Saving is the first step in the process of creating wealth, says Rahul Jain, President & Head, Nuvama Wealth.
In an interview with MintGenie, Jain said that investors must develop discipline in the investment process.
Edited Excerpts:
Q. To any investor, what is the first advice that you give regarding savings and investments?
Saving is the first step in the process of creating wealth. We encourage investors to start saving as much as they can, even if it’s a small amount, and begin their investment journey as soon as possible. Investors should avoid delaying the saving process as time is money and time lost is money lost.
When it comes to investments, we recommend investors adhere to the asset allocation principle, which employs the thumb rule of 100 minus their age- the result is the percentage of their savings that should be allocated to equity. To be successful in their wealth creation journey, it is important for investors to develop discipline in the investment process. One way to do so is by beginning an investment through systematic investment plans (SIPs) in mutual funds.
Q. What are the usual investing styles that wealth managers advocate for their clients?
Each wealth management firm has its own philosophy. Some wealth managers, for example, take the asset allocation approach and then build the portfolio around it. This enables them to guide investors using a portfolio approach and to focus on portfolio-level returns. This is the best approach because it assists investors in meeting their financial objectives.
Few wealth managers take a tactical approach, investing in asset classes that appear to be promising in the short to medium term. Their primary goal is to maximize portfolio returns.
Q. Many new-age investors do not understand the parameters to judge fund performance. How do you suggest that they decide on their mutual fund investments?
It is common for investors to select a mutual fund scheme that has performed well in the recent past. Herd mentality is frequently at work in this behaviour. Most investors expect past performance to be repeated in the future, so they jump onto the bandwagon only to be disappointed later. To avoid making this mistake, investors, particularly Do-It-Yourself (DIY) investors, must master the art of selecting the right type of mutual fund. Investors can educate themselves on such topics by reading related blogs on the internet, taking online courses, or attending physical workshops. Alternatively, investors can seek professional assistance by hiring a wealth manager or a financial advisor who is qualified for the job.
Q. How do you suggest people create wealth by their early 40s?
Compounding power is required for wealth creation, and it works best when given enough time. As a result, time is of the essence in wealth creation. Aside from time, one must choose the right asset class, which is equity, because it has the potential for higher, and sometimes exponentially higher returns. To accumulate wealth by the age of 40, investors must begin early, perhaps when they begin their careers. They must recognize the importance of time and equity investment early on and begin investing in stocks or equity funds, whichever instrument suits them best. They should not be concerned about volatility or market noise, which can derail the wealth creation process.
Q. Is it possible for individual investors to ape their favourite fund manager’s investing style?
We come across star fund managers whose investment style is imitated by their followers in the world of investments. Because mutual fund portfolios are widely available, investors can easily replicate their personal portfolios. However, investors should be aware that this strategy is not foolproof because fund managers can make occasional modifications to the portfolio that may not be reflected in the monthly factsheets. Furthermore, the fund manager has a single goal in mind: to maximize returns within the constraints of the investment universe available to him. Investors who follow a fund manager blindly may be taking on more risk than their risk tolerance allows.
Q. The LTCG tax benefit removal has caused many investors to prefer high-interest bank FDs. In the face of rising gold prices, do you think investments in gold bonds, funds, and ETFs would yield better results?
Investors should not mix debt and gold. Both asset classes have a place in the portfolio. Debt can provide security and predictable returns, whereas, Gold is a good inflation hedge during financial crises. It is true that gold has emerged as the preferred asset class in recent years, but this was primarily due to the pandemic, rising inflation, and geopolitical tensions. We recommend keeping the overall allocation to gold between five and 10 per cent and following the asset allocation thumb rule for the rest. Investors seeking higher yields should consider instruments such as bonds and non-convertible debentures (NCDs).
