21 May, 2011

Simplify your investments and stay focussed to reap steady returns

Mahatma Gandhiji was the epitome of simplicity. Over the years, he had eschewed almost everything and his very few possessions were a few personal items like his watch, pen, eye glasses etc. Most of us have not learnt our lesson from him and end up complicating our lives.

Simplicity is a sublime concept, which needs to be experienced. Less is more, most times. Simplicity works beautifully. Like they say, less the luggage, more the comfort... Simplicity is even more relevant, with one’s finances.

We all invest in our favourite schemes – be it FD or Equities… We also put in money in insurance products. But many of us have the insatiable urge to diversify. That prompts many of my clients to ask me “What’s new?” – meaning if there are any new products in which to invest.

The main point is that they need to invest for their goals, consistently, in instruments which match their risk profile and return requirements. Diversification also is required till a point… but that does not mean that you need to have every product that has ever been launched, in your portfolio.

Mostly, the basic products are good enough to take care of most requirements. One needs to make a clear assessment of one’s needs and select appropriate investment vehicles. Among debt products, FDs & Debt Mutual funds, along with PPF, are good enough to cover most requirements on the risk-return continuum. Some might be tempted to add bonds and debentures to it and I’ll still smile and go with it. But beyond a point, diversification loses it’s meaning.

For instance, for Retirement planning one may invest in FDs, PPF, Equity & Equity MFs. A long list of twenty different products may not be required. Unlike what is normally assumed, a long list of pension policies is not required to secure the golden years. By keeping it simple, even the administration would be easy. Easy does it.

Even within a category of products like Mutual Fund schemes, you need not have a finger in every category from large-cap to thematic, sectoral to hybrid. Rather, you should be choosy about what categories you invest in. Once the category is chosen, zero in on the schemes that best represent that category.

But what about the structured products, guaranteed return products, PMS products with exotic payouts and other amazing constructs. Mostly, they can be ignored without jeopardizing any goals… these exotic products are generally not that amazing to the investors, as they are made out to be. Since there is always an expectation from the investing public for something new, there are those who oblige – launching such new fangled products. The craving for something new is also the reason why IPOs, NFOs always get a good response.

That is true of insurance products too. The industry keeps churning out one product after another – when their most important mandate is providing a security net. This has been forgotten by the industry and given the short-shrift by the consumers too. Insurance companies hence keep talking of investment products and obliging customers beat a path to their door. When clients come to us, they come loaded with all manner of insurance products and very little of what insurance products are supposed to provide – Insurance ! Very few have term insurance. Just taking an appropriate term cover would be the simplest / low-cost option to secure. But the simplicity of this product leads many to disbelieve the product – how can such small premium cover me for so much – there has to be a catch somewhere, people think. At the other end, others see the premium as money down the drain little realizing that in any insurance product there is a mortality charge, which do not give returns.

The product brochures make interesting reading and could tempt you or even psyche you into putting money into various schemes. That is the job of a product brochure! Some of your friends may be excellent raconteurs and may end up setting you up for a product inadvertently. What works for one is not necessarily best for another. The product selection largely depends on one’s goals, situation, time horizon, risk bearing capacity etc. Keeping it simple, works... Good old common sense should be your friend, confidant and guide. Or pull out a currency note and see if Bapu can inspire you on this front? If nothing works, the likes of us are waiting to simplify things for you – at a price!

Article by Suresh Sadagopan ; Published in The Economic Times on 1/4/2011

No comments: