Financial Planning Philosophy

You can generate great wealth even if you start saving and investing in a small way. Some save when they can, not having a clear plan and hoping things will work out in the long run. Others have a written financial plan – of where they will invest this saving and how to protect and grow it.

Having a financial plan can 

• Increase your confidence
• Enable good financial habits
• Allow your investments to grow
• Help you create a basket of different financial products and investments that is diversified for growth and protection as per your risk liking.

Financial planning and investment advice can help you achieve financial freedom – the ability to do what you want, when you want, with who you want, for as long as you want.

To build your Financial Plan, we consider who’s in your family, your income, your expenses and savings, and your risk profile. Here’s our thought process.

Building wealth is not about making the highest returns since they tend to be one-off hits. Great wealth is built by earning good returns, which can be repeated for the longest time without disturbing them. Investing over the long term produces wealth that surprises most people. This happens because of the power of compounding. However, this could come under threat if it is unnecessarily interrupted.

One of the main reasons why people withdraw investments is because of a medical emergency and hospitalisation. The first job, then, is to provide Medical Insurance for yourself and your loved ones. Let the insurance company pay for hospitalisation. We’ll tell you how much, the type of policy and why.

Life is uncertain, so the next thing is to protect your loved ones who depend upon your income. Have Life Insurance for earning family members to provide for an income replacement. We’ll tell you how much, the type of policy and why.

Besides medical emergencies and death, it’s wise to have an Emergency Fund to protect against other events you cannot plan for. We’ll tell you how much, why and where you should invest that.

Organise yourself to simplify your financial life. We’ll give you some financial hacks for that.

Now you’re ready to invest.

Safety First. Build a base of safe investments which give a good return. We’ll tell you which and how much to invest in them.

Build your investment portfolio, which provides increased returns by investing through mutual funds, letting professionals manage your money. Investing or trading in stocks and knowing when to sell requires time and effort and is stressful. We build your portfolio of mutual funds, both debt and equity, based on your risk profile, so you are more likely to stick with it for the long term. Based on our detailed research, we’ll tell you precisely which funds to invest in and how much. Interested in learning more about our Investment Philosophy? Read on.

Investment Philosophy

1. Time + power of compounding and why not to interrupt it unnecessarily. How do mosquitoes multiply so quickly? Say a mosquito lays three eggs which makes three mosquitoes. Each of these lays another three eggs; before you know it, we have thirteen mosquitoes. However, if you interrupt this process by removing just one mosquito in line two, it will lower their number by 30%! Something similar happens to your investment. Every investment earns you something, which in turn earns something (compounding), which over time grows in a manner that surprises most of us. The idea is to not interrupt it unnecessarily. We believe investments should be for the long term and just like the mosquitoes, it is possible to start small and still be wealthy.
   
   
2. Investment is different from trading. Trading is like a lottery. Traders take a risk and trade often to maximize returns, but these tend to be one-offs. For investment, our focus is to earn good returns, repeated for a long time to generate wealth that surprises most of us. And it requires less effort and stress, leaving you with time for things that matter – your work and loved ones.
   
   
3. Let professionals manage your money. You can get even more time for work and family, with lower stress, by letting professionals manage your money. That’s why we believe in investing through Mutual Funds. Think of Mutual Funds like a Playlist on a music app. A Playlist contains different songs and there are different types of Playlists – Dance, Chill, etc. Similarly, you can invest in an Equity Playlist or an Equity Mutual Fund. The money invested by you and others in the Mutual Fund is then invested by a professional fund manager in equity shares of companies. You could also invest in Debt Mutual Funds which lend money to companies and to the government.
   
   
4. Deciding the proportion based on risk and time of investment. How do we choose how much in Equity Mutual Funds and how much in Debt Mutual Funds? We want to build wealth, but safety first. An investor should have safe investments and take risks with others. What proportion of each would depend upon your ability to take risks – depending upon your circumstances, your willingness to take risks – depending upon your comfort and when you need the money. An equity investment, where the investor is an owner, is riskier than debt. This is because the owner is only paid from profits. Interest on a debt has to always be paid, even before the profit is calculated. The lower your risk profile and shorter the time frame, the greater the allocation towards Debt Mutual Funds.
   
   
5. Deciding which Mutual Fund to invest in. But there are so many Equity Mutual Funds and types and Debt Mutual Funds and types. Which ones to invest in? Most people do basic research and rely on friends and family. We do a detailed analysis based on several metrics (see below). We use this to suggest funds specifically for you and help you build different funds and assets over time as your wealth grows.
   
   
6. Growth Option or Dividend Option. From a long-term investment perspective, we suggest investing in the “Growth” option of Mutual Funds as against a “Dividend Payout” or “Dividend Reinvestment” option (also called IDCW). You may invest in the IDCW option if you are retired and have no other sources of income.
   

Also Read : Importance of Investment Planning

What we consider to suggest Mutual Funds

1. Mutual Fund Charges
   
   
   1. Total Expense Ratio (TER)
      
      To provide the investment service, the Asset Management Company (AMC) that manages the Mutual Fund charges a fee called the Total Expense Ratio (TER). This is charged as a percentage of the fund and lowers the Net Asset Value – NAV, the daily declared price of the fund. While we prefer funds with lower TER, a good fund may sometimes have a higher TER.
      
      
2. Fund Performance
   
   
   1. Rolling Returns
      
      Of course, the obvious thing to consider is the fund’s past return, even though past performance is not an indicator of the future. Most people look at Point-to-Point returns, which is what many research sites report. It’s like saying if it rained last year this time, it would rain today also. Hmmm, not really. We don’t believe in point-to-point returns, which consider returns between two dates, now and the same date last year. This ignores everything that happens in between. We prefer Rolling Returns. For 1-year Rolling Returns, we consider the 1-year point-to-point returns every day – today to last year; the day before to the day before in the last year etc. We do this for several years and then average these. This tells a better story of how the returns performed.
      • For Ultra Short Duration and Low Duration Debt Funds, we have considered an average of 1-year returns calculated daily for the last 3 years.
      • For Short Duration Debt Funds, we have considered an average of 3-year returns calculated daily for the last 3 years.
      • For Banking & PSU Debt Fund and Corporate Bond Funds, we have considered an average of 5-year returns calculated daily for the last 3 years.
      • For Equity Index Funds, we have considered an average of 3-year returns, calculated daily for the last 3 years.
      • For Equity Funds other than Index Funds, we have considered an average of 5-year returns, calculated daily for the last 3 years.
        
        
   2. Alpha
      
      While returns are essential, it is vital to see if the fund manager is worth the Total Expense Ratio paid and is beating the market. The market can be measured by a benchmark index (eg NIFTY 50 or SENSEX). Alpha measures whether the fund manager is beating the relevant benchmark index. A positive Alpha indicates out-performance by the fund manager; negative Alpha might indicate underperformance. We have used Alpha for equity funds.
      
      
   3. Capture Ratios
      
      Apart from seeing whether the fund beat the benchmark, one must also know how the fund performed when the market was up and also when it was down. For this, we use Capture Ratios. The Up Capture Ratio measures the extent to which the fund captured the positive returns of its benchmark index (the higher, the better). On the other hand, the Down Capture Ratio measures to what extent it captured the negative returns of its benchmark (the lower, the better). We have considered the Up Capture by Down Capture Ratio (higher the better) to determine how the fund has performed during the ups and downs of the market. We have used Capture ratios for equity funds.
      
      
   4. YTM – Yield To Maturity
      
      Mutual Funds lend money to companies and the government by buying bonds or securities issued by them at a declared rate of interest. These bonds can also be bought and sold through a bond market. Since a fund buys bonds at different prices, the effective return, known as yield, is different from the interest rate that the bond pays. The YTM is the effective yield the fund will get if it holds its bonds until maturity, ie the loan is repaid by the company or the government. Since your gain in the fund is related to this, we consider YTM of the bonds held by the debt fund.
      
      
3. Risk
   
   
   1. Your Ability and Willingness to take a risk and the Period of Investment
      
      We first consider your ability to take a risk, which generally depends upon your circumstances. The next is your willingness to take a risk, which depends upon your comfort.
      We also consider the period for your investment. Remember that markets, including the value of equity and debt mutual funds, go up and down all the time. If your investment period is short, we suggest a less risky portfolio since you may want the money when the markets are down while still providing a return. One way to reduce risk is to invest for the long term. We believe that in the long run, the markets will go up and hence provide positive returns.
      
      
   2. Treynor Ratio
      
      If a fund takes great risk it could have a great return. It could also bomb. What is important is the premium generated per unit of risk taken. This is measured by the Treynor Ratio. The risk premium is the difference between the fund’s return and risk-free return (typically government debt). The unit of risk is measured by Beta. The higher the Treynor Ratio among similar funds, the better the fund. We have used the Treynor Ratio for equity funds.
      Beta, used in the Treynor Ratio, measures the fluctuation in periodic returns in a fund compared to the change in periodic returns of a diversified stock index (representing the market) over the same period. The diversified stock index, by definition, has a Beta of 1. Funds whose Beta is more than 1 are more volatile and riskier than the market. Beta less than 1 indicates the fund is less risky than the market.
      
      
   3. Modified Duration
      
      If the market interest rates go up, the price of a bond falls. This is because the bond pays a fixed interest and whoever is now buying it from the market expects a higher return. That person is willing to pay less for the fixed interest bond – effectively increasing the return. Thus interest rates and bond prices move in opposite directions. Modified Duration, expressed in years, measures a bond’s price change to a 1% change in interest rates. The lower the Modified Duration, the lower the risk.
      
      
   4. Government Bonds & Low-Risk Bonds
      
      Since bonds issued by the government are considered safe, we analyse the proportion of a debt fund’s investment in government bonds. We also consider the debt fund’s investment in bonds other than government securities with the highest credit safety rating.
      
      
   5. Number of Instruments
      
      A Debt Mutual Fund that owns bonds issued by more companies is less risky. This is because the impact of a non-repayment of a loan may be worse for the Debt Mutual Fund that owns bonds of fewer companies. For Debt Funds, we consider the number of instruments the fund holds. A higher number of instruments lowers the risk of a higher negative impact should something go wrong.
      
      
4. Fund Size or AUM – Assets Under Management
   
   
   1. The amounts that various people have invested in the fund are the fund’s Asset Under Management (AUM). We have considered the size of the AUM and ignored those funds with a low AUM.
      
      
5. What we have not considered
   
   
   1. We have not considered those funds that have a negative or nil return, that have a low AUM or a negative alpha or where one of the metrics we are using is not available. We have then assigned weights to the different metrics and determined the ranking of the funds to suggest which fund you should invest in.
   2. We have ignored specific categories of funds because either they are too risky for you or the return premium does not justify the increased risk.