The enigma of “Risk Appetite”

Jayant Pai |

As in every profession, Financial Planners too have their own jargon. To my mind, one of the more quixotic terms they use is “Risk Appetite”. I have not heard this term used very often in other contexts, for instance, in the case of a para glider or a white water rafter but it is commonly used while determining the asset allocation for otherwise staid clients. Of course risk can take many forms and financial risk is one of them. So in that context the term may not be misplaced. But what does it really mean?

While it implies the desire to take risk I think it could be further synthesised into the ability to take risk and the willingness to do so. The problem is that there may be a disconnect between the two. Continue reading

Is there a parallel between “Earth Hour” and investing?

Jayant Pai |

“Earth Hour” was celebrated globally a few days ago. Everyone was exhorted to switch off their lights for an hour as an annual expression of their love and respect for planet Earth.

A friend and ex-colleague of mine called me up that night after the “60 minutes of darkness” had passed and narrated his experience. It seems that he had participated with gusto and had shot off e-mails to one and all to switch off their lights. He had also used the blogosphere and social networks to communicate his message.

He was shocked and strongly berated me when he knew that I had failed to participate in this effort. Actually this due to an oversight rather than design but I must say “Mea Culpa”. Continue reading

Investing: Forward looking markets…

Jayant Pai |

My friend whom I mentioned last week is pretty relieved on two counts :

  • He adhered to my suggestion and did not discontinue his Systematic Investment Plan (SIP) program.
  • The broad indices have managed to creep up above the 200 Day Moving Average (DMA) thereby signifying (in his opinion) that the uptrend had resumed.

His joy did not, however, stop him from dwelling on the sudden upsurge. How is it that the markets have rallied so strongly in the face of such negative developments, whose implications are as yet unknown ? After all, rarely do we simultaneously witness the emergence of unholy trinities such as scams, natural disasters and public uprisings. He even coined a term for this….the SME effect (Scams, Middle East and Earthquakes). Continue reading

Indian Mutual Funds : Vying for a place in foreign portfolios

Jayant Pai |

While most observers feel that this year’s Union Budget is devoid of big bang reforms, many are enthused about the proposal to permit eligible foreign residents to invest in Indian mutual funds. In fact, one of my acquaintances even told me that he will now zealously hold on to his (open-ended) mutual fund units as the demand for them is bound to increase.

Obviously the above statement is factually incorrect as any open-ended fund can keep on creating new units in sync with rising demand. It is not like the issued capital of a listed company which consists of a finite number of equity shares. In other words, open-end mutual fund units do not have any scarcity premium built into them. Continue reading

Financial Planning: Translating theory into practice

Jayant Pai |

A couple of weeks ago, I was addressing a group of students in their early 20s regarding the basics of financial planning. It covered topics such as investing, insuring and debt management among others. Although these students had minimal hands-on experience regarding these topics, I was startled to observe that their individual family backgrounds and history had already ingrained in them certain set ideas…

Here are a couple of examples:

1. While discussing investments, I showed them a graph which depicted how a sum of Rs. 1000 would have grown over the past thirty years. Obviously, investment in stocks (as represented by the BSE Sensex) handsomely outpaced options such Public Provident Fund and Bank Savings Accounts. However, a few students were adamant that they would avoid stocks completely. It appears that their families lost heavily during the 1992 market correction (notoriously known as the Harshad Mehta crash) and ever since, their parents had drilled into them the idea that stocks were anathema. While they did not dispute the data displayed in the graph they felt that stocks were not for them.

2. While most concurred that taking on debt was not a prudent move there was one student who felt that it was the only way to progress. It seems that his grandfather had come to India from Pakistan in a penniless state in the late 1940s but was able to amass a large fortune over the next forty years because he leveraged himself with large loans for his truck transport business. He felt that if his grandfather had only relied on his own capital he would not have been able to purchase even a single truck, let alone a fleet. Besides, taking on debt instilled a sense of discipline in one’s activities since lenders were keenly watching us.

Both these examples could be used as case-studies for practising financial planners. While we want our clients to achieve their financial goals by instilling the right ideas in them and helping them choose appropriate vehicles, often we may not be on the same page as them simply because their past experiences (which includes that of their near and dear ones) will militate against a particular choice. Once we encounter that, no matter how good the option is, their own mental blocks will come in the way.

The challenge is to find a golden mean between what is good for them and what is compatible with their long-held beliefs. Of course, it may be a bit easier to mould the minds of youngsters because as we grow older we tend to become more inflexible. Sometimes advisors could even try to exploit the natural rebelliousness of the youth to guide them towards right investment and insurance choices by tactfully pointing out how their parents’ choices were sub-optimal.

A few more such cases from readers would be welcome….