The starting point for taking advantage of market returns is to learn about the various options available, says Shiv Gupta, Founder & CEO, Sanctum Wealth.
In an interview with MintGenie, Gupta said how with the rapid expansion of financial markets, the options available to investors to not just get good returns but to get products with different combinations of risk and return are also expanding.
Edited Excerpts:
Q. How do you define financial independence to your clients?
Financial independence means different things to different people depending on their circumstances. At its core is the idea that people can achieve a desired lifestyle and pursue their interests without feeling financially constrained. The level of wealth at which this is achieved can differ widely across people.
Our clients are high-net-worth and ultra-high-net-worth individuals, who have usually achieved a level of wealth that allows them to feel financially independent. In some cases, it means that they can sustain their lifestyles without having to work. In others, it is about sustaining their lifestyles, having access to opportunities, and indulging their interests including areas like philanthropy even while being productively employed as entrepreneurs and professionals.
Q. There are more options to earn good returns than before. How do you think today’s generation can benefit from the numerous investment options available to them?
With the rapid expansion of financial markets, the options available to investors to not just get good returns but to get products with different combinations of risk and return are also expanding. These can help the investors create more optimal portfolios matching their specific circumstances. Further, these products are increasingly available in sizes that do not restrict them only to the very wealthy.
The starting point for taking advantage of this is to learn about the various options available, for which many resources are also becoming available in the public domain. Additionally, a good financial advisor can also be a valuable guide while evaluating the suitability of the various options.
Q. There is a shift in wealth management with portfolios being more diversified than ever before. What is your advice concerning wealth creation?
With the availability of many more options, investors have started diversifying portfolios more than before. That said, while diversification is good for better optimization of risk and reward, diversification without complete understanding may not add value. Investors need to understand how different asset combinations are likely to perform under various situations and how they complement each other.
On wealth creation, our advice to all investors is to be clear about their investment goal, risk tolerance, and time horizon first and then proceed to construct their portfolios. This takes thoughtful effort.
We then recommend that they follow an asset allocation approach and find the allocation that best fits their profiles. This could range from very conservative all-cash portfolios that are expected to generate 6-7% returns to longer-term oriented all-equity portfolios that are expected to generate 14-15 per cent returns. The latter may even include less liquid alternative investments like private equity and venture capital that promise higher returns albeit they require larger corpus amounts to invest in them.
Once the asset allocation is in place, some thought must be devoted to selecting the best routes to market.
Our general advice for creating wealth over time is to keep saving and investing, stay in the market, use tactical opportunities when available, and appreciate the power of compounding where at a 10% return you roughly double your money every seven years.
Q. Sebi has proposed a slew of changes to the total expense ratio (TER) that is charged to mutual fund investors. What's your take on this?
SEBI’s goals of increasing transparency, bringing down the costs of investing in mutual funds and other investments, and curbing mis-selling are well known. These latest proposals are very much in line with these goals. For example, SEBI has proposed to include brokerage, STT, B-30 incentive, GST, etc under TER. This increases the transparency of total costs to the clients.
Additionally, base TER slabs will move from the scheme level to the asset class level which benefits some of the smaller AMCs. Further given that a reasonable proportion of schemes underperform the index, SEBI has proposed to introduce performance fee elements. However, this is an evolving situation, and more clarity will emerge on implementation in the coming weeks.
Q. As per a recent report, senior citizens are betting on small savings schemes more than ever before. Do you think the removal of indexation benefits from debt funds has shifted the focus back to government-sponsored schemes?
The removal of indexation benefits from debt mutual funds has made many other debt investment options, including government-sponsored schemes attractive. Some allocation to these schemes depending on individual circumstances can make sense. However, most of these schemes are locked in and hence may not be suitable for all.
We believe debt mutual funds still offer some advantages such as liquidity without impact cost, the possibility of mark-to-market gains in a declining interest rate environment, and diversification of credit risk.
Q. Mutual fund houses are getting more innovative with their new range of fund schemes. Do you think this would prompt people to adopt new investing styles?
Even today, a wider variety of investment styles are in practice given the sheer number of possible permutations in the way portfolios can be constructed. These include instruments used, decision-making styles and frequencies, self-driven versus advisor-assisted approaches, long-term versus short-term, etc.
As financial markets evolve, new schemes and instruments become available, more first-time investors enter the market, and investors become more sophisticated, it is inevitable that more investing styles will emerge. However, at the most fundamental level investing styles can be seen on a spectrum where one end is a long-term, fundamentally driven, asset allocation style and then at the other end is trading and opportunistic investing, and many combinations in between. This framework is enduring and will remain in place.
Q. What is fuelling gold prices? Do you advise an increased allocation to gold in one’s investment portfolio?
Apart from its functional uses, gold is seen as a safe haven in times of uncertainty, both economic and political, and a hedge against inflation. Given that both conditions have been prevailing globally for the past year or so, gold has found itself in favour with investors.
Going forward we are about to enter an environment of low growth and high inflation globally, also known as stagflation. Historically gold has outperformed other asset classes during stagflation and hence we remain overweight gold.
We generally work within a range of 5-10 per cent in gold for Indian portfolios and have recently been at the higher end of the range.
