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Attain financial security through diversification, investment in financial assets, equities-based products

The key to financial security is covering the basics of personal finance and having a diverse mix of investments.

Attain financial security through diversification, investment in financial assets, equities-based products
In 2022 we have seen both the tail end of a bull market and the ongoing (but erratic) bear market.

By Vasanth Kamath, Founder and CEO, smallcase

There’s nothing quite like the peace of mind that comes with being financially secure. The key to financial security is covering the basics of personal finance and having a diverse mix of investments. A well-rounded portfolio can help buffer you against market volatility and provide a steady stream of income before and after retirement. Both saving and investing are vital for financial security which requires the basic know-how and discipline to follow through.

In 2022 we have seen both the tail end of a bull market and the ongoing (but erratic) bear market. The uneasy markets are trying to stabilize themselves, although equity investments have historically proven that they provide fruitful outperformance over time. As per data from depositories, of 89.7 million Demat accounts that exist currently 63% have been added in FY22. Reasons like increased smartphone usage, easier digital onboarding of customers, and attractive returns delivered by the equity markets have propelled this phenomenon. This has also led the investment and wealth-tech sector in India to unravel providing investors with the option to consider equities as a legitimate option for financial security.

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Investing in equities for financial security:

Apart from trading, investing is also a viable and safer option for those who can plan ahead with clearly defined financial goals. Planning basic personal finances entails some more primary aspects to cover before one move to investing for wealth creation:

·   Secure your assets and family with life and health insurance policies/investment options

·   Ensure a financial strategy for self and family for key life goals

·   Put more emphasis on saving as a commitment than as an afterthought

·   Keep track of the invested funds periodically

·   Establish measurable benchmarks so that financial security can be measured

Once an investor has covered the above, investing for wealth creation and thereby financial security is the next step. There are multiple public and private investment instruments customizable to unique investor goals with technology. Investing in single stocks, mutual funds, ETFs, or smallcases are some of the options to take exposure specifically to equities. Better UX on platforms, customer experiences and relatively higher returns from these products has made them a particularly attractive option for those looking to build their wealth over the long term in recent times.

Diversification is not just a buzzword:

No matter what your goal is, diversification is a key to investing. Diversification is used to reduce the overall risk by distributing the investment among different asset classes, sectors and companies. One should safeguard their investments from economic vagaries by not putting all bets on one type alone. There are numerous options to help diversify like bonds, real estate, or digital assets. Each of these assets has its own advantages and caters to different goals.

A strategy that works well for a regular investor is to have a plan of financial goals and a strong framework in place, and then carefully carry out the process of asset allocation. By doing this, they can avoid constantly monitoring their portfolio in relation to the market and, as a result, repeatedly adjusting their portfolio in accordance, which can be very stressful, leading to higher taxes and delayed achievement of the goals.

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Curating investments and ideas:

When it comes to investing, there is no one-size-fits-all approach. Each person’s risk tolerance, investment goals and preferences will dictate their asset allocation. For investors looking to diversify and upgrade to direct equities, baskets of securities are a simpler, healthier and professionally managed way to take this exposure. Ready-made portfolios of stocks/ETFs reflecting various ideas become a more transparent option for investors to choose from based on what they understand and believe in. Portfolio level diversification and professional management also reduce the risks that come with single-stock investing.

To zoom in on one example, a smallcase is a more concentrated portfolio related to the specific idea it reflects. This results in a larger catalogue of ideas and strategies that could be created with a smaller portfolio composition. For ex. House of TATAs with all the listed TATA group companies, sector-specific ones such as Insurance, IT, Realty trackers and thematic ones such as Corporate Governance, Rural Demand, Renewable Energy, Electric Mobility smallcases can enable even a new-to-market investor to choose a portfolio that closely matches their beliefs and helps attain their goals.

Changing retail investor behaviour:

According to Jefferies data, ~5% of Indian households have invested their savings in equities. However, the last 3 years have seen an influx of new investors as well as investors allocating higher amounts to equities in their portfolios. Even though over the last 6 months, new investors and accounts getting opened have reduced for the industry given market conditions. Redemptions from retail investors on an amount level have also been reduced. Investors are playing the long-term game by holding on to their investments and keeping faith in the equities markets bouncing back. In keeping with this optimism, the change in investment amounts per order continues to remain the same for new and SIP orders. Most allocations are going to less volatile smallcases vs high-beta strategies and very small pockets are capitalizing on the dip in small & mid-caps with the majority playing it safe.

These recent trends are in-line with the larger theme of financialization of savings and we are only at the beginning of this new phase of changing retail investor behaviour. Attaining financial security through investment in financial assets and equities-based products is mainstream.

(Vasanth Kamath is the CEO and Founder of smallcase. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)

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