Tag: Mutual Funds

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.

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.