When you borrow money, make sure that your EMI (equated monthly instalment) liability does not outpace one-third of your total income. And remember that your allocation to investment rises proportionately with your income. This, along with and several other personal finance lessons, are shared by Jayesh Faria, director, regional head, west, Motilal Oswal Private Wealth.
In a telephonic interview with MintGenie, he also shares his views on the magic of compounding, challenges in achieving financial independence, future of investing in cryptocurrencies and the market outlook ahead of Lok Sabha polls.
He also explains the reason as to why should investors have a long-term view of market while investing in IT stocks. In the run up to general elections, he gives his expert advice of exercising caution as it is unfair to have any drastic expectation from the market.
It is often said that one should start investing at a young age so that one can make the most of compounding. What is the right age and strategy to invest early?
Those who don’t invest early don’t understand compounding. At a young age, your disposable income is high so you have a long time to invest.
Moreover, equity — when invested over a long time - is a safe investment. So, my take is that one should start early as soon as one starts to earn, and one should also increase the allocation to investment with an increase in income.
What if you outlive the desired time span? So, you need to have money for that.
We are trying to explore the question of financial freedom in the backdrop of Independence Day. What are your views on the same? What does one think of getting financially free at a young age?
Becoming financially free at a young age is not a mission impossible but a mission tough. While saving for future, people calculate the future expenditure at current level, not realising that it would increase with time and circumstances will change too.
But certainly, achieving financial independence is not an impossible task if you start investing early and keep increasing this amount along with your income.
What is your take on investing in cryptocurrencies and other digital currencies such as bitcoins?
When you invest in speculative assets to meet financial goals and your call (in cryptos) happens to go wrong, you may have to work post-retirement. Compounding happens at a slow rate and it becomes phenomenally high when you give it enough time.
Cryptos are meant for speculative purpose only and it may work for some people. But I advise that you should not invest in something from where you can't recover. Moreover, one should not invest in an unregulated asset.
Do you believe that one should be wary of taking too much of loan, as it slows the process of achieving financial freedom?
One has to be careful while taking loan. Unless you are a corporate, you don’t get the advantage of interest payment. So, taking a loan is a double whammy from the point of view of your financial planning.
Ideally, loan repayment liability should not be more than one-third of your monthly income. If your income is ₹100, the loan EMI should not go beyond 30. Else, one may get stuck in a vicious cycle because if you skip the EMI for one month, it increases in the next month, so on and so forth.
There are serious economic troubles facing major economies such as inflation and slowdown in IT. In view of this, what outlook do you have on Indian economy in the near and medium-term future?
Economy and markets have nothing to do with each other in the short term, but they converge in the long term.
In India's economy, there is no domestic issue as such and the GDP is rising, so India is better positioned. If you look at the price to equity ratio, corporate earnings and corporate loan to GDP, balance sheet of top 100 companies, there are indications that these companies will do well, and the same will reflect in the markets too.
As far as decline in the IT sector is concerned, it is already factored in the markets.
In view of attractive valuations, is this the right time to invest in the IT companies?
It is good to invest in the IT if you are investing for three plus years because the downside risk is protected. One must remember that we are prone to 10-12 percent correction in the short term but eventually the market recuperates.
For example, Sensex ended calendar year 2021 higher by 22 percent but it saw a 10 percent plus correction during the year.
What are your expectations from the reaction of market to the forthcoming general elections?
From the market’s viewpoint, this (General Elections 2024) is an event and one should not have drastic expectations from it.
Large cap stocks are already fairly valued but mid and small caps are overvalued. So, if someone wants to invest in the large caps, one can invest across the next three to six months and as far as small caps are concerned, one can stagger the investment in the next six months to one year.
Do you think algorithmic trading and IT models-based investing can phase out human intervention, in the process of investment?
In the short term there will not be any impact. And when I say long term, I mean longer than 10 years.
India, after all, opened for the rest of the world in 1993. And algorithmic trading works on some logic for which it needs data. India only has 30 years of data. So, the things won't change for a decade to start showing results to catch the investors' fancy.