In spite of the much-needed equity cult coming in, lack of financial planning makes many investors suffer when the market trend reverses.
Last few years have witnessed an equity cult finally arriving in India. While this is always a welcome move, what is even more heartening is that retail investors have invested primarily in mutual funds rather than directly into the equity markets. In fact, retail investors have been far more disciplined and non-speculative in this bull run compared to the previous ones. This has enabled a strong investing ethos to evolve, something which will enable both the development of a solid base of investors as well as growth of risk capital in our country.
Despite mostly positive developments, this bull market too has had its fair share of excesses. There have been many first time investors who have put in their savings into equities or equity schemes of mutual funds. The temptation of high returns lured many retired persons to take a risk with their savings. Hence in spite of the much-needed equity cult coming in, lack of financial planning makes many investors suffer when the market trend reverses. Financial plan for a majority of investors is either not made or not adhered to when any market starts trending either upwards or downwards. To conquer both greed and fear requires a very strict adherence to a financial plan, something which many investors have not been able to do so.
I take the case of Delhi-based Mr Harinder Singh, an 85-year-old man. He has lived his life well and in doing so has spent more money than he earned. Hence to sustain his livelihood he has slowly and steadily sold off all the properties and other assets which he had inherited. Hence from being a multimillionaire and having several properties he was reduced to a net worth of around Rs 3 crore savings balance plus an apartment where he currently resides. This 3 crore was mainly the amount received from the sale of the last property that he owned apart from his residence.
Now a good financial planner would have made him put his last sum of money into a fixed deposit or some very safe and liquid investment opportunity. Instead he got lured by the shining returns of equity mutual funds and invested in them. Now these funds are down by around 10 per cent. For any investor having a long-term investment horizon and not having any liquidity requirements, this would not be a worry as we all know that equities in the long run do generate above average returns.
However, Mr Harinder needs to withdraw around Rs 2 lakh every month to meet his living expenditures. Now he is in a quandary. If he books his losses, then the drawdown is significant and if he stays invested and the market falls further, then he runs the risk of running out of all his money in a few years. Life expectancy cannot be accurately ascertained and the thought of being financially constrained at such an old age is scary, especially keeping in mind the rather luxurious lifestyle enjoyed by him throughout his life. This is a clear case of needless risks taken by him on his investments. A proper financial plan would have prevented him from all these hardships.
(By Ashish Kapur, CEO, Invest Shoppe India Ltd)