Docstoc

Investor psychology

Document Sample
Investor psychology Powered By Docstoc
					                    INVESTMENT PLANNING




Investor psychology
in the maze of investment options
Has the investor matured enough to understand the many choices and offering which
are available to him today and acting more rationally than earlier or has he become
more confused and looking for answers & guidance.




60 | FINANCIAL PLANNING JOURNAL | JANUARY - MARCH 2008
                                                                                                slightly higher and except NSC and PPF
                                         Arun Thukral, CFPCM
                                                                                                other small savings schemes do not offer
                                         Vice President-Treasury, Axis Bank
                                                                                                attractive returns.



V
           olatility has become order of       of diversification. This has resulted in
           the day and if you have been        emergence of new options within the same         Mutual Funds
           tracking Equity markets for the     or fresh asset classes. There are more           This is an option which has shown mind-
last few months you will understand the        products available with in each asset class      boggling growth and it has become one of
point I am trying to make here. The kind of    be it Equity, Mutual Fund, Gold, Real            the most important and popular choice in
volatility we have witnessed in this asset     Estate etc. Let us examine the same in           recent times. Under this option if we look
class in recent times is unprecedented.        little more detail.                              at earlier era we had few MF schemes like
It is true with other asset classes like                                                        MasterShare and Mastergain from Unit
Gold, Currencies, and Bonds etc also.          Bank Deposits                                    Trust of India, Morgan Stanley Growth
This leaves the investor baffled at times.     The plain vanilla Bank Deposit is easier         Fund which generated huge response.
If we get into further details, we find        to understand of all the products. There is      Today, there are over 600 MF schemes
that the continuous volatility is affecting    not much change in this product over the         available and there are at least 20 types of
Investor Psychology in a big way. We,          years other than deregulation of interest        variants like Diversified, Sectoral, Floaters,
therefore, have to get into an investor’s      rates. In the early 80’s we had regulated        Liquid, and Arbitrage etc. There were
mind and experience the upheavals going        interest rates on these deposits and there       more than 150 New Fund Offers last year.
on there. We will now try to attempt           was huge interest in this asset class            Even for investment/disinvestments there
and compare the investing experience           as there were fewer choices then. Now            are several ways known as Systematic
across two different time periods. We          the interest rate is deregulated and that        Investment Plans (SIPs), Systematic
will go back to early 80’s and check           actually makes the choice easy but this          Withdrawal Plans(SWP). The SIPs actually
the options available then and compare         also leaves in more risky situation at times     works on rupee cost averaging and then
with the options available now and then
see actually how it has affected the           THE INVESTORS WITH HIGHER RISK APPETITE
investor today. Has he matured enough               want to experiment and try new and exotic
to understand these choices completely           products in the name of diversification. This has
and acting more rationally than earlier or         resulted in emergence of new options within
he has become even more confused and                             the same or fresh asset classes.
looking for answers and guidance.
    In earlier times Investor had the option   when you get lured for higher interest           there is another concept called “Value
of investing in plain vanilla Bank Deposits,   rate only move your funds to towards a           Averaging” thus ultimately leaving investor
Government Bonds, Post Office schemes          weak bank. The other changes in recent           wandering how to select the best option?
like NSC, Indira Vikas Patra, Kisan Vikas      times are primarily technology related
Patra and Monthly Income Schemes. If           like we have flexi deposits and floating         Direct Equity
he wanted exposure in real estate, he was      rate deposits.                                   One can invest in direct equity himself
buying land primarily. He bought gold                                                           through a local broker or by utilizing the
mainly for his personal use on occasions       Post Offices Schemes                             online platform of any large bank/NBFC.
like festival, marriage etc. and never         /Government Bonds/PPF                            The other option is to avail the service
seriously thought of it as an asset class.     There is not much change in the product          of a reputed Broker/AMC and sign on
    In today’s scenario we have to take        features in any of these products and the        the Portfolio Management Scheme (PMS)
into account a major change i.e. economic      only change over the years is the reduction      offered by them.
prosperity all over. The entire world is       of interest rates from around 12% to 8%              For Primary market investment, one
talking about the robust growth rates in       now. Around three years back when the            can apply for Initial Public Offers of
this part of the world. Higher income          rates on bank deposit started testing bottom     various corporate. In the earlier era also,
levels and booming stock markets have led      and touched as low as 6%, all these small        I remember at times there used to be
to more and more numbers of HNIs. This         savings schemes got huge investments as          euphoria of IPOs. People used to apply
means the availability of huge investible      there was an arbitrage opportunity to earn       regularly and make some money on listing
surplus. The investors with higher risk        higher return and in few products like PPF,      day. This still continues for some investors
appetite want to experiment and try            NSC you got tax benefits also. However           and actually it has become quite easier
new and exotic products in the name            at the moment bank FD rates are quoting          now if you are a tech savvy investor. Sign


                                                                                              JANUARY - MARCH 2008 | FINANCIAL PLANNING JOURNAL | 61
on with any online platform of a bank/                   tax saving’s point of view but also as         Derivatives
NBFC and on the click of a button you                    a retirement planning option. There are        Derivatives are primarily financial
can apply for IPO and need not worry                     people who want to buy it only for life        agreements derived from some underlying
about filling up forms or getting your                   cover and would go for term insurance.         assets. These underlying has to be
refund orders back in time. Everything is                ULIPs are hugely popular and sold as an        quantifiable and can be anything from
instant now right from applying for new                  attractive asset with Insurance/Retirement     Equity/Forex/Loan etc. Derivatives can
shares to getting back your refund in your               benefit. People are generally aware now        be used for Hedging, Speculating or
bank account in less than a month’s time.                about insurance cover, yet given the           Arbitrage. This is a double edged sword
    To decide on PMS provider one has                    plethora of insurance products, making         and if not used judiciously this can destroy
to be careful though as most of them will                the right choice becomes difficult at times.   the total net worth of an investor so when
talk about capital preservation with quality             Investor is left thinking what product to      to use it and how to use it is a big question
growth. They will assure the investor about              buy and from whom.                             for the investor today.
good model and research-based advice and
obviously about consistent returns. One                  Overseas Investment                            Commodities
has to then see whether they have process                RBI has come out with one more option          Indian markets have recently thrown open
driven methods of capturing periodic                     for Resident Indians today. One can invest     a new avenue for investors in the form
gains and their performance history during               upto 2 lakh US $ abroad in one name and        of Commodity derivatives. For those
volatile periods. One has to look at the                 minors are also included in this scheme.       who want to diversify their portfolios
                                                                                                        beyond shares, bonds and real estate,
DERIVATIVES CAN BE USED FOR Hedging,                                                                    commodities are another option available
Speculating or Arbitrage. This is a double edged                                                        now. Commodities offer potential to
sword and if not used judiciously this can destroy                                                      become a separate asset class for market-
the total net worth of an investor so when to                                                           savvy investors in times to come. This
use it and how to use it is a big question for the                                                      can be a hedging tool also if one has
investor today.                                                                                         specific interest in a particular commodity.
                                                                                                        Investors who claim to understand the
margin of safety and kind of churning in                 So if a family of four with husband, wife      equity markets may find commodities an
the portfolio and last but not the least                 and two kids wants to invest abroad, they      unfathomable market. With the setting up
the kind of fee model i.e. flat or hurdle                can buy real estate, stocks, derivatives,      of three multi-commodity exchanges in
approach and understand the risk. At the                 currency etc upto a total value of US          the country, retail investors can now trade
end our investor is again at the crossroad               $ 8 lacs. One can retain, reinvest and         in commodity futures without having
and struggling to take the decision.                     repatriate this asset. What you actually       physical stocks. These exchanges are
                                                         need here is a bank account with a branch,     regulated by the Forward Markets
Insurance                                                which allows foreign remittances, and an       Commission. Unlike the equity markets,
In the earlier days, Insurance was bought                account with a provider of these overseas      brokers don’t need to register themselves
primarily for tax purposes and very few                  options. The provider can be a large           with the regulator. The FMC deals with
people actually bothered about life cover                bank or NBFC with an online platform           exchange administration and will seek to
as such. LIC was the only player and                     for these options. This option primarily       inspect the books of brokers only if foul
offered money back policies, endowment                   suits HNIs who would like to invest in         practices are suspected or if the exchanges
policies and few single premium policies                 global products. But the question to be        themselves fail to take action. Now to
like Bima Nivesh. However, as an asset                   answered here is do they fully understand      invest in this asset class one has to go
class it was not considered an option and                the taxation methods, systems, procedures      to a member broker. Several already-
there were not many schemes available for                etc. The other risk may be that an asset       established equity brokers have sought
retirement planning. People were grossly                 like overseas Real estate investment is        membership with these exchanges. Some
underinsured and there were no private                   vulnerable to scam at times. The market        of them also offer trading through Internet
insurers. Nobody even talked about pure                  depth is generally there so manipulation       just like the way they offer equities. You
insurance cover or term insurance. Look                  by single fund or investor is difficult but    can also get a list of more members from
at the options today, there are whole lot of             risks are inherent in all such investments     the respective exchanges and decide upon
private players and offer several choices.               and there are specific bars from RBI angle     the broker you want to choose from. At the
The schemes are packaged in such a way                   as you cannot buy lotteries or cannot send     end the investor is left with few questions
that investor look at it not only from                   margin money on overseas exchanges etc.        again which commodity has to be bought


62 | FINANCIAL PLANNING JOURNAL | JANUARY - MARCH 2008
and why. There is a global market for           investments with in a defined time frame.          inclination or energy to get into those
most of such commodities so it has lot of       These funds are typically structured as            options, evaluate them or concentrate on
depth but the risks are also inherent in this   pooled vehicles into portfolio companies           your core competencies and focus all your
form of investment.                             or special purpose vehicles (SPVs), which          energies there. Then you have to leave
                                                offers the contributors a number of benefits       these Asset class selections to the people
Gold                                            such as leveraging and tax efficiency. The         who actually excel in this job and provide
In recent times gold has appreciated and        portfolio companies generate cash flows in         you the best options suitable for you.
every body is now talking about this new        the term of periodical income and/or sales         One needs investing solutions that are
asset class and it is termed as a very good     realization and generate returns largely           customized to suit each client needs and
hedge also. More importantly, the dollar        through dividend and capital gains for the         risk appetite. Investor looks at dynamically
is weakening so globally and the hedge          contributors.                                      balanced asset allocation mix consisting of
concept is actually better understood than          One can also buy stocks of Real Estate         above mentioned asset classes. There are
ever before. In Indian Context, earlier         companies being listed on exchanges.               Financial Planners in the market to help
people used to buy gold in form of              There is a possibility now for Real Estate         an Investor today. They help investors to
jewellary on occasions like marriage,           Mutual Funds to be introduced soon. We             plan budget, identify financial goals and
festival etc. On the investment front, few      come back to the same question and look            suggest diversification keeping in the risk
investors used to buy gold bars. Today          for the best option out of those discussed         appetite of the investor. I personally feel
you have more options and slightly better                                                          that one has to enjoy his life and leave
options to invest in Gold. More and more        Art                                                the rest to experts and more importantly
investors are buying Gold ETFs, as this         In the recent times this asset class has           trust them. If you can trust your personal
is one of the best ways to invest in            established its return credentials and the         physical trainer or your medical doctor by
Gold. Another variant is investing in gold      market depth is increasing day by day.             following their instructions then there are
mines across the world. This option is          Auction around the year and around the             definitely huge benefits and mental peace
also available through MF route as there        globe is providing bit of liquidity regularly.     if you follow your Financial Planner’s
                                                                                                   advice the same way.
COMMODITIES OFFER POTENTIAL to become                                                                   The investors with higher risk appetite
a separate asset class for market-savvy investors                                                  want to experiment and try new and exotic
in times to come. This can be a hedging tool                                                       products in the name of diversification.
                                                                                                   This has resulted in emergence of new
also if one has specific interest in a particular                                                   options within the same or fresh asset
commodity.                                                                                         classes. There are more products available
are specific MF scheme investing in gold        There is insurance cover available and             with in each asset class be it Equity,
mining companies across the world.              the logistics improving day by day. The            Mutual Fund, Gold, Real Estate etc.
                                                artist history, work quality, medium and                Derivatives can be used for Hedging,
Real Estate                                     movement determine value of an art                 Speculating or Arbitrage. This is a double
The only way one could invest in this           piece. Apart from insurance and storage,           edged sword and if not used judiciously
asset class earlier was to buy a piece of       restoration infrastructure is improving the        this can destroy the total net worth of an
land or house/shop. However, the property       asset class credentials and investors are          investor so when to use it and how to use
market is not that efficient, not very          looking at long term prospective. It has           it is a big question for the investor today.
transparent at times, the liquidity a major     become fashionable to invest in art these               Commodities offer potential to become
constraint and the transaction costs very       days. Art investment is through two routes         a separate asset class for market-savvy
high thus making the decision to invest         it can be art advisory for art collectors          investors in times to come. This can
very difficult. One has to look at the          whereas it can be art funds for the pure           be a hedging tool also if one has
options then like reality funds. A reality      investor.                                          specific interest in a particular commodity.
fund is an entity established usually in the                                                       Investors who claim to understand the
form of a trust or a company for collecting     Conclusion                                         equity markets may find commodities an
funds from various investors (known as          So we can now surely conclude that there           unfathomable market.
contributors) which then invest these           are options and with in those options
funds in portfolio companies engaged in         there are more options. Investor looks                             arun.thukral@axisbank.com
developing real estate projects with the        at superior returns and measured risk.
objective of realizing profits from such        The point now is whether you have time,


                                                                                                 JANUARY - MARCH 2008 | FINANCIAL PLANNING JOURNAL | 63

				
DOCUMENT INFO