Visit A Fashion Show To Invest In Financial Products

Expecting a ‘garment’ kind of sales effort from your adviser makes it easier for her to missell as you could end up buying something unsuitable for you

Sounds anomalous? That’s what it is meant to be. A staid title line probably wouldn’t have attracted your attention as much. Now if I say “people, do this”, you would probably not be interested and say “too much”. But pause for a while and think. When you buy any goods or services, you pay money and get them at that point of time. It could be something physical like a shirt, car or phone, or a service like a haircut or transport. When you invest in a financial product, you get nothing. You get a promise (like in debt) or an expectation (like in equity) of getting the money back in future, and getting back more to compensate for your current sacrifice.’

What you should look for is how strong is the promise or expectation of getting your money back, how long can you spare the money (investment horizon) or if you suddenly require your money one day, how much do you expect to get back (liquidity). If you ask other things to your financial adviser, like what all products are there with her, you are expecting her to put on display a fashion parade of products.

An investment decision is different from buying a garment—this too is a matter of choice, but more a matter of suitability to your conditions. Expecting a ‘garment’ kind of sales effort from your adviser makes it easier for her to missell, because you would buy something you fall for, but it may not be suitable for you. While misselling is a problem and it does happen, if you ask the wrong questions, you are opening the door for it. This can also be termed as mis-buying. 

This is where investors go wrong. The foremost FAQ is about return expectation, “kitna dega (what is the return)?”; whereas this should come later. You may ask: returns is what I am investing for, why should that question come later? Let me give an analogy. Let’s say, higher returns while investing is the same as lesser expenses while spending. You want transport and you don’t have your car. You have a choice all the way from an auto-rickshaw at the lower end to a radio taxi service’s at the higher end. The factors you would look for are:

Comfort: a sedan is more comfortable, while an auto-rickshaw is jerky and dusty;

Travelling time: Which one will take you faster;

Availability: Is the app faster than going to the road looking for an auto-rickshaw or a cab?;

Other comfort factors: Wi-Fi and all in radio taxis;

Safety: Especially for women;

Charges: What you pay upfront.

The point here is that even for a small one-time transport service, you consider so many factors apart from your expenses. If cost were the only factor, you would travel by public bus. 

When it comes to investing your hard-earned money, it should be more about suitability, followed by return expectations. In a fashion show, a colour or design may attract you; in a suite of financial products, a particular feature may appeal to you, for example, equity market being in a bull run, low inflation prompting the Reserve Bank of India to reduce interest rates, a portfolio management service provider who has given returns higher than peers in the industry in small-cap funds, and a structured debenture is giving a higher coupon if the equity market moves in a particular range. 

Let’s see what is buying right and what are the questions you should ask your financial adviser: 

Suitability: Any product, be it equity or debt or hybrid, for the allocation recommended in your portfolio, has a rationale. Ask your financial adviser for a brief, non-jargonized reason why this product is suitable for you. 

Volatility: Technically, volatility may be both on the upside (returns higher than expected for a while) and the downside (returns lower than expected for a while). Naturally, nobody has a problem with upside volatility. Ask your adviser, what is the expected maximum downside in an extreme adverse market event. This downside, technically called drawdown, should be acceptable to you. 

Risk profiling: Your adviser does you risk appetite profiling. Understand from her how she is classifying you—aggressive, moderate, conservative—and the basis thereof.

Horizon: There is a recommended or optimum horizon for any investment. You should understand that, and not negotiate. High net worth individuals (HNIs) have a tendency to ‘negotiate’ this with the adviser but the investments are in the market, not in a term deposit of the adviser. 

Liquidity: You may be comfortable with the horizon, but in case you require the money earlier, the perspective should be clear from the beginning.

Any typical or particular risk: For instance, a credit-oriented fund will have relatively higher credit risk, which should be clarified. 

Some of the queries to be avoided are whether the product is ‘exclusive’ and who else has invested in it, because the market is for all and all individuals are unique.


Investors in fixed income-oriented mutual funds have the option of investing in various categories of funds ranging from plain liquid to long bond funds. These funds vary in their risk-reward profile. Liquid funds are the most stable in returns with portfolio maturity less than three months. Long bond funds are more volatile with portfolio maturity typically in the range of 10 to 15 years, may be higher or lower depending on the fund manager’s views. If interest rate movement works in your favour, your investment in long bond funds will give better returns than liquid funds, and vice versa.

Currently, the view on interest-rate movement is positive. We expect the Reserve Bank of India to ease policy rates further by 0.25% to 0.5%. Inflation is within control, consumer price inflation (CPI) inflation was 3.63% in November. Though the RBI expects it to be approx 5% by March 2017 and approx 4.5% a year hence, it is acceptable in a growing economy like India.

The government is committed to bringing fiscal deficit down to 3.5% of GDP in 2016-17 and 3% the year after, and is expecting better direct-tax collection due to demonetization. However, the market has run ahead; the 10-year government security yield, was approx 7.85% in February 2016 and has eased to approx 6.4% now. That is to say, interest rates in the bond market have already eased, following RBI rate cuts of 1.75% since 2015.

To give a perspective on the working of funds, there is a fund called yield to maturity (YTM) fund, which is the yield on the portfolio and there is a recurring expense rate that is charged to the fund. The net accrual rate i.e. the rate at which the fund earns for its investors, prior to market movements, is the net of expenses YTM. For illustration, let us say there is a short-term bond fund with a YTM of 7.25% and expense ratio of 1% i.e. net running yield of 6.25%. As against that, there is a long bond fund with a portfolio yield of 7% (yield is lower because of government securities in the portfolio) and expense ratio of 1.5%, hence a net yield of 5.5%.

For the long bond fund which has lower running yield, it will take a significant rally in interest rates in the market to beat the short-bond fund with a higher yield, which may or may not happen. Moreover, long bond funds are more volatile in performance. With the 10-year benchmark security trading around 6.4%, there is some scope for easing of rates, but not to a significant extent. That is to say, long bond funds do not look attractive from a risk-reward perspective at this juncture.

Long bond funds are more volatile in performance. With the 10-year benchmark security trading around 6.4%, there is some scope for easing of rates, but not to a significant extent

Liquid funds are the most stable in returns with portfolio maturity less than three months, unlike long bond funds that come with risk-reward returns


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