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Role of Technology

I made my first ever “investment” in mutual funds more than two decades ago and I didn’t know anything about mutual funds then. My father was dead against it – he called it no different from betting on a horse race. But a friend of mine had highly recommended a friend of his – as person I can trust “to not run away with my money” – who will help me do so. The process of investing was tedious with all kinds of forms to be signed in 6 six different places and true copies of various documents to be submitted each time I had some small surplus in my savings account to invest. This friend’s value addition was – He managed all this tedium, he gave me these colorful brochures to read without which I wouldn’t have known where my money was going, he sent me an account statement every month (which he prepared by hand).

During the last decade or so, technology has changed this process completely. I don’t need this friend of friend anymore to do all the things he was doing for me then. Every AMC now has an app or a technology platform using which I can do all this myself. There are at least 20 or 30 independent apps and/or technology platforms which claim to be AMC agnostic. Technology claims to have gone even further, way beyond whatever my friend was able to do for me – Use knowledge of financial markets in ways my friend could never have used – because it was either not available to him and/or it was too voluminous for any human being to digest and distill down to specific action, Perform complex computations such as the Efficient Frontier : the optimal balance between risk and rewards or solve Black-Scholes equation, which my friend could never have been able to do.

It is therefore claimed that technology today can deliver a level of productivity even when I do everything on my own, which in the old days I could never have got even with the help of a specialist like my friend. But let’s examine that claim a little more closely.

Technology has enabled the distillation of ALL the “extrinsic” factors which can influence investment decisions – financial markets, products, assets, events which affect all these and so on, to deliver digestible capsules of information – information which in the old days was very hard to get. One could therefore argue that technology has enabled making far more informed and “rational” decisions. “More informed” and to the extent that availability of better information facilitates taking “better” decisions, certainly. However “Rationality” is not a function of the amount or quality of information. Rationality is the result of being able to overcome our emotions and impulses.

Emotions and impulses are the “intrinsic” factors which influence investment (or for that matter, ALL) decisions – fear, greed, faith and so on. Does (and if at all) technology help us curb and control these? Could availability of timely and better quality information help address our fear of the unknown? Could it help us overcome our greed by informing us about the consequences of greed seen in the past?

However, countless studies have shown that we don’t actually use information objectively. We ignore information which goes counter to our beliefs, we draw only those inferences from it which reinforce our biases. So while technology helps us execute our decisions orders of magnitude more efficiently – faster and cheaper, it does not necessarily enable us to make “better” and “more rational” decisions by simply providing us more and better information about all the “extrinsic” factors which are important in making decisions. This information is important but not sufficient. We need somebody or something to hold a mirror in front of us to inform us about our own “intrinsic” attributes, analyze our own behavior and highlight how our impulses could lead us away from reason.

That is something, at least I have not seen any app or investment platform built using the fanciest imaginable technology, be able to do thus far.

But could it do so in the future?

Could technology be built in the future that can analyze our own past behavior and distilling up knowledge about our “intrinsic” biases and beliefs and how they affect our decisions? What would it take to build such technology? That is a subject for a “white-paper” in itself but briefly –

First, we will need a model of our behavior – specifically behavior which we display while making financial decisions. Attempts to do so have been made in the past e.g. Kahneman and Tversky’s Prospect Theory is one such example. Second, we need data about our past (financial) behavior to create a faithful simulation of such a model (in currently fashionable terminology, this would be called machine learning). This – the gathering of this data is no mean task but if it can be done, perhaps technology is reaching a stage where building models of sufficient fidelity may be possible.

But until then to hold the mirror in front of us to let us see for ourselves the irrational influence of our intrinsic emotions and impulses, we better find an advisor with the right expertise and whom we trust.

All You Wanted To Know About Mutual Funds

A year back Mutual Funds only brought one thought to peoples’ minds ‘Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Over the past year, Mutual Funds hold much more meaning than the advertisements rattling off the statutory disclaimer. Mutual Funds Sahi Hai! With so much information and mis-selling around us, we need to filter out the noise and understand what Mutual Funds are and the basics of investing in Mutual Funds.

So here is a Beginner’s Guide To Mutual Funds –

At Happyness Factory we help you understand your goals, place them on a timeline and then create a plan to save and invest toward these goals. We also help you evaluate the various investment avenues you can invest your money in depending on your risk appetite and investment horizon.

Planning to retire early? Here are a few tips.

Growing up, college seemed like the ultimate dream. But when we eventually got there, we realized how wrong the movies had it because having to attend lectures religiously and curtailing expenses wasn’t part of that dream! The next dream had us envisioning ourselves as working adults. And why not? All they had to do was go to work and get paid for it. Unfortunately, this bubble burst pretty soon as well because work was hard, hours were long and savings were hard to create. Next came an early retirement dream to enjoy the results of your hard work in the prior years.

Now, retiring as early as 45 seems like an appealing idea but with the ever-rising inflation rates and the unimaginable demands of future generations, is retirement actually as comfortable and fun as we imagine it to be? Or is there a catch or a reality check that we fail to comprehend?

It’s important to remember that the grass is always greener on the other side but, only when one makes an effort to water it. This concept holds extremely true when it comes to retiring early. Many might think it to be a trivial thing to consider but, it is only with a purpose that a plan can become successful. So, once the purpose has been envisioned clearly, the next step towards an early retirement would be to strategize about how to get there.

The first step should be deciding upon the MAGICAL NUMBER, the one that will unbind you from all work-related obligations to let you breathe freely, without compromising on your current lifestyle or aspirations. It should also provide for any contingency in equal measure so as to empower you to leave behind a legacy for your loved ones.

Following the below-mentioned practices can help you set yourself up well for retirement.

1. Setting aside 25 % of your gross income every year

While this amount might seem quite less in the initial years, as your career advances and you reach your retirement age, the small amounts add up considerably. As you will progress in your career and reach your age of retirement, these savings could not only add comfort to your early retirement but, also come in very handy in paying off any sudden liability or unplanned requirement. This doesn’t mean that weekend trips and impulsive buys should stop completely. A few smart choices there as well will award you with inspirational financial freedom. This practice would also serve as a good lesson in planning for your future for the coming generations.

2. House yourself in a budget

There truly would be no point in early retirement if one had to worry about repaying a staggering amount of loans as opposed to having their basic needs like having a roof over their head fulfilled. Thus, it is very important to start EMI planning at the earliest. It is best advised to set aside a minimum of 30% of net income for EMI towards housing loans.

3. Invest in equity from the start, NOT debt

During the start of one’s career, one can afford to take a little risk, be aggressive in investments and opt for the equity option when building an investment portfolio. Of course, when nearing the age of retirement, one could move towards debt. But placing debt strongly before equity without having a profitable investment build-up would mean loads of interest payments being made from day one. thus, This would make early retirement almost impossible to achieve.

4. Prudently monitor all expenses

Human nature is such that it takes very little time to become habituated to a luxury which in turn becomes a necessity. A very apt example here would be the mobile phone. Earlier, it was a luxury before but now, it’s an absolute necessity. One cannot cut back on expenses when they become a necessity. Thus, savings become dependent on one’s growing needs. So, closely monitoring lifestyle choices and chalking out a monthly expenditure plan is imperative to retiring early and leading a comfortable retired life.

5. Invest any inherited asset cautiously

An inherited asset is always a valuable heritage. Thus, if one becomes fortunate enough to receive such an inheritance, prudent investment of it will double the asset value in no time. Hence, instead of blowing up the inheritance, it is always advised to do a quick financial check of it with respect to its market rate and inflation prospects.

What Is The Right Time To Exit Your Mutual Fund Investments?

Investors’ thought process and behaviour while choosing a Mutual Fund to invest in usually mirrors their behaviour while exiting the investment as well. If you have chosen a Mutual Fund because it was doing well in the past few months, then you’ll probably feel like selling it if it under-performs for few months. You will then move to another fund that is currently performing well and continue this vicious circle.

In reality, continuously worrying about market conditions and obsessively tracking your returns is futile. When the market is falling, most investors panic and want to exit their investments to ‘mitigate’ their losses. The trap of wanting to invest in a ‘better performing’ investment avenue is always very tempting but very harmful.

Before panicking in times when the markets aren’t doing well, you must realise that Mutual Funds are actually a portfolio of financial instruments like stocks and bonds. Thus, as they are diverse portfolios with instruments having varying risks and characteristics, a decline in one or a few of the stocks can be offset by other assets within the portfolio that are either steady or increasing in value.

So, while you may want to avoid worrying about market ups and downs, there are few circumstances when you may have to exit your investments due to some pressing needs. These are a few situations in which you should exit your Mutual Fund investment –

When you need the money for a goal: Most of us have tangible goals like buying a house, funding a dream vacation or providing for our child’s education, for which we save money. At least 6-12 months before you need money for a goal you should sell your equity investments and move the funds into a fixed deposit or floating rate fund. If the market is down at this point of time, see if you can utilize any other source of funds for your goal or check whether you can wait for an additional period of time. This decision on whether to ride the downturn a few months before you need money is completely based on your risk tolerance and varies from person to person.
When you need money for a personal emergency: There might be a time when a personal emergency warrants far more money than the money you have saved in your Contingency Fund. At such times when Bonds, PPF and Post Office instruments might have a lock-in, you can look at selling your Mutual Fund investment which is not performing.
When your investment has gone sour: There are periods where your investment will under-perform the broader market. Should you immediately sell at this point? We generally give any fund manager a couple of quarters of under-performance especially if he has a consistent track record of delivering risk-adjusted returns. Check out the reason for under-performance whether it’s due to high concentration to few sectors, or a fund manager change or bad market timing etc. Generally, when a fund does too well, there is a lot of money that flows into it and hence you might see some under-performance in the funds’ performance due to excess cash in its portfolio. However, if there is a change in the fundamental attribute of the scheme and it does not match the reason you invested in the fund, you could consider exiting it in consultation with your Financial Coach.
When you need to re-balance your portfolio: Asset Allocation is one of the key decisions that you must make when it comes to your money and studies have proved that Asset Allocation accounts for almost 91% of your investment performance. Suppose you decide on an exposure of 60% Equity and 40% Debt, but because of the bullish market conditions, your equity exposure has gone up to 80%, then to bring back the portfolio to its original allocation, you would need to sell Equity and buy Debt. In such cases you can shift from an Equity Mutual Fund to a Debt Mutual Fund also.

This is where consulting a good Financial Coach will help and they will not only help you with your ideal Asset Allocation but will also review your portfolio at least once a year, to ensure it is on track with your goals and matches your risk profile.

Thus, as you can see above there are situations where you must exit your investment irrespective of how the market is performing. However, continuously panicking when the markets go down and trying to continuously time the market is futile. At Happyness Factory, we believe “It’s not about timing the market, but about your time IN the market”. When you stay invested for a long period of time and focus on achieving your financial goals, these phases of bad performance will not matter.

12 signs you need help with planning your finances

Sometimes while focusing on the next multi-bagger, top-performing fund, or booming real estate investment, we end up ignoring the most important factor that impacts our family’s financial well-being – our behavior and emotions towards money. Our emotions, previous experiences, and psychology play a big role in any financial decision-making process and may end up doing more harm than good.

Let’s look at 12 such signs which might indicate that sometimes we need a little bit of help making wise investment decisions.

With finance being such sensitive, yet integral aspect of your life, mistakes are bound to occur. These could either be because of your own fallacy or circumstances out of your control. Thus, the truth remains that you do need a good, qualified financial coach. Not only to help you rectify all the 12 signs listed above but also to stop you from making mistakes, help you be certain of your financial future and be your trusted partner in your financial journey.

Another important step is giving your money a purpose. When you have a goal in mind and are saving and investing towards achieving that goal, you are more likely to stay focused and not let your greed or indecision come in the way. Giving your money purpose and focusing on goals ensures you don’t get carried away by multiple investment avenues and select what suits your needs and requirements.

Saving for Children’s Future: Common Questions Answered

Culturally, Indians are entrenched in family values and it doesn’t come as much of a surprise that securing one’s children’s future sits at the top of most parent’s priority list. Making sure that the coming generation has a superior quality of life and better opportunities is what all parents want. In today’s article, I’ve answered some of the most common questions parents have while planning for their child’s future.

What are the biggest investing mistakes people make while saving for their children?
Most parents opt for Children’s insurance plans and feel they have secured their child’s future. A children’s insurance plan is a very inefficient way of saving money for your child’s future. In fact, setting aside money for your child’s goals like education, and marriage can be achieved by investing in Mutual Funds or any other investment avenues.

Another mistake parents make is to start planning for the child’s higher education only when the child has already neared the age of starting college. By then it is already too late to start building a corpus for higher education and they start eating into their retirement corpus. One of the biggest mistakes parents make is not ascertaining how much money they would need for their children’s goals. They tend to overlook the impact of inflation and how it will increase the financial requirements for their child’s education and marriage.
Should one only look at long-term goals like education and wedding, or also save/invest for short-term goals?
While higher education and marriages are big expenses in the long run, there are many expenses that come up in the short term. School fees and other extra-curricular expenses have skyrocketed. These recurring costs may not look big taken alone, but over a period they will significantly impact your family’s budget.

Be it your child’s school fees, higher education, or marriage, prepare an estimate of how much you would require for each goal and when you require it. Start saving and investing towards these goals through monthly SIPs from the time of the child’s birth.
What kind of mutual fund should one invest in for a child’s goals?
The first step would be to ascertain the major milestones you want to plan for – graduation, post-graduation, marriage, etc. All of these require a lot of money and you will greatly benefit if you start investing for these milestones well in advance. If you start investing a small amount from the time your child is born, you will have considerable time to build a good corpus for your child’s education and marriage.

For long-term goals (more than 5 years away) you should invest your money in Equity Mutual Funds which will help your money grow and achieve these goals. Expenses that you will incur for your child within 3 to 5 years, like your child’s schooling, can be invested in debt and balanced Mutual Funds. When it comes to short-term goals, there isn’t a lot of time for your investments to grow as you may need the money in 1 to 2 years. For such goals, it is advisable to keep your money in a Liquid, Arbitrage Fund.

However, there is a pressing need to gain a holistic view of one’s overall situation prior to creating any plan. The best thing to do is to get in touch with a financial coach to help you streamline your finances in a way that helps you achieve your goals.
Should one invest in real estate for the kid’s life goals?
For most people in India, buying real estate is not just an investment, but a dream goal. While we feel we own a physical asset that we can pass on to our children or sell to fund our children’s education or marriages, the truth is that real estate is not such a lucrative option anymore.

Real estate had a great run from the 1990s to 2008, and most people who talk about real estate giving great returns, are talking about their experience during this phase. However, post-2008 the real estate market has performed abysmally. The equity markets have outperformed the real estate markets by a great margin from 2009 to 2016 when it comes to capital appreciation.

Therefore, though people view real estate as a source of wealth creation and value appreciation, in reality, the picture is very different. So as an investor, it is better to invest in Mutual Funds than real estate. Mutual Funds are a much more liquid asset. It is not easy to sell real estate when the need arises.

Buy property for residential purposes rather than investment. DO NOT go overboard buying 2 or more properties thinking about retirement or kid’s needs or wealth creation. Look at building a more liquid, tax-efficient investment portfolio with mutual funds.
Should one opt for Child Plans (ULIPs) or Endowment Plans?
People are made to believe that any product that is labeled as “Children’s Plan” is the best option for their children. But as parents, you must not fall for child-specific insurance products and “Children’s Plans”. Keep your insurance and investment decisions separate. The plan should be to cover risk through pure insurance products like Term Plans and opt for mutual funds for the purpose of investment.

The most important thing for a parent is to plan for your children’s goals and start investing in them in a consistent manner. This will help you realize the bright future you envision for him/her and safeguard your family’s financial future.

5 Financial Goals to plan in your 40s

Mr. Joshi, a senior executive in his early 40s, lives in an upmarket apartment with his wife, a teacher, and their 12-year-old daughter Avani. His Facebook posts are a source of envy to his friends who see him taking exotic vacations and checking into new restaurants every weekend. Yet, he is vaguely stressed about maintaining his current lifestyle and planning for his major future financial goals. This is not Mr. Joshi’s story alone.

As a financial coach would say, Mr. Joshi is now in his peak earning years and it is in this phase that he has a great opportunity to create wealth for his future goals.

Mr. Joshi, like many others, has been making ad hoc investments to ensure he is saving. For him, investment is all about starting a SIP, asking his broker for the next big investment ‘tip’ – the upcoming IPO, that great stock tip or the ‘best’ insurance plan, or saving through PPF. As for his expenses, even though his earnings are high, his expenses (including EMIs, insurance premiums, and lifestyle and education expenses) are higher and there is practically nothing left every month. The question is – Is this approach going to help the Joshi family meet their future financial goals?

The truth is any decision you take about money impacts your overall finances. However, when we decide to invest in real estate or take a loan or buy stocks or mutual funds, we do it without considering the impact of one decision on the other and without considering how this impacts our future financial goals.

Like Mr. Joshi, most of us are unable to identify all our important financial goals and chart a simple, implementable plan to achieve these goals. However, if he were to begin the goal-based financial planning process now, let’s see what a few probable goals would look like –

Setting financial goals is the most important part of the financial planning process. Even if what you can actually invest might be lower than the required investment, it’s absolutely fine! Your earnings will increase every year and as long as you are disciplined with your investments and keep increasing your investments each year, your goals can be achieved.

Mr. Joshi’s story is often reflected by many people. The 40s are a great time to give serious thought to this planning process as a lot of your financial requirements can be met if a proper goal-based financial plan is made and implemented.

A Doctor Needs A Doctor Too – The One-Stop Guide For Doctors To Choose A Financial Coach

Whenever we have asked doctors who advise them on financial matters, we get almost the same answers-

My relative/father/brother/sister manages my finances
I approach my Chartered Accountant (CA) for all my finance-related needs
I have a friend who is a financial coach
I am a Privileged Customer in my Bank and have Relationship Managers
I get investment and stock tips from my colleagues or my patients

As you can see above, anyone with some knowledge of finance is assumed to be a Financial Coach. The truth is that doctors are so busy in their professions that they barely get time to look into their finances and when they do, they consult whoever is the easiest to approach and take their financial advice.

Consulting a Financial Coach is akin to seeking medical help from a Doctor. If you were seeking medical help, would you go to a Doctor or to a Chemist? Obviously, a Doctor, for his expertise and domain knowledge, right? Similarly, Financial Coaching is a field that requires specialized qualifications and expertise. A CA may be a tax wizard, but he is NOT a Financial Coach. Similarly, Financial Distributors and Bankers are also NOT Financial Coaches.

So, how should you choose your Financial Coach – one who will understand all your financial needs and goals and create a plan to ensure that you achieve those goals?

Thus, as you can see above, choosing a Financial Coach is a very important decision that will not only help you secure your future but also help avoid making financial mistakes that doctors are prone to making. With almost everyone using similar designations in the Finance industry, differentiating between the noise and the real deal is becoming increasingly difficult. Make sure you understand your financial needs and consult only an expert for handling your hard-earned money.

Other than approaching a good Financial Coach, doctors should also focus on setting their financial goals. When you keep in mind the life cycle and unique financial requirements in each phase you can plan your finances better.

Investing the RIGHT WAY

Have you ever booked your flight tickets and packed your bags before deciding a destination for a vacation? Sounds ridiculous, right? Of course it is! But most of us follow this method when it comes to finances. We invest our money in various products before understanding our financial needs and goals. The ideal way to invest is to follow the 3 steps shown below –

Investing the RIGHT WAY involves following the 3 steps below-

PLAN – Start with ‘WHY’

Planning your investments begins with understanding WHY you want to invest your money. Focusing on goals like ensuring a peaceful retirement, paying for your child’s education or purchasing your dream home will help you focus on what is important to you.

Once you know your goals and how much money you need to achieve each goal, determine when you want to achieve these goals. Classifying goals as short, mid and long term, will make them more achievable.

PROCESS – Focus next on the ‘HOW’

Once you have defined your goals and timelines to achieve them, start planning on HOW to achieve these goals. Knowing how much money you will need to achieve your goals will help you determine how much you should save and invest to achieve these goals.

PRODUCT – Proceed with ‘WHAT’ to invest in

After defining your goals and saving for them, you should decide where to invest your hard-earned money so that it can grow and help you achieve your goals. With the vast range of investment avenues like Bank FDs, Insurance products, Real Estate, Equity, Mutual Funds, etc. it can get overwhelming to decide where to invest your money.

This is where a good Financial Coach can be very helpful. An expert It really helps to have an expert help you navigate the sea of investment avenues and avoid the mis-selling which is rampant in the finance industry.

At Happyness Factory, we guide you through all these 3 steps in a well-planned and systematic manner. We help you understand your goals, place them on a timeline, and then create a plan to save and invest toward these goals. We also help you evaluate the various investment avenues you can invest your money in depending on your risk appetite and investment horizon.

Doctor, your Finances might need a Check-up!

Mr. Shetty finally got himself to the doctor after having dealt with a terrible cough, high fever, and constant body pain. It’s not like he didn’t try to cure himself in the meantime. He absolutely did, but just used Dr. Google instead of an actual doctor. Upon examination, the doctor at once realized what the problem was and set Mr. Shetty on the right course of treatment. He also exhorted that an actual medical degree should NEVER be confused with a Google search and explained the importance of avoiding self-medication due to its possible side effects.

And Mr. Shetty isn’t alone in exhibiting this behavior. Most people prefer to self-medicate instead of consulting a qualified doctor. Self-medication by relying on a web search can have detrimental effects, but that doesn’t stop most of us from indulging in it. This is because the perils of ‘self-medication’ often pale in comparison to the comfort and ease of getting this ‘so-called medical advice’ in the confines of one’s own home.

Coming from a doctor, a request to avoid self-medication doesn’t seem all that odd. But when you consider that these doctors themselves indulge in self-medication when it comes to an extremely important area of their lives, the irony is hard to miss. Research has shown that 75% of doctors believe in self-medicating when managing their own finances.

So, are doctors exempt from the advice that they dispense to their patients? Well, they shouldn’t be, because the trap of self-medicating one’s finances can have adverse effects on a doctor’s overall financial situation. The most common mistakes doctors make include:

1) Making investments in a combination of schemes that might not necessarily go together, simply because they seem relatively profitable.
2) Having limited knowledge about the field of finance, causes them to become a victim of mis-selling.
3) Relying on the advice of family, friends, peers, and CAs while making financial decisions.
4) Delaying the investment process due to believing that they don’t have enough money to make substantial investments at an early age.
5) Not having adequate Insurance for Disability or Professional Risk.
6) Over-concentration in real estate, which is an illiquid asset.

But all these mistakes can be avoided if doctors follow the same procedure they use while diagnosing a patient and prescribing medication. Traditionally, doctors get a full history of the patient prior to prescribing any medication. But they fail to apply the same precision when it comes to diagnosing their own financial situation. It is not like doctors don’t think about their finances at all. Simply put, doctors just don’t have too much time to dedicate to understanding the intricacies of financial coaching. But complacency, when it comes to one’s finances, can prove to be very harmful.

So, how should doctors go about making (profitable) investments?

1) Well, for starters, a doctor’s financial journey must begin by going against his/her own instincts to “play doctor”, in a bid to improve the situation.
2) The second step is understanding that there is never a wrong time to begin investing. Investing, even later on in life, is much more profitable than not investing at all.
3) The third and most important step would be to find the RIGHT PARTNER, one who would understand all your financial needs and goals and create a plan to ensure that you achieve those goals.

When trying to create a profitable portfolio, paying to get advice might not be everyone’s first choice. And doctors are no different. But, getting advice from someone who might be more knowledgeable in the field of finance might be a good starting point. This is because they will give you the right advice you need for protecting and growing your finances. So, just in the way you would approach a doctor for any physical malaise, or for help with your finances, get in touch with a trusted financial coach.