Retirement is inevitable; thus, preparation is required. According to Abhishek Banerjee, Founder & CEO, LotusdewWealth and Investment Advisors, investors must plan for predicted assets and liabilities early in life.
In an interview with MintGenie, Banerjee said that in a rising interest rate environment, dividend purchasing strategies may not perform well. When interest rates rise, corporations may be compelled to redirect cash flow from dividend payments to debt service.
Edited Excerpts:
Q. More people are now investing in the market as evidenced by increased participation in NFOs and mutual fund SIPs. What advice would you give to new-age investors looking to earn money from the market?
New fund offers (NFOs) are intriguing when a new asset class is introduced or when an asset management company (AMC) has the option to build a new strategy. We are seeing NFOs in State Development Loans (SDLs) and dividend schemes. The SDLs are not formally guaranteed by the sovereign, but, like government bonds, have an implicit guarantee. It is implied that the centre would step in if a state defaulted on its loans.
A recent instance was when the centre released Goods and Services Tax (GST) compensation to states despite insufficient compensation cess revenues. With the introduction of the GST, India has perfected this sort of hybrid federalism; if the state loan crisis comes to fruition, we could witness an expansion of this. So, these NFOs can be considered because they are newly issued loans that can be retained till maturity.
In a rising interest rate environment, dividend purchasing strategies may not perform well. This is because, when interest rates rise, corporations may be compelled to redirect cash flow from dividend payments to debt service. Typically, dividend-paying corporations return funds from operations that they cannot spend on higher-yielding endeavours.
In my opinion, the role of management is to maximise the value of equity holders; therefore, returning capital to shareholders in the form of dividends may be a tax-efficient method of wealth distribution for some organisations. Thus, I favour growth or buybacks over dividend payments.
Q. Many people plan for retirement quite late in their lives. How would you advise the new-age generation to include retirement planning in their early investment planning?
Retirement is inevitable; thus, preparation is required. But, for most people, especially younger professionals, it appears remote. Utilizing tax-saving mechanisms, such as the public provident fund, equity-linked savings plan, and national pension trust, to reduce the tax burden is the initial course of action.
One can use interest payback on home loans, school fees, and health insurance premiums to lower their tax burden later in life. At this point, it is essential to plan for predicted assets and liabilities, such as supporting children's education, an emergency fund required for job search, annual trip expenses, purchases of luxury items, vehicles, and social obligations, among others.
We believe a well-thought-out retirement plan is essential for people of all ages, but it's a bit like dieting. Everyone is aware of what is desirable, yet few adhere to it. By starting early, establishing precise objectives, utilising retirement funds, diversifying your portfolio, and staying informed, you can lay the groundwork for a safe retirement while pursuing other financial objectives.
Q. What are the factors that you ask your clients to look into before advising on how to improve their finances?
When advising clients on how to improve their money, it is often necessary to begin by assessing their present financial condition. Aspects such as age, career, secondary income sources, family support system in terms of responsibilities, and dual income sources are fundamental considerations in our risk profile. In terms of planning, there is always a personal engagement.
By monitoring the client's sources of income and tracking their expenses, we are able to discover areas where they may be able to reduce their spending and boost their savings. We have advised on financial planning for anticipated divorces and appropriate alimony. We have served as advisors concerning job losses. We have served as consultants for conditions that are lifelong.
Consider the client's debt and credit score. To identify credit score improvements, we help clients understand their debt-to-income ratio. We also suggest consolidating high-interest debt, paying payments on time, and lowering the utilization ratio to lower debt and improve credit scores. We work with our clients to create a comprehensive financial plan that incorporates retirement, investment, and estate planning to help them meet their long-term financial goals.
To help our clients prepare financially, we advise on insurance, taxes, and other financial issues. In the end, the primary objective of a financial planning exercise is to determine a client's needs and goals and to create a customized roadmap to help them accomplish them.
Q. Achieving financial independence early in life is mostly misconstrued as retiring early in life. What is your take on the same?
Financial independence is the state of having sufficient income and assets to cover your living expenditures without actively working. This indicates that you have sufficient assets, investments, and passive income streams to maintain your standard of living without a typical job or vocation.
It is crucial to remember that obtaining financial independence does not inevitably entail retiring early, despite the common association between the two. Many individuals who achieve financial independence continue to work because they enjoy or find meaning in their profession. Regardless of whether you intend to retire early or not, it is necessary to create financial objectives and plan for the future. This involves assessing your basic living needs and ensuring that your income or assets are sufficient to meet them. Regularly saving and investing a portion of your income, ideally at least 30 per cent, will help you develop a nest egg that can support you in the future.
To retire early and attain financial independence, it is essential to maximise your potential returns on earnings and investments. This may entail searching out occupations with equities upside or investing consistently in the stock market with instruments such as SIPs and equity baskets. If you diligently manage your funds and make intelligent investment decisions, you can work towards financial independence and potentially retire early, if that is your goal.
Q. When the whole world is anticipating a recession, how do you advise people to plan their emergency funds?
While the economy is in a recession, one should plan an emergency fund with crucial considerations in mind. First, guarantee that you have sufficient funds to cover your basic living needs like rent or mortgage payments, utilities, groceries, and other necessary expenses for at least three to six months.
Second, it is essential to maintain a liquid and low-risk investment for your emergency fund. Consider maintaining your emergency cash in a savings account or money market fund instead of riskier investments such as equities and bonds. Even during a recession, it is crucial to keep your emergency fund as much as possible to ensure you have a safety net.
Lastly, suppose you are concerned about the influence of a recession on your job security. In that case, it is crucial to plan ahead and investigate strategies to grow your savings and decrease your expenses. This may mean reducing discretionary expenditure, pursuing a side job, or searching for ways to boost income or skills.
Recession is part of business cycles and there is always one generation that sees it for the first time. If a person over 40 is career-focused, they may search for a position for 18 months. At a savings rate of 30 per cent and market growth of 12 per cent, it would take four to five years to build up this buffer. Thus, BEGIN NOW and prioritize your savings making sure you have enough money to weather any financial storms.
Q. So many mutual fund houses are launching new debt fund offers. Do you think the AMCs are now catering to the conservative and careful mindset of the investors?
When it comes to taking debt exposure, mutual funds are the best vehicle to take debt exposure compared to individual bonds for a number of reasons. One major advantage of debt mutual funds is that they offer daily liquidity, which means that investors can buy and sell their mutual fund units on any business day. This level of liquidity is not available with individual bonds, which can have long lock-in periods and be illiquid. Additionally, mutual funds offer diversification benefits as the fund managers invest in a basket of bonds, which can reduce the overall risk for the investors.
However, it's important to note that debt mutual funds are not without their risks. The recent Franklin Templeton debt fiasco is a case in point. In April 2020, Franklin Templeton announced the winding up of six of its debt schemes, which led to a lot of panic and uncertainty among investors. This incident highlights the importance of carefully evaluating the risk associated with the particular mutual fund scheme, particularly in terms of the credit quality of the underlying bonds, the liquidity of the scheme, and the ability of the fund manager to manage risk. A good advisor should have been able to steer their clients away from it. Hence, instead of non-convertible debentures (NCDs) or individual corporate bonds, I always prefer debt mutual funds as the promise of daily liquidity is more precious than a few extra basis points of yield.
Q. The market is now moving sideways instead of being completely sunk in the red zone. Do you think it is time for the bulls now to overcome the bears?
The sideways market movement indicates the absence of a discernible trend or direction. It can be difficult to anticipate the future direction of the market. In such circumstances, it may be prudent to concentrate on acquiring assets at average prices, such as through systematic investment plans (SIPs). This method permits investors to profit from the volatility of the market by averaging out their entry price over time.
Regarding the market's short-term direction, it is difficult to predict. Yet, some analysts believe that smaller Indian companies have a high development potential and could be an excellent investment option for bullish investors. Always keep in mind that investing entails risk and that investment decisions should be based on an individual's financial objectives and risk tolerance.
In conclusion, market fluctuations are always unclear, and predicting the future is difficult. As investors, it is essential to maintain discipline, maintain concentration, and not be carried away by market fluctuations. It is prudent to maintain a diversified portfolio, a long-term investing horizon, and to refrain from making hasty judgements based on short-term market volatility.
Likewise, it is necessary to stay abreast of the most recent developments, seek competent counsel, and react to shifting market conditions. By adhering to a disciplined strategy and remaining committed to their investment objectives, investors may develop long-term wealth and realise their financial goals.
