“This is ridiculous !! I have been saving and investing since last 10 years now. Still the growth I can see in my money is not even peanuts!!” said Anurag Srivastav, a 37 year old Senior Executive working with a renowned FMCG Company. “Everyone keeps telling me that one should follow some principles of saving and investing, which I have followed so religiously over the last 10 Years. But what’s the result?”
“What Happened Anurag?” asked his colleague Kapil. “You look so depressed”
“Depressed ? That’s an understatement Kapil. I am agitated, disappointed and devastated.” Said Anurag.
“Oh My God !! Now that’s something worrisome. Please tell me what happened.” Asked Kapil.
“Ever since I started working, almost 10 years back, people used to tell me, that I should be saving and investing money. Also, few super-minds also told me to diversify my investments. As per them, this would create wealth for me.” Said Anurag.
“That’s absolutely right. So why are you disappointed then?” asked Kapil
“That’s right? I have been saving and investing around Rs. 60,000 per year from last 10 years. And guess what, my so-called Wealth accumulated till date is just Rs. 7.75 Lakhs.” Said Anurag.
“Well, I agree with your disappointment now. This is actually no growth at all. But where did you invest, that you got such insignificant growth? Didn’t you Diversify your portfolio ?” Asked Kapil.
“I have a completely diversified portfolio Kapil. I am investing Rs. 5000 p.m. Out of this, Rs. 1000 goes into an Endowment plan, Rs. 1000 goes into a Money-back plan, Rs. 1000 is invested in a Post-office RD, Rs. 1000 is invested in a bank RD and lastly Rs. 1000 goes into NSC (National Savings Certificate). Even I understand that one should not put all his savings to a single avenue. Thus, I had diversified my portfolio completely. But no results !!”
Kapil Smiled. “Do you really think your portfolio is diversified?”
“Yes, haven’t I invested in all different asset classes?” asked Anurag.
“Absolutely not!! Ok, tell me first, what are the different asset classes which you know?” asked Kapil.
“Yes, asset classes are like NSC, PPF, Insurance Policies, Govt Bonds, Mutual Funds etc.” Said Anurag.
“First of all, let me tell you, that NONE of the products you have mentioned is an asset class. They are tools to invest in different asset classes. Basically the main asset classes are Equity, Debt, Precious Metals, Real Estate and Commodities. Then there are some alternative asset classes like Art etc. NSC, PPF, Mutual Funds etc are the tools to invest in these asset classes.” Said Kapil.
“Oh is it ? Then what about my portfolio? Which asset classes I have invested actually?” asked Anurag.
“Your portfolio is a totally debt-oriented portfolio. All your investments are finally being invested in debt-securities. You have no exposure to any other asset class as of now.” Said Kapil.
“I just thought I will invest money in safe and guaranteed return products” said Anurag.
“That’s apparent from your portfolio. But you can yourself see the flip-side of such conservative thinking. Ok, tell me something, what happens when you drive your car or bike with the brakes fully or partially applied all the time ?” asked Kapil.
“Multiple problems would occur. One is I will not be able to drive freely. The speed will be irritatingly slow, I will not reach my destination on time and also the brake apparatus will need to be replaced quite often.” Said Anurag.
“That’s right. And does that ensure enhanced safety ?” asked Kapil.
“Not really. I just need to have working brakes in my car /bike which I should be able to apply when I want. That should be good enough for the safety sake. Also, I should drive with a reasonable speed, so as to avoid any accidents.” Said Anurag.
“There you are!! This is the same principle one needs to follow with investing. One needs to have accelerating components like equity, gold and real estate in their portfolio. Having only debt products in the portfolio don’t really ensure safety, on the contrary they expose you to the inflation risk. In debt, your portfolio grows by 5-6% wherein the inflation is eating it at 8-9% every year. Now, when you say equity, do not get into F&O or intra-day kind of trading, which could have flip-side like rash driving. But not having exposure to equity at all is going to kill your money.” Said Kapil.
“But suppose I invest money in equity, and suddenly the market falls, then wont I lose my money.” Asked Anurag.
“Correct. And that is the reason why you should not invest at one go in the markets. You should invest the same way, which you are doing currently. Invest some amount every month, so that you are only positively affected by the movements of the market.”said Kapil.
“But advisors generally advise to invest in these products only e.g. Endowment, Money back, NSC , Post office RD etc.” said Anurag.
“Then you need to find out if they are really ‘Advisors’. How much fees do you pay them for their advice?” asked Kapil.
“I don’t pay any fees to them. Why should I pay a fee?” asked Anurag.
“See, you don’t want to pay them a fee but want them to give you an unbiased advice. This is when they will only advise you products wherein they earn more, not you.” Said Kapil.
“So what do you suggest I should be doing?” asked Anurag.
“First of all, update yourself about the importance of asset allocation and the need for various assets in your portfolio. Second, seek a good advisor who can give you unbiased advice. Third, pay him a fee for his advice, so that he is not inclined to give you biased advice. Lastly, review your portfolio at least once a year and consult your advisor if any changes need to be done in the same.” Said Kapil.
“But isn’t advisor fees an additional cost for me, When I can get advice for free?” asked Anurag.
“Free advice would always prove to be more costly to you. Best example is your current portfolio. You have saved on fees all these years, but the strangled growth is proving to be much costlier than the saved fees. Its similar to directly taking medicines to save doctor’s fees to realise that the wrong medicines have done so much damage to the body that the cost to treat it will be much higher than the doctor’s fees saved.” Said Kapil.
“You have a point, Kapil. I will not shy away from other asset classes now and seek professional help so that my money starts growing. Thanks for your inputs.” Said Anurag.
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(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical).