A recent survey on the investing habits of new investors, a majority of them millennials, shows a disconnect between risk and return expectations. Unlike earlier, when investors expected high returns but were unwilling to take higher risk, many of the new investors are looking for returns that are just better than fixed investments but have chosen the riskier small-cap funds. Are investors setting themselves up for failure with wrong product choices? Sunita Abraham asks experts how to read this investment behaviour and how a course correction can be done.
Align MF investments to objectives and not just returns
—Sanjiv Singhal, founder and chief operating officer, Scripbox
Many investors make their choices based on recent returns rather than suitability to purpose. Hence, we see that different types of mutual funds become fashionable at different times. This is a result of a product-centric marketplace that focuses on return as the sole criteria. Return is important, but only within a similar set of investments with similar risk and return characteristics.
Yes, this does lead to disappointment and even aversion to market-linked products. The approach we recommend is that of aligning investments to objectives. The decision tree leads from objective to asset allocation to product and finally to a security (specific mutual fund).
Investors should focus on what they hope to achieve at the end of the day, create a definable financial goal with a time frame, choose the appropriate asset class and only then select a product. This approach largely removes the possibility of such mistakes. It also ensures that the risk versus goal dynamic is factored into any plan the investor works on. The idea is to be sure about what you want and what you need to get there.
Trade-off is justified if millennials stay for long term
—DP Singh, executive director and chief marketing officer, SBI Mutual Fund
The narrative of investments in Public Provident Fund (PPF) and fixed deposits (FDs) should be seen from the perspective of investment horizon and risk-taking ability. If the investment is for the long term, then the risk-taking ability can also be higher.
Millennials today idolize entrepreneurs who lead new-age startups, and understand that staying committed for the long term is the key to wealth creation. If millennials are investing in small-cap funds with a longer time horizon of around 15 years (like in case of PPF investments), then the risk-return trade-off is justified as small-cap funds buy stocks of companies that could become multi-baggers in the long term. But, liquidity needs should be considered by millennials with entrepreneurial aspirations. It is important to follow an asset allocation approach for a better investment experience.
As an industry, we also intend to create different communication modules catering to different investor profiles based on age group, profession and understanding of the financial markets. This will assist investors in building a healthy financial portfolio.
Wrong money decisions can affect investing attitude
—Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors
Investor mindset is the platform on which right and wrong investment decisions are made. Amid the concrete world of financial products, it is obvious that any individual, be it a millennial or a middle-aged person, who is a new investor, will face difficulties in selecting the right investment product.
It is important that the right expectation management along with the purpose of investment is set in the initial stages itself. If not addressed in a proper way, it could turn out to be disastrous for investors.
Millennials need to be handled with greater care as many of them keep changing their career path in order to move up the ladder. This itself poses a potent risk. In addition, if they take wrong financial decisions due to lack of knowledge, it could have a negative impact on their attitude towards their investments. The simple solution is spreading financial awareness about investment products and the risks associated with them along with asserting the importance of time- and goal-based investment planning. It is crucial that financial sanity is instilled at an early age.
Millennials may be getting swayed by free advisory
—Ganesh Ram, business head, mutual funds, BSE
Millennials may be taking uncalculated risks because of the availability of free advisory content readily available over the internet (including articles on small- and mid-cap performance and trend) and their hesitation to approach proper advisers. Absence of the right guidance to do proper assessment of risk appetite and return requirements leads to wrong product choices.
Lower expense ratio in direct plans may be a reason why some prefer DIY investments. The ease of investing from the smartphone also plays a role in taking decisions that may have not been thought through completely.
Mutual Funds Sahi Hai has really helped but “is this MF (scheme) sahi hai for my financial goals" and/or “mera financial goals sahi hai" is the gap this generation struggles with. This will have an impact on the industry too given that 35%-plus new investors are millennials.
Taking financial advice that will lead to better understanding of risk appetite, having long-term financial goals and proper diversification can help investors make the best of the available opportunities.