Should you get a registered investment adviser?

First, get the liquidity requirement taken care of. What is needed for the next six to nine months (or 12 to 18 months) should be kept in a safe place, accessible when needed. The period that you consider depends upon whether you are working or not, and whether there is other income to supplement. In case of retired or passive investors, we consider the longer period. In this category of investment, liquidity is the prime driver, and avoiding risks is the next. Returns are not at the centre of such investments.

For the rest of the money meant for the long term, we would recommend that a scientific risk profile is done. This will give us the limits that we can invest in equity or growth assets without causing you to lose sleep at night. The rest of the money can be invested in debt or fixed income return instruments.

In equity, we follow a few rules: depending on your experience in equity, we allocate funds between large-cap, mid-cap and small-cap, taking into account tactical calls as well, such as valuation and prevailing sentiment. We try and restrict exposure to one fund manager to not more than 10-15% and hence portfolio management schemes (PMS) are recommended when the corpus being invested is more than ₹5 crore to ₹6 crore. Similarly, AIFs (alternative investment funds) are recommended for portfolios greater than ₹10 crore. For the rest, mutual funds have adequate width and depth to meet your requirements.

In large-cap mutual funds, predominantly investments are in index funds and the more actively managed funds are chosen for mid-cap and small-cap only. That is because expense ratios are lower for index (passive) funds, and the potential to generate alpha from fund manager actions in large-cap is limited. We recommend at least 10% of the allocation in international markets as a hedge against volatility in the domestic market. The fund of funds route is best because of the issues on estate duty when you invest through the LRS (liberalized remittance scheme).

Gold is another asset class where we would part 5% of the corpus—this is an allocation decision and a “safe haven" investment. Again, the aim here is not returns.

That brings us to the fixed income component. The objective here is to make post-tax returns that beat or at best meet inflation. And remember, inflation is not the official rate that is published, but that which applies to you. In the extreme situation that all your spending is on fuel, and the price is up by 20% in the past year, the inflation rate for you is 20%. Remember, the returns we are seeking is post-tax; hence a bank deposit earning 5.5% per annum (pa) will be below 3.75% pa for someone in the 30% tax bracket.

It’s important to have in-depth knowledge or a good adviser to manage your investments and your behaviour; and this is where a registered investment adviser (RIA) comes in. Regulated by the Securities and Exchange Board of India (Sebi), this adviser acts in a fiduciary capacity—putting your interest over theirs; and charging a fee for the advice. If you invest through them, they would choose advised or direct plans. These are not only cheaper than regular plans, but also give you a sense of comfort as you know they are not recommending an investment for the commission that they will make.

Apart from investments, the RIA has a 360-degree view in looking at insurance requirements—risk or term cover, medical insurance and critical illness; as also the ability to connect you with a professional to help you make and execute your Will. Understanding your needs is at the top of the list of this adviser so that the solution he/she recommends is holistic and customized.

You will note that I have not asked what amount you have to invest as your goals are more important than the money you have at your disposal. You can rest assured that the fees charged are reasonable—part of it comes back to you by way of extra returns you make by not investing in regular plans. While there is a pain of writing a cheque for fees each year, you are investing in a buddy who could be by your side in good times and bad, and get you over the line in your journey that’s called life. Invest today in that buddy.

Lovaii Navlakhi is a registered investment adviser.