ET on ground event patna - financial planning a must before investing

The UTI Mutual Fund's Swatantra on ET Now moved to Patna in Bihar, a state that was at the centre of heightened political activity just a few weeks ago. A panel of experts drawn from the financial advisory community in the city that included Ravi Kumar, head investment planning, Rapture Consultants, Gaurav Mehrotra and Binoy Shanker Sahay, both independent financial advisors, and moderated by Tanvir Kaur Gill of ET Now discussed how to bring about more awareness about investment and financial planning.

The discussion started with the moderator asking Kumar why he would advise his clients to go for financial planning and would mutual funds be part of the overall financial plan. According to Kumar, most investors bank on fixed deposits for saving. “But in the long run, inflation eats into the returns from FDs. On the other hand if you participate in the stock market through the mutual fund route, the returns you get are usually more than inflation and post tax returns are also better than FDs,“ he said

According to Sahai, investing in mutual funds through the systematic investment plan (SIP) route is the best option since it brings in rupee-cost averaging for the investor. “But one has to first set the Goal, like when the person will require the money for which he is investing. For example it may be the education of the children, the marriage of the daughter, buying a car, house etc. If one takes the SIP route, he could benefit from it immensely,“ Sahai said.

According to Mehrotra, when one talks about investing through bank FDs, real estate, gold etc, investing through the mutual fund route is the best method, for the short term as well as the long term. “This is because of the better wealth creation opportunities that mutual funds provide, better tax efficiencies, the inherent flexibility, liquidity and they help investors achieve their Goals without too many complications,“ Mehrotra said.“These advantages make mutual funds the best instrument for financial planning for investors of every age bracket and also all types of investors like retail and well as high networth individuals,“ he said.

One of the attendants asked if the substantially higher weightage of 47% for the banking and financial sector in the nifty index, almost negligible 4% weight for the construction sector and zero representation from the real estate sector, make it a good index and if one should invest through the index funds. To this, Kumar said that the diversified Equity funds are the best schemes to invest for the long term.According to Mehrotra, histori cal data show that diversified Equity funds have given much better returns than index funds, so one should go for diversified Equity funds, than investing through the index funds

On the question of whether to invest in midcap funds, Mehrotra said that these are good for long term investing but they come with higher risks and higher chances of greater return. “Some of the midcap and smallcap funds which have been there for 15-20 years have delivered very strong return and created huge wealth for investors. But they come with risks in the short run compared to their larger cap or multi-cap peers. So there could be some allocation to midcap and smallcap funds if the investor has the risk appetite,“ he said. Sahay and Mehrotra both concurred that another important factor in asset allocation is the time horizon of the investor. “If the time horizon for the investor is six months, one year or even two years, he should forget Equity funds and should be invested in Debt funds,“ said Mehrotra. “If the time horizon is four years or more, then Equity funds as an asset class could be considered. Among them, the allocation could be between large cap, mid cap and small cap funds, provided he has the risk appetite,“ he said.

According to Sahay, asset allocation also depends on the age of the investor. “If he is above 60 years of age, he would probably not be able to afford investing for 10-15 years.For him, Liquid Funds could be appropriate,“ he said

Kumar said that if the Goal is to be achieved in less than three years, the investor should go for Debt funds, if the Goal is between three and five years, balanced fund should be preferred while if the Goal is more than seven years, he should definitely look at diversified Equity funds. “If you are going for an investment horizon of 10-15 years, invest in diversified Equity funds through the SIP route,“ he said.

On the question of investing in sectoral funds, Kumar said that investing in such funds require special attention to the economy, to the particular sector and several other variables.

On a question from the audi ence about where to invest now for child's education, Kumar said if the time horizon for him to need the money is say five years, he could put the money in balanced funds now and after four years should shift it to Liquid Funds, where it will stay for the last one year.“This is because if the market falls in the fifth year, he will not lose his corpus,“ he said. “For any investment, the Goal is important. A mutual fund is a very good instrument and one can make good returns from all types of schemes,“ he said.Kumar also explained the benefits of indexation and how that benefits investors by lowering their total tax outgo

On the question of how to tackle the scare of volatility while investing in mutual funds, Kumar said SIP and STP (systematic transfer plan) are the best modes of investing.Through SIP route, one could tackle volatility in a better way, he said. About STP, he said that if someone has say Rs 1 lakh, he could put the money in a Liquid Fund, take the STP mode and slowly the funds will be transferred to an Equity fund.“Benefits of averaging are more if one invests through the STP route,“ he said