In the last two and a half years, the investment climate in India has been dismal, with low disclosures and high risk. There have been regulatory hurdles, poor macroeconomic environment, geographical tensions, falling oil prices, poor economic activity in India and now the Covid-19 challenge.
The single-largest contributor to defaults in both the debt and equity markets has been unethical management. This brings the essence of ethics and corporate governance to the forefront. Many well-established organizations have turned belly up in a matter of days because of greed.
In all this mess, the big will grow bigger and the small may consolidate, shut shop or quietly distinguish. Given the environment, investors need to be mindful of certain factors. Here are some of them.
Risk and returns: The first part is about managing your return expectation. Super normal returns are not possible in the real world. I have always told my clients that there is no magic in the market. You get what you put in. Also, “give me high returns with low risk” is a ridiculous ask. In a declining interest rate scenario, returns above the benchmark and above risk-free return is the best an adviser can gun for.
According to our research desk, investment in equity over 10 years despite varying market cycles of negatives plays in the interim, and including the 2000 bubble and the 2008 Lehman crisis, has given an average return of 15.27%.
The second part is about understanding the risk and return of an investment. It is important to understand the overall risk and return factors. Stay away from complex products that are difficult to understand and are based on a multitude of ifs and buts.
Remember that past performance is not an indicator of future performance.
Management: Investment managers should be thoroughly researched on parameters such as qualification, experience, investment methodology and research.
You should also check the organization’s philosophy, strategy and investment methodology, and if the processes and risk mitigation measures are in place. Also, check if the decisions are centralized or taken by a team backed with sufficient data and research. Since the proof of the pudding is in the eating, when members in the top management have a stake in their investment products, then there is more confidence. At the end of the day, a fund manager is more a risk manager.
Regulation: Investment products should be regulated and adequate capital norms should be followed. For the investor, it is easier to seek redressal if that is so.
The regulator should make it mandatory to share complete disclosure of a portfolio, with illustration to the investor of the best, worst and optimum scenarios.
If, for some reason, the nature of securities are illiquid, or of low credit profile or not listed, what proportion of the portfolio comprises this and are they secured or not? The regulator needs to have stringent guidelines in place for this.
Rationale: Investors should take investment decisions after taking into account all available information and parameters. Every investment recommendation should be backed by a rationale.
Do discuss the pros and cons of your investment decisions with an adviser. Following an asset allocation plan should be the basis for portfolio construction. Diversification among geographies and various asset classes will help keep the portfolio healthy. Don’t forget to keep an emergency fund aside to tide over uncertainty due to job loss or sudden medical expenses. This should ideally be equal to six to eight months of expenses and up to a year for periods of heightened uncertainty such as now.
In a market which is full of complex products and varied investment options, and given the underlying uncertainties, consulting an adviser will do you good. Choose an investment philosophy, a time horizon, a goal, a reasonable return, backed by rationale.