Of dodgers and radicals

For investors, the latest correction in the Indian stock markets courtesy the global jitters over the financial troubles in the euro zone was an opportunity, a risk and a non-event- all at the same time. The outlook would have varied depending upon the investor's financial personality.

An ultra-aggressive investor, for instance, would have been thrilled to see the share prices come off their highs, giving him an excuse to enter the market or stock up on his favourite shares without evaluating risk and reward. On the other hand, the sharply correcting market would have heightened the risk perception of an ultra-conservative investor and further reinforced his notion of the market as a money gobbling monster. For the habitual procrastinator, like so many times in the past, there would always be a correction next time to take advantage of.

Needless to say, none of these responses would be considered appropriate and conducive to building wealth in the long run by financial planners. By looking at the patterns of common mistakes made by investors, Money Today has formulated strategies for four financial personalities: spendthrifts, debt mongers, radicals and dodgers. We dealt with the first two personality types in the previous issue of this magazine (Master Your Money, BT, June 13). Here, we take up the other two personalities: radicals and dodgers.

The Dodgers
Chennai-based Shanil Mohan, 29, doesn't have a financial plan. Why? He hasn't found the time to sit and crunch numbers. Like Mohan, everyone is prone to procrastination. An otherwise harmless indulgence, it becomes a problem when people keep things on hold for too long. In finance, this can prove very expensive.

Consider Mohan's case. His household cash flow, after including his wife's income, generates a surplus of Rs 43,000 a month. Of this, he socks away only Rs 12,500, while the balance sits in his bank account. The randomness of his investment strategy is evident in the couple's slim portfolio, which is about Rs 3 lakh in value. Had Mohan regularly invested just Rs 5,000 a month, in five years, the portfolio would have swelled by Rs 4.08 lakh (assuming a 12 per cent annualised growth).

Procrastinators pay a high price for evading monetary issues. To begin with, they do not make a budget, forget about following one. Minor bills are left unpaid, while the late fee piles up. They have no idea about their goals and save in spurts. As they are unable to discipline investments, any foray in direct equities is doomed. They postpone tasks to such an extent that they are forced to take lastminute decisions, with no time to scrutinise the fine print or conduct adequate research about a financial product. So there may be time bombs ticking away in their portfolios but they are blithely unaware of these.

If you are a dodger, the challenge is to make a plan that can be executed and maintained with minimum effort. Also, the plan must help catch up with all the time lost due to your procrastination. The first step is perhaps the biggest hurdle-budgeting. Collect all the bills from your department store, utilities and credit cards in a month (it is way easier than maintaining a diary). Consolidate all information under broad heads like groceries, household products, etc. and what you get is a monthly budget complete with actual expenses.

Figuring out your surplus is just mental math, something the dodgers are good at. Next comes the step Mohan dreads-identifying financial goals. Actually, this should be the easiest part because all you need to do is dream about yourself, say, 30 years later. Your goals are likely to be a house, corpus for children's education and a tension-free retirement.

As dodgers cannot be bothered much with money, overspending or overleveraging is very rare. Once you discover your surplus and goals, all that is left to do is to invest the right amount in the right asset class.

To do this the easy way, trawl the Internet for investment calculators that tell you how much to invest to build a target corpus. There is a possibility of error ranging from 5-15 per cent, but the calculators give a reasonably good idea of how much to stow away.

Obviously, you can't be trusted to invest regularly, so let banks and brokerages do your job. Rajnish Kumar, Head, Product and Marketing, Fullerton Securities, suggests, "SIPs are a powerful tool for such investors. An even better option is to invest via value investment plans, which define a range of investment every month. For example, you could give instructions to a brokerage to invest between Rs 5,000-10,000 a month depending on market movements."

If you are a stocks buff, an option that requires minimum effort is investing in the model portfolios of brokerages. Two caveats: carry out thorough background checks before entrusting your money to a brokerage. Secondly, don't give it a completely free run and review the portfolio once in a while. It is your money, after all.

How about keeping some cash handy for exigencies? There is a shortcut for building an emergency fund too-park cash in sweep-in accounts. These accounts transfer the money that exceeds a pre-set limit into a fixed deposit. As a bonus, you will earn higher interest than from savings accounts.

Finally, take maximum help from technology. Set alarms to pay your bills on time. Use electronic transfers to pay the insurance premiums. Some software allows users to fix triggers for changes in scrip values, asset allocation, etc. These are a must-buy tool for dodgers. Roping in a financial adviser also makes sense. He can take care of the nitty-gritty, such as selection of financial products and reinvestment of dividends, which is beyond the scope of technology. Remember, the aim is to put your finances on autopilot. In this way you get a lot of time to procrastinate other things.

The Radicals
Mukul Machave is a 34-year-old doctor based in Pune. Theoretically, he is at the peak of his risk appetite. Yet, till last December, he had eschewed equities altogether to squirrel away Rs 5 lakh in ultra-safe fixed deposits and National Savings Certificates. "My father had suffered heavy losses in the market. This made me wary of equities," explains Machave. Psychologists believe that ultra-safe investors take cues from other people's bad experiences and shy away from risk. The problem is usually worsened by the lack of knowledge about the risk factors.

Machave thinks along similar lines: "I am a conservative investor, but I am aware that with this approach I can't achieve my goals. So I have started learning about equities to overcome my hesitance."

Naresh Pachisia, Managing Director of SKP Securities, says: "Ultraconservative investors are motivated by capital preservation. What they do not realise is that high inflation can lower the real returns of debt investments." This is why most conservative investors come up short in their long-term goals despite investing regularly.

If you are guilty of playing it too safe, experiment with small steps towards higher risk. Invest in instruments that combine equity and debt. Pachisia says balanced funds are a good option as they invest 35 per cent of the money in debt instruments and carry less risk than equity funds.

Index funds are also suitable for your risk profile. Your investment grows with the benchmark index. Besides, shift from traditional insurance policies like endowment plans to pure term plans and Ulips. Term plans offer protection at a very low cost, whereas Ulips combine cover with market investments.

In the final stage of risk evolution, move to hardcore market investments via diversified equity mutual funds. These funds are one of the safest ways to invest in the market.

At the other end of the risk scale are people who thrive on high volatility. Unmindful of risk, an ultra-aggressive investor will increase the stakes in the roulette till his luck lasts. Pachisia says that very little reins in such risk addiction. "I am not sure that they aim for wealth creation at all. They seem to seek only the excitement of making big bets on the market," he says.

Often, aggressive investors are forced to take debt to invest more and make up for previous losses. This is a blunder. It is only when they have lost all the money that reality sinks in. If avoiding high risk is impossible, at least invest in safe havens alongside. If you do not have the will power to voluntarily allot a part of your surplus to such investments, then take the automatic transfer route to put money in debt investments like fixed deposits. Or give some money every month to a family member or a friend who can invest in a safe instrument.

Also, make sure you have covered your dependants adequately. Opt for term plans so that there is no lure of returns. Similarly, buy health plans so that even if you have been bled white in the market, there is money to deal with emergencies. Though they take extreme stands on risk, both conservative and aggressive investors have the same lesson to learn: a middle path to prosperity exists. time to procrastinate other things.

Courtesy: Money Today