Investors must stick to their asset allocation
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In April-May 2017, Mint carried out a survey of 19 financial advisers, on the biggest mistakes that investors make (read them here: bit.ly/2p2Va8U and bit.ly/2qxzhgG). In July, we started a series where advisers delve into some of these mistakes and recommend solutions. Over the next few weeks, we will talk to more advisers about the mistakes investors make. You can read the series here: www.livemint.com/investor-mistakes. This week, we talk to Gurgaon-based mutual funds distributor Ashish Chadha, about the sort of mistakes he sees among those who come to his office for the first time.
Mutual fund mistakes
Flavour of the season: Every time the markets hit an all-time high, a specific type of fund starts to sell like hot cakes. “In 2008, there was a boom for infrastructure and mid-cap funds. Lots of new fund offers came in those days. Then, in 2008, when equity markets fell sharply and the net asset values of such funds fell too, investors pulled out,” Chadha said. He remembers being reprimanded by a client in those days, to whom he did not sell an equity fund but his bank had. “But because he had leveraged, he had to sell the portion that we managed—to pay-off his debts,” said Chadha. “Don’t chase the best-performing funds. You’ll get into serious trouble,” he advised.
Poor asset allocation: By chasing hot products, investors get their asset allocation wrong. In 2008, Chadha said, investors went overboard with equities. He explains that when equities return more than 20% in a year, suddenly fixed income returns of around 7-8% look very low.
People start pulling out of fixed income, he says. It is also partly the fault of distributors who don’t want to lose their clients and so they give in, because clients have a choice to leave distributors or go direct, he said.
Chadha’s advice is: if equity markets are overheated, that’s when you should cut your equity exposure and shift partly to fixed income, even though debt funds give much lower returns than equity investments, when markets are booming.
Self-help websites: Chadha says that in rising markets, investors tend to ignore their financial goals and dismiss fixed income mutual funds as ‘too conservative’ and start paying heed to ‘tips’. Chadha, an ex-serviceman, advises on investments that belong to companies, institutions, and defence units. He says that the finance committee members of these bodies frequently call him up and ask for a ‘tip’...They may want to buy shares of companies on the basis of recommendations they read on the internet. “In a bull market, schemes always come to us by their names from investors. A dividend being paid on a monthly basis is taken for granted by clients…the schemes they ask for are invariably small-cap and mid-cap. But investors must stick to their asset allocation at all times, good and bad,” he adds.
Non mutual fund errors
Ignorance about insurance: Although you don’t need to buy too many insurance policies, you still need a few of them. And here’s where ignorance can hurt. Chadha has a slightly different approach.
He does not sell unit-linked insurance plans (Ulips), but says that he doesn’t just get them redeemed if he sees too many of them in a new customer’s portfolios. “People are not willing to buy mutual funds. An existing Ulip is still some investment in a mutual fund-type product. We let investors continue in them as we continue to persuade them to put incremental money in mutual funds,” said Chadha, who believes that some savings are better than no savings, or say, better than buying real estate.
Too much credit card debt: Chadha says that it is common among many people to display their wealth. This leads to people accumulating debt; specifically credit card debt.
“We see people revolving their credit debt, which is equivalent to their 4-month worth of salaries,” Chadha said, and added that he uses insurance money from selling insurance policies to pay the credit card debt. “You can sell insurance policies to pay your debt. It is better than selling equity,” he says.
No Will: “We Indians are very poor at making Wills. We usually don’t make them,” said Chadha, who adds that although it could sound like a morbid discussion, his firm makes it a point to bring it up regularly with the clients. People must be sensitised to plan for the lives of their family members and their businesses after their death. Having a Will ensures that the assets are passed-on smoothly, and without disputes, to the heirs.