Investing lessons from crorepatis: Know what to follow and what to avoid
Portfolio
diversification and long-term investment commitment are great habits of the
rich. But excessive focus on returns without being mindful of the risks is a
negative trait.
What’s
the secret to becoming rich? Most of us want a one-pointed answer to the
question. Money is certainly not everything, but it’s important. Especially in
these pandemic times, when jobs, incomes and careers have been ravaged. A good
corpus helps us tide over such difficult times, help us repay our loans and
meet our daily living expenses. We wonder what the rich have done to ensure
stability and comfort in their money matters. What can we learn from them? And
what is it that we shouldn’t be? Here is a special three-part series on what we
can learn from the rich – the crorepatis, as we often refer to them
colloquially, or high networth individuals in investment parlance. Today, let’s
understand their typical investment habits.
Compounding: An investment term that means substantial growth of
wealth over time. You would have heard it from your wealth advisor or read
about it in every other investment literature. But many take it for granted.
For instance, close to 34 percent equity assets are exited before a year.
Although this was down from 43 percent in June 2015, a longer term analysis
shows that not much has changed in terms of investor behavior.
The rich know better, though. Financial advisors and distributors
say that they understand ‘compounding’ better than the average investor. Here’s
what you can learn from them, when it comes to building wealth for you and your
family.
Don’t
let money remain idle
Despite
being wealthy, the rich don’t let money remain idle in their bank accounts. Even if they get Rs 5 lakh – a relatively small amount for them – they,
typically, won’t leave it dormant. The moment they get the cash, they invest, they are
always on the lookout for investment opportunities. They may have a Rs 40 crore
investment portfolio. But even if Rs 10 lakh worth of Public
Provident Fund matures, the rich client would want to reinvest
the proceeds, soon.
Willing
to invest globally
Indian
investors are increasingly opting for international
funds over the past few years. But financial advisors who
Moneycontrol spoke to say that rich investors have been investing in
international funds for a long time, before they became widely popular.
Vishal Dhawan, founder CEO of Plan Ahead Wealth Advisors, points
to a few triggers for why the rich warmed up to international funds early on.
The rich aspire to send their kids abroad for further studies. But foreign
education is costly. Besides, the Indian Rupee is a depreciating currency. For
instance in 2013, one US dollar was worth Rs 55. Now, it is worth Rs 74.42.
“Due to a depreciating currency (Indian Rupee), investing in international
funds is a good way for financing your kid’s foreign education,” says Dhawan.
Despite being biased to investing in their own domestic markets,
large or experienced global investors also deploy about 10-15 percent of their
assets in emerging markets such as Indian and China. “The importance of
diversification is, therefore, well understood,” he adds.
Talk
to experts, seek help
“It’s a
fallacy to assume that just because people are rich, they have knowledge of
money management. They may be experts in their own fields, but many HNIs need
the help of an advisor
or a wealth management firm,” says Mrin Agarwal, Founder of
Finsafe India.
The
proliferation of direct
plans and investment websites have nudged many
millennials to take the direct route, without seeking financial advice. But if
you cannot tell a good investment from a bad one, you don’t create wealth in
the long run – you destroy it.
While there is much to
learn from the rich, there are some aspects not worthy of emulation.
Focus on returns
Getting into exotic products
What do you do if your
portfolio is already well-diversified with equity, debt and gold, apart from
perhaps a few bank fixed deposits, a public provident fund account and possibly
some non-convertible debentures? Typically, if you have more money to invest,
you should largely top-up your existing investments.
Dhawan says that here’s
where the rich investor gets it wrong. “There is a strong urge to try new and
exotic investments,” he says. Aside from structured products such as market-linked debentures and perpetual bonds, Agarwal adds that, at present, there is a
trend to invest in incubator
funds that finance start-ups.
“Investing in start-ups may sound cool, but investors need to research well. You need the expertise of a corporate finance professional who can study and analyse balance sheets of start-up firms, project their cash levels, understand the businesses in which they work and project some sort of income, to make your investment worth the while,” says Agarwal.
Happy Investing
Source: Moneycontrol.com
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