Investment advisory in India was fragmented for a long period of time. In the 1990s and early 2000s, most people relied on brokers, mutual fund distributors and insurance agents, but more for making investments rather than for seeking advice. The other set of advisors by default were chartered accountants, who while helping individuals file their tax returns also informed them about investments that could reduce the tax liability. Until then, the most sold products were insurance policies and bank fixed deposits.

It was only in the mid-2000s that financial advisory entered India, with the Financial Planning Standards Board spreading its wings beyond the US to issue certified financial planner (CFP) certificates. When FPSB came to India in 2004, the concept of financial planning took centrestage, especially after 2007 when the Securities and Exchange Board of India (Sebi) allowed direct retail investments in mutual funds.

It was much later in 2013 that Sebi floated the concept of Sebi-registered financial advisors, who are now among the most trusted individuals for disseminating financial advice.

Still, India remains massively under-advised though the appetite for investments has gone up manifold. After 10 years since the inception of Sebi RIAs, there are only 1,331 RIAs in India against at least 120 million demat account holders and a little over 150 million mutual fund folios, as on July 13, 2023, according to the latest data. There are 139,764 MFDs in India as on June 30, 2023. To know more about financial advisory in India, read our freedom special (bit.ly/3Eoajrv).

Little wonder that holistic financial advice still eludes a large chunk of Indian investors, especially in tier II and tier II cities, who remain dependent on brokers, agents, CAs, bank managers, and even financial influencers or finfluencers.

The latter are now under Sebi’s scrutiny. In a recent interaction, Sebi chairperson Madhabi Puri Buch indicated that some regulatory measures for financial influencers are in the offing. Moreover, the Advertising Standards Council of India (ASCI) recently made it mandatory for finfluencers to register with Sebi or the Insurance Regulatory and Development Authority of India (Irdai), depending on the kind of advice they were providing.

The Way Forward

Sebi is tightening the noose around brokers and agents to curtail mis-selling, which is still widespread. It is still to be seen though how and when the financial advisory domain settles in India for the customer’s benefit. The regulations are expected to be the key to resolving the problem of mis-selling.

The rise of technology and digital platforms have posed a number of challenges, but at the same time have helped spread financial awareness. Major regulators in India, including Sebi, the Reserve Bank of India (RBI) and Irdai have financial literature that can help customers make the right decisions. However, the need of the hour is to disseminate it through the right channels. In the interim, many genuine advisors may suffer (bit.ly/3qDaqMj) but that is a price that may need to be paid for healthy customer-centric advice to proliferate in India.

Opting for a financial plan can sort your life. Lovaii Navlakhi, MD & CEO, International Money Matters talks about the key elements of a plan and why financial planning is important for everyone.

What Are The Essential Elements That A 360-Degree Financial Plan Should Have?

There are multiple ways in which we can classify the elements of such a plan. We start with having a conversation with the individual to get data on five elements—the financial goals; the regular and one-off earnings; the regular and periodic expenses; the investments, with details of rates of return, if fixed, and maturity dates; and finally, the liabilities or commitments which do not form part of the regular expenses.

Once we analyse and work on these, other elements emerge that need to be taken care of. The questions that arise are: What is the element of risk and how to prevent that? Is there adequate health, life and critical illness cover? What are the best options to get or upgrade them? What does the cash flow look like in the next few months, following quarters and a few years? This last one will help identify liquidity risks, if any. What is the allocation of assets—not only between equity and fixed income, but also between physical and financial assets, and across geographies and currencies? What is the ideal asset allocation based on the risk profile of the customer? What needs to be done to correct the asset allocation, and when? What will be the tax implications of such a move? Are the assets in the right instruments? Are they competing well across their peer groups? What is the mechanism of setting up a regular review to ensure that these questions are addressed on an ongoing basis?

A holistic financial plan will also look at life post-retirement, as well as how to deal with the transfer of assets post-life. Is there a better way to hold the assets so that the transfer is seamless and with minimal of paperwork and hassles? As families become more global and assets get spread across geographies, all the issues of risk, investment, and transfer will arise for each of these locations and will need to be addressed by a 360-degree planning exercise.

Finally, financial planning is also not static. Changes may need to be made to the plan based on higher or lower earnings, a windfall or an unexpected outflow, and market fluctuations and regulatory changes such as increase or reduction in tax rates. Also, financial planning is, typically, for the family and not just an individual.

The question to ask here is whether the non-active members will be able to manage the myriad options with the same alacrity as the active member—this might result in changes from the ad-hoc investment style to a more disciplined approach of planning.

I’ve Read Risk Appetite Can Affect Returns. How Do I Assess It? Is It Different From Risk Capacity?

Lovaii Navlakhi  | MD & CEO, International Money Matters

Our clients often tell us that they are okay with high risk, or not fine with it, but the interpretation of risk may vary from person to person. Thus, there needs to be a scientific base to determine what every individual’s risk appetite is. There are psychometric measures which are derived from a bunch of 15-20 questions that can help rate a person’s risk appetite in numerical terms. This leads to the classifications of aggressive, moderate and conservative investor categories and a few more in between, such as the moderately aggressive. This exercise helps in determining the threshold of exposure (to growth or risks of assets) beyond which the investor will not be comfortable.

Let’s understand this with an example. If you are comfortable with losing 5 per cent of your net worth, and equity markets could lose 20 per cent at any time, one way to look at this would be to restrict your investments in equity to 25 per cent. Of course, your risk appetite would also impact the potential to generate returns.  

Risk capacity refers to the amount of risk that investors must take to achieve their goals. To make an analogy with a one-day cricket match, if the required run rate to win climbs, the batsman has to attempt to hit a boundary or a six even though there is the risk of losing the wicket. In the above example, if the investor needs a return of 10 per cent per annum to meet the goals, and if equity will generate 12.5 per cent and fixed income 7.5 per cent, the investor will necessarily have to allocate 50 per cent to growth assets. If the investor sticks to investing in line with the risk appetite, the potential returns generated will be 8.75 per cent per annum, (25 per cent in equity and 75 per cent in fixed income), thereby reducing the chances of achieving the financial goals.

We suggest that the risk appetite questionnaire is run every three years or so to see if there are changes in the circumstances of the individual. Examples of such changes could be when a goal is met, when there is drastic increase or decrease in earnings or otherwise. We have seen the risk appetite increase as clients get older, and when their goals are met and, hence, have never followed the “100 minus your current age should be invested in growth assets” adage.

Is Financial Planning Meant Only For The Rich Or For The Middle Class As Well And Why?

Most individuals have dreams and desires for themselves as well as for their families. It does not matter whether the individual is rich or not. A financial planner’s job is to convert those dreams and desires into money terms.

The middle class has targets to achieve and income to be earned to help them achieve their goals. What we normally ask every individual is to list how much money they need and when, and for what purpose. We ask for the amounts in today’s value and give an estimated future value. Besides listing the goals or desires that they have, we also ask that they rank them based on priority, so that we know what can be sacrificed in case the funds fall short of meeting one or some of those goals.

I often come across investors who want to delay their financial planning exercise to a time when they have “sufficient” funds. However, as human beings, we keep striving for more. In fact, no one would like to bring down the standard of living that they are used to. So, postponing planning to when you have sufficient funds is like saying that I will plan where to stay, and what to do on my holiday from India to the Far East only when I board the flight to my destination. What gets measured gets done, and thus setting a financial target is the first step in creating a dashboard to check one’s progress.

On the other hand, even the rich have goals. But the difference is that, for the rich, the funds or the corpus available today is more than what is needed for the goals. For them, financial planning can play a role for a portion of their assets to be deployed for these goals. The extra or surplus assets can be invested in an extremely aggressive manner (since the goals will not be compromised) or in an extremely conservative manner, where protection of the surplus assets is the goal. That is the added benefit that they have.

Why Is Goal-Based Planning Important? Wouldn’t Goals Be Automatically Met If I Have Enough Wealth?

Goals can be sequenced chronologically or based on the individual’s priority. Some sort them based on size, others on the fact whether these goals need to be met in full or in different parts. Each of these goals may have a different inflation rate as well. For instance, goals for medical needs have higher inflation than those for education and those for regular expenses. Those need to be taken into account while planning.

Thus, the timing of the goal and its purpose makes a difference. Some of these have a fixed time, such as the dates to pay the semester fees for education. Some can also vary, such as the amounts kept aside for a holiday. However, the paths to accumulating funds for these goals will be different, partly because the number of years to approaching these goals and withdrawing the funds for them will be different. As we approach the goals, we reduce the risks so that we are less impacted by sharp movements in the values of our investments.

If you do have enough wealth and want to be lazy about managing your money, you could have a situation of remaining in sub-optimal asset classes, such as savings bank or fixed deposits, even though the time horizon for the goal is over five years away.

The other extreme would be someone having all the funds invested in equity markets as they have more than sufficient wealth and, hence, can afford to ignore the risks of sharp falls in the equity market. We remember the recent phenomenon of equity markets falling 35 per cent in a short period of six weeks in March 2020 during the onset of the Covid-19 pandemic.

But it is also important to understand that even as we are living life according to our own set of plans, the vagaries of life intervene at the most unexpected of moments and circumstances. At that time, we will feel secure and satisfied that we have been planning for our goals for a while and hence we have made at least some progress in accumulating funds for those goals. It would hence be foolhardy to assume that just because we have enough wealth, our goals would be automatically met—even if they are, they would not be in the most productive way.

Is There A Way By Which I Can Know How My portfolio Is Doing?

Before you start investing, you should have a target in mind. The target could be in terms of absolute returns, or relative returns beating a benchmark, or it could be the availability of funds to meet certain goals without compromising on the investments. It’s best that your advisors knows about those targets as they will construct your portfolio accordingly keeping your target objective in mind.

One of the normal expectations of a new investor is to make returns (lots of it), not to lose any money (or beat the fixed deposit rate) and have the option to withdraw at any time a part or the whole of the portfolio.

But we know that there is no single investment product that will meet all these criteria. That is precisely the reason why we need to create a portfolio which has different products for different needs. This also means that the requirement to withdraw funds in a short period of time must be met from the liquid portion of the portfolio, and not a long-term investment instrument, such as an equity fund, even though its performance has been sub-par till date. We all know that the longer we are willing to stay invested in equity funds, the better is our probability of not losing money and achieving long-term growth.

One important thing to remember is that you should never base your investment decisions on the returns over the past one year—any point-to-point evaluation of returns of the past is fraught with huge risks.

As you are investing for the future, your portfolio evaluation should always be based on the overall outlook. If at all you need to use the past as a base, consider rolling returns which normalise the effect of a single point in time for entry as well as exit. Instead use a periodic (say annual) review of your asset allocation and rebalance the portfolio accordingly so that you do not end up making decisions in haste on the basis of either fear or greed.

But it is also true that these emotions come in the way of rational investment decisions, and so, having a trusted advisor might be the solution to enhance returns to your portfolio—at least those that are compromised by your emotional interventions.

Kuntal Kumar in 2007 (Left) and in 2023. Photo: Photo: Shome Basu

Then and Now

Kuntal Kumar

Dehradun-based Kuntal Kumar, 46, has come a long way in his investing journey since his first interview with Outlook Money in the summer of 2007 when he and his wife were expecting their first child. At the time, he was a young professional in the hospitality industry, while his wife Nisha juggled between being a homemaker and an HR professional. They now have two children, son Savya (15) and daughter Saatvika (9).

The couple is well-settled now and has managed to fulfil most of their goals they had envisioned as 20-somethings. It is now just about managing their corpus and savings well. They are financially secure and are not dependent on a regular job. Kuntal diversified his investments from fixed deposits and annuity plans to shares and mutual funds, which helped him grow his wealth quickly.

Kuntal changed his investment strategy drastically after Covid. Before that, he invested only in equities, but now maintains a debt portfolio too.

He initially planned to retire by the age of 45, but has taken up a consultant role in line with his planner’s advice. This ensures he has steady income and has ample time for his family and hobbies. In his free time, he writes blogs, travels, and meets people who could help him with new business opportunities.