Self Driving your Investments is safe?

 Background

Recently a senior citizen contacted my office for arguing that we are not delivering on our promise of assured returns. He took helpline number of my firm from social media. Actual reason of his call was to ask how he got very poor return on his investments in an alternate investments he did on his own in last financial year.

What happened?

Let us say his name is Mr. Mishra and is from North India. He is a retired central Government officer and he thinks he knows about the finance industry, due to his work profile in the past. So Mishra ji who is 65 now lives happily with his wife and a married son who is working in IT industry and earning well.

Mishra ji had total of about Rs 7 Crores of retirement corpus last year. He himself, without taking help from any expert, invested about Rs 1.5 Crore in alternate investment options (invoice discounting) which is comparatively safe as it is for low duration (usually 90 days) and offers 10-12% annualized guarantied returns. I also recommend this product but it should not be total of 2-5% of client's portfolio and he/she should be younger than Mishra ji to digest if anything happens with investments. 

He calculated that in last financial year from this investment he received about 6% return after 10% TDS. So he was confused why he got almost half of return from what was promised. He went online and searched for helpline number of that company but instead he dialed number of my company. First I have to disclose and convince him that this is actually a wrong number!! But still as he called us with some issue with his investments (which is not made through us), I will try to help him with his queries.

So to understand his financial position, knowledge about the markets and his family background better I asked some basic questions first. After this questions were answered I got the picture clear. 

Regarding his question with low return, Mishra ji calculated the % return on an absolute terms rather than on annualized basis. 

So what is that, let us understand it first. If anyone invested Rs 1 Lac in 2010 in any instrument and in 2015 it grows to Rs 2 Lac. So absolute return of this investment is 100% in 5 years, while annualized return is 14.4%. 

Here Mishra ji invested Rs 1.5 Crore in a low duration products (up to 90 days, 10-12% annualized guarantied returns) so after completion of investment period amount auto-credited back to his account. Hence actually whole of amount never remained invested for a full 365 days. As per our discussion he got about Rs 9 Lac from this investment in last financial year which is 6% return in absolute terms. Probably he invested 2 times (90 days x 2 schemes) in a year hence for remaining period amount remained in his bank account only!

I explained this to him and convinced him how to calculate real returns. He worked at a very reputed and critical accounting agency of central Government (I can not name it to keep it anonymous).

Afterwards

After this was explained and Mishra ji was convinced I asked him what other ways he used for investing his life savings?

He informed me that he invested Rs 3.5 Crore in XYZ mutual fund schemes. This fund is using momentum style of investing which basically is a trading by fund manager with our money. According to risk profiling parameters this style is very much risky and is to be never recommended to any retired person.

Rest of money uncle invested in a P2P lending company which offers about 12% annualized return on his investments. 

My 2 cents

After knowing all of his investments at various places, I took a deep breath!!!

Immediately asked Mishra ji if any financial advisor is there with him for all of these decisions? I sensed there is no one to hold the hands of Mishra ji. He told me he knows about the markets so he never thought of having any advisor! And he took help of Google baba to search for best funds and schemes to invest!

I simply asked him in a Tier 2 town in North India where he is living with his wife, how much monthly amount is needed for a luxurious life? Rs 1 Lac maximum I told him before he said Rs 60-70k. So I back calculated his real requirements from his corpus (about Rs 7 Crore). If he is satisfied with Rs 12 Lac interest / return per year to spend for household expenses, he needed to invest in instruments with yield of only 1.7% per year!

And he was running to get more than 12% from his investments which is very much high than his real requirements! 

So I told him this and he was shocked to learn this side of the story! 

Learning

When we go to markets for investing naturally we look for highest returns product. This is human nature and we can't change it. But what we need to do is first to have our requirement fixed. For this goal planning and proper investing according to our risk profile is very much essential.

Here Mishra ji has Rs 7 Crore with him so he can be called rich, but as his decisions with his money are not proper he may not be called wealthy in future! 

In my own house my father who is 65 and my son who is 12 lives together. My son sometimes goes to birthday parties of his friends 3-4 times in a week where mostly they have pizzas and of course cake! He can digest this diet without any problems due to his young age. But I can not tell my 65 years old father to have such a diet in 2-3 times a week, right? Why is it so? Because it is not suitable to his risk profile!

Same way not all investment instruments are suitable to all of investors coming in the markets. Risk profiling based on age, financial conditions, risk taking abilities etc helps us to choose right product. 

Second, it's not always necessary that investing in a risky product will always deliver higher returns without ups and downs. Proper blend of various asset classes (equity, debt, real estate, gold etc) can deliver much consistent returns over long period of time efficiently.

Hope the information age we live in ends well for all of us!!! See you soon!

(Based on true story, name changed)