English transcript of my interview in Business Today

1. My first question is that you are a personal finance advisor. Why personal finance advisory is important at the present time?

Money management is a necessary life skill especially in a world where most of us won’t have the comfort of a pension. When you manage your money well, it gives you a peace of mind and a sense of control over your financial life. It improves the quality of your life. 

Investors who have interest in personal finance can spend time and effort required to learn it on their own and become capable ‘Do It Yourself’ (DIY) investors. But most investors lack the time and interest required to learn it on their own. All such investors need good personal finance advisers. 

2. After Covid, a lot of people came into equity investing, what advice would you like to give to such investors and investors who want to create wealth through equity?

Markets have rewarded all investors who came to market during covid with good return. These investors should take care not to extrapolate returns they got in the last 3 years into the future. Equity doesn’t give a linear return like interest paying instruments. Equity returns are lumpy. There could be a long period when equity may not give any return or a market correction could wipe out all the gains of the recent past. 

Equity is a long term asset class and it should be treated as such. Any investor who wants to create wealth from equity must take a long term view and learn to stay invested in equity through thick and thin.  

3. Nowadays, on one side there are traditional mutual funds, on the other side there are index funds. But mutual funds and index funds also have so many categories that people get confused. How to Choose the Right Mutual Fund and Index Fund?

Market cap weighted index funds like Nifty 50 Index Fund or Nifty Next 50 Index Fund are true index funds. Everything else is some degree of active management. 

Investors should either use market cap weighted index funds or use flexicap funds if they want to trust fund managers. In flexicap funds, fund managers don’t have a restriction where they should invest fund assets. Apart from these two categories, retail investors can safely ignore all other categories of equity mutual funds.   

4. If you were asked to choose between index fund or flexi cap fund, what would you choose?

I would choose an index fund. The problem with flexicap funds or any actively managed fund is that there is no reliable way to choose winning funds of the future in advance today. There is always the risk of staying invested in an underperforming fund for a long time. Even a small difference in return creates a massive difference in the final corpus when time horizons are long.

Even funds that would beat the index over the long term are going to go through periods of underperformance. When a fund goes through underperformance, there is no way for an investor or adviser to anticipate how long this underperformance would last or if the fund would ever come out of it. While you can trust fund managers, fund managers also change. Changing funds is also not an easy decision because it attracts tax liability which reduces return. 

Index funds make life simple for investors. Index funds guarantee to beat the returns of more than 75% professional investors. Investors can achieve all their financial goals by capturing index return. They don’t need to take the risk of underperformance.

5. Apart from equity, what is the asset class that should be in an individual’s portfolio in financial planning because investing in equity is lumpy. How to balance portfolios?

Financial goal planning is primarily done using financial assets. There are two important financial assets; equity and debt (or interest paying instruments).

Debt is an important part of any investment portfolio. It reduces the volatility of the overall portfolio which makes it easier to handle the portfolio at emotional level. Debt also gives equity the necessary staying power. Without debt in the portfolio, an investor could be forced to sell equity at the wrong time.    

6. People are relying on products like NPS for retirement, the government also wants people to invest in NPS, do you think NPS alone will be able to fund retirement?

While NPS is a good product, it alone won’t fund retirement. It is important that investors calculate the corpus required for retirement based on their anticipated annual expenses in retirement and monthly savings required to accumulate this corpus. They have to then choose products on the equity side, debt side and the suitable asset allocation. NPS could be one of the products in the retirement portfolio, not the only product.    

7. Apart from Equity based mutual funds, can anyone create wealth with debt exposure also? Do you think people are less aware about debt funds?

Debt products don’t beat inflation post tax. We use Debt to provide stability to the portfolio, not to generate higher return or create wealth. 

There are many categories of debt funds and it is as difficult to understand all these categories as it is to understand all categories of equity funds. Some categories of debt funds have higher yields compared to some other categories but these categories are also riskier. It doesn’t make any sense to take additional risk in debt funds because potential reward for this risk is minuscule. 

Retail investors should try to keep debt part of the portfolio as safe as they possibly can. Liquid Funds or Money Market Funds are simpler funds with low credit and interest rate risk. Investors who do not understand debt funds should avoid going beyond these two categories.

8. Equities have given very low returns in the last two years, do you think dynamic asset allocation funds or multi-asset funds should also be in portfolios?

Real money management is done at net worth level. Since no investor can put 100% of his liquid net-worth in dynamic asset allocation funds or multi-asset funds, I do not see a need for these funds in the portfolio. Expense ratio of these funds are also on a higher side.

9. You have been advising people on personal finance for so many years, what mistakes do people make that they should not do?

The most common mistake investors make is they try to invest like pros without the necessary knowledge and skill. If you don’t have the skill of Suryakumar Yadav, and try to play shots that he plays, either you would get out early or you would get injured. Investors must understand what kind of investors they are and design an investment strategy accordingly.

Most investors would do far better if they put their investment portfolio on autopilot by using products like index funds and focus on their primary profession. They should try to become as successful as they can in their primary professions. Human asset play a hero’s role in wealth creation, not investment portfolio.      

10. RIA regulation doesn’t allow individual RIAs to have more than 150 clients. Do you think this limit should be increased? Don’t we need more fee-only advisors in the country?

RIA regulation is unfair for genuine RIAs in the country. Regulation doesn’t allow some of the finest financial advisers in India to have more than 150 clients. 

An RIA can go for non-individual registration if he wants to handle more clients but no-individual registration requires the RIA to have at least 50 lac liquid net worth to even think about it. Young advisers cannot have this much money. The irony is regulation puts restriction on the income than an individual RIA can earn but requires him to have significant net-worth to handle more clients. 

The 150 client limit for individual RIAs has also increased the cost of quality advice in the country. An individual RIA who wants to offer affordable financial planning advice cannot achieve his own financial goals. He has no option but to increase his fee. 

We certainly need more fixed-fee advisers in the country but with current RIA regulation, any pragmatic adviser would choose to continue as a MFD or an insurance agent rather than becoming an RIA. 

RIA regulation is also not friendly for young RIA aspirants. To become an RIA in India, one needs relevant post graduation as well as 5 years experience relating to advice in financial products or securities or fund or asset or portfolio management. This essentially forces an young RIA aspirant to do commission selling of financial products for 5 years, asks him to give up his commission business before granting him registration, and then restricts him to 150 clients. 

Unless SEBI makes changes in RIA regulation, the number of RIAs is unlikely to grow in India.