Taking on assets and liabilities without any plan

Shyam Sunder of PeakAlpha Investment Services lists the mistakes his clients make, and recommends solutions for them

In April-May 2017, Mint surveyed around 19 financial advisers on the biggest mistakes they saw investors making ( read it here and here). Next, Mint Money started a series where an adviser delves into some of these mistakes, and recommends solutions for them. Over the next few weeks, we will talk to an adviser about mistakes investors make. You can read the other stories in the series at Here we talk to Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd.

Opportunistic buying

How do you make sense of more than 400 equity funds and 1,000 debt funds? As a result, said Shyam Sunder, many investors tend to buy anything and everything. “This is usually indicated by a wrong asset allocation," he said. This leads to investors walking into his office with “funds by the kilo" and portfolios full of “flavours of the month" funds. Sunder says to buy funds systematically. “The right way to build a mutual fund portfolio is to do it strategically, with the end in mind, which is financial freedom. Based on a determination of one’s cash flow needs, risk profile and life stage, one must establish the target asset allocation. Based on this, the portfolio must be constructed, with instrument selection being the last piece of the puzzle," he said.

Bequeath wealth, not worries

Many financial planners complain that women often leave the tasks of managing money to their husbands and don’t make enough effort to understand where the money is invested. But what happens if the spouse is no more? Sunder recollected a couple where the husband had passed away suddenly. The wife, he said, was obviously distraught; and on top of it, she had the complex task of making sense of the investments. After searching for—and sifting through—their papers, Sunder found out that the couple had invested in about 30-35 mutual fund schemes.

Mistiming the market

This is relevant to current times. Sunder says that investors often enter markets at high levels, after having sat on the fence for far too long. He recollects a new customer who had walked into his office and wanted to avoid equity funds “like the plague." Upon digging deeper, Sunder found that the client had lost money in mistiming the market. “His mistiming was so perfect, he couldn’t have bought higher even if he had set out to," said Sunder of the client’s experience. “Greed and fear are powerful emotions, and an adviser needs to step up and play the role of a coach to ensure that the client protects himself from his worst instincts," he added.

Is it a bird, plane, investment?

Sunder said that many investors tell him that they have mutual fund investments, but when he looks at their documents he finds that what they hold is a unit linked insurance plan (Ulip). “Now, Ulips are not inferior products in themselves. However, it is important that it is seen to be what it is: which is, insurance with flexibility. For someone who doesn’t need insurance or already has adequate insurance, the mortality costs are a drain on their wealth creation," he said.

Sunder said that he recommends “caveat emptor as a principle to be taken seriously by clients, who must get used to asking questions and diving into the details to avoid mistakes."

Voyage of discovery

Many advisers complain that poor bookkeeping is one of the biggest mistakes that investors make over the years. Sunder recollects several cases of investors walking into his office for the first time or at the time of on-boarding, with huge files and binders that look intimidating. “We find these filled with old share certificates, fixed deposit receipts, mutual fund statements, and many other investments," he said. He recently helped one of his clients to sell as many as 28 insurance policies; many of which he had bought over the years from an insurance agent who was also his childhood friend.

Too many loans

Sunder said that these days there is very little stigma attached to borrowing. “Borrowings help in consumption smoothing by spending tomorrow’s income today," he added. But that leads to investors making one fatal mistake: they may not be aware of how expensive some loans can be. Sunder suggests making a rates ladder and “using it to identify where to borrow from first. A similar ladder can be used when deciding which loans to clear first."