). However after the next 10 years, his investment puts him to shame, even after yielding tax free returns, his PPF investment gave him Rs 0.89 crore, which is nowhere near his target. If in case this investor exposed his money to some risk for the longer term goal and invested in a diversified mutual fund for his retirement, instead of the PPF, then the scenario would have been different. Let's say the Mutual fund gave him a 12% tax free return, he would have got Rs 1.53 crores from his Mutual Fund and he has already met his daughter's wedding goal from the FD. Incorporating some equity into his portfolio for long term goals have helped him achieve both his goals.
To conclude, many advisors encounter such investors who are very difficult to be convinced for modern products. It is indeed isn't easy to enter into their territory, but it is not impossible either. We need to show them the true picture by giving them an account of the losses they are incurring year after year, supported by facts and figures, followed by other important investing ideologies.
{s}
[[script type="text/javascript"]]
$(document).ready(function(){
new DiscussionBoard("divDiscussionBoard", "1145", "http://www.njwebnest.in/esaathi/index.php/discussion").load();
});
[[/script]]
{/s}
