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

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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

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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 [email protected]
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,

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