Every month we talk to people just like you to understand their relationship with money and markets.
Another month and here's another personal finance perspective. This month we asked Pranav Bhatia - Product and Growth at Viacom, about how he feels and navigates risk as a retail investor. Here's what he has to share:
As a retail investor, I found assessing my risk appetite quite difficult and confusing. As my savings have been growing over the past couple of years, I started looking for investment options in order to start as early as possible to gain the benefits of compounding. The plethora of options out there just added to the fear of missing the suitable risk range, should I hop on the crypto train (I definitely didn't almost buy dogecoin) or am I better off with good old FDs? Now there are a gazillion articles about the concept of risk and how to figure out what's best for you. But all this could be a little hard for us beginners.
Knowing the actionable part of the journey before assessing my risk helped me a lot. Eliminate bad debt - set up an emergency fund to help yourself through a rainy day - insure yourself and your financial dependents - set money aside for any big upcoming commitment that requires cash. But honestly, after this, I was not really sure about the next steps. Wouldn't it be nice to have this massive blocker broken down into smaller actionable steps? That's exactly what I did.
The first thing was to look back and run the numbers again. After going all the way from eliminating debt to setting cash aside for possible big expenses in the near future, I had a number that was ready to be invested in the markets. Once I had this number, the next step was to understand the odds at play. As retail investors, we don't have the time or tools to consistently outperform the markets. I did my research and finally concluded that markets are seldom wrong, and trying to outsmart them is extremely difficult if not outright impossible for someone like me, moreover I would rather spend my time advancing my career than burying myself under tons of financial jargon.
After deciding to go with the flow (of the markets), I looked at my investing horizon and goal. As a young professional, I understand that I have years to stay invested and grow with the markets. Goals aren't too hard and fast either, the only aim is to use the savings for something useful rather than keeping them locked away in a savings account.
Bringing such a complex summation of factors to a single number is a little difficult but I would say that on a scale of 0 to 10, my risk appetite will stand somewhere near 8. I don't have a big goal apart from building long-term wealth at the current stage of my career. This might change further down the road but I think for the next 5 years, I can follow the set-and-forget style of investing.
I haven't quite figured it out yet. It obviously feels bad to see the graphs go red but I guess the first step toward being an intelligent investor is to understand that the markets will go down at some point or the other, no matter what. The second step is probably understanding that they will also go up, eventually.
Based on this and after googling graphs for numerous indices and strong companies, I think I can confidently say that if you're following the markets and have a decent time horizon, riding out a downturn is much more beneficial than cashing out.
Learn where your money is invested and become a smarter investor.
Indian Mid Cap Equities represent ownership in Indian corporations that have a market cap between ₹ 5,000cr and ₹ 20,000cr. These funds invest at least 65 percent of the corpus in companies ranked 101 to 250 depending on their market capitalization. They are considered riskier than large caps because they are smaller and hence less protected. However, we expect them to perform better in the future to compensate for that risk.
Mid Cap Equities are more volatile than the Large Cap ones, they take a bigger hit during times of economic slowdowns and also take more time to recover. But with more risk comes more returns. They are believed to produce market-beating returns but investors must be willing to face the uncertainties.
Indian mid-cap equities offer higher returns and liquidity (albeit with slightly higher risk) when compared to other forms of "safe" investments, here are some stats over the last 10 years:
In contrast compared to large-cap schemes, mid-cap funds have found it easier to keep up with their own benchmark indices in recent years. More than 50% of the Mid Cap Active funds managed to beat their benchmark index over the last 10 years.
The maximum CAGR from an active fund was 22.15%. The average CAGR from an active fund was 20.09%. The minimum CAGR from an active fund was 17.31%. Here again, sticking to the index would keep you on par with most active managers without shelling out more money.
Point to note: Mid Cap funds on average charge higher expense ratios than large-cap funds, understandably due to harder-to-find research material for mid-cap companies. The average expense ratio of Mid Cap active funds is around 2.3%, while that of Mid Cap passive funds is around 0.25%.
To tie it all up the potential of such high returns makes Indian mid-cap equities an essential component to diversifying your portfolio according to your risk appetite. If you're someone who can maintain their calm during turbulence, mid-caps should definitely be a central part of your portfolio.
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Take a quick look at how asset classes across India and the globe fared.
The US S&P 500 led global markets lower in September, notching its worse monthly decline, -9.6%, since March 2020 when the pandemic struck. The benchmark is now down 25% YTD. Investors are in risk-off mode as central banks globally try to find a delicate balance between taming rampant inflation by raising rates, while trying not to throttle economic growth by tightening financial conditions too quickly and aggressively.
The Indian market so far has been surprisingly resilient in the face of bear markets globally but wasn’t able to escape the broad-based sell-off in September. Indices across cap size were hit - with the Nifty 50, our large-cap benchmark, down nearly 4% for the month. The Nifty 50 is now in the red for the calendar year. While the Indian economy remains on strong footing vs. its global peers, it wouldn’t be entirely resistant to a global slowdown, which investors are now starting to price in our markets.
The next few months promise to be volatile as a confluence of factors come into play - globally tightening monetary policy (i.e. high rates); more difficult borrowing conditions for corporates, which haven’t played out in the economy yet; a struggling UK economy; a global investment bank on the brink; and worrying geopolitical developments in Russia and Ukraine amongst other things. However, how these factors play out is anyone’s guess, and predicting markets in times like these is a fool’s errand. Our recommendations: don’t change your asset allocations around too much, continue your monthly investments as per schedule, invest in things you understand, and don’t try and be too cute in these whipsaw markets.
E-meet Srikanth Chellaboina, who leads product and growth as we build India's first end-to-end digital wealth manager
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