Odd as it may seem and notwithstanding the recent debacle in the Mutual Fund Industry, we are really spoilt for choice as to how we can manage our savings.
Take for example our protagonist who works for an ecommerce major. During the Pandemic, she has had enough of her distributor (of mutual funds) after the market (and her portfolio) collapsed and was looking for a better solution. But the moment she googled “adviser”, interesting options popped up, everything from “For Fee Neutral” adviser, to investment management tools, to services with “Machine Learning” and “AI” Algorithmic, Heuristics driven Robo advisers.
After going down that rabbit hole and a few million search results later, she is none the wiser i.e., to say some fundamental questions remained unanswered: Is there an alternative to Mr. Distributor or her Bank? Can/should she handle it herself? If the answer to either is a “yes”, where should she start?
Here are a few lessons for her to keep in mind while handling her savings:
Lesson 1
If she is not paying for it (in a direct and transparent manner), the adviser/distributor is not working for her.
Most commission driven businesses be they cars, real estate, electronics or computers, the salesman is employed by the store / shop / business to sell products which maximise their profits not value delivered to Ms. ecommerce manager.
Investment product sales are no different and therefore there is a need to pay for advice, directly. The real question is who to pay? Or do it yourself?
Lesson 2
Yes, she can do it herself. But it will require some elbow grease. All of us have day jobs and an important aspect of our lives is planning our finances.
However, somewhat like picking up a new language, some reading and comprehension is required to understand the prose of finance.
Fortunately, it need not be the tedium it’s made out to be and there are many fun ways to learn the basics with videos, interactive platforms and even personal financial trainers who can get her up and running in a short period.
The flip side of the argument? She should not do anything she is not comfortable with or does not grasp fully, it may end badly.
Lesson 3
Systems and advisors are just tools, what she does with them is important.
And that means the system or advisor should help her understand what she should be planning for, developing the plan, executing transactions (buying & selling securities one time and on an ongoing basis) and last but not the least, managing the portfolio.
An ideal scenario could be a combination of the two where the adviser helps with setting up goals and then uses a system to execute, manage and monitor investments.
Lesson 4
If she cannot measure it, she cannot manage it. There are two aspects of this measurement, one is relative performance i.e. answers the question how is her selection doing? Or is 10% a good return.
For this an appropriate benchmark is required which can be a public benchmark like the Sensex or a blended one. And the second one is a live access to investment reports and measure it against the benchmark, using methods like XIRR rather than absolute returns.
With these four lessons in mind, she can now subscribe to a platform which simplifies the problem - algorithms are far better management tools than seat-of-the-pant advisers with excel sheets, simply because there is too much information and sifting through that mountain of bits and bytes manually is impossible. Similarly, ETFs are far better instruments for use with such algorithms than actively managed funds.