"The biggest risk is not taking any risk.. In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg, Facebook

In order to grow, we need to take risks, in businesses and in our careers, we need to walk up the hill to see what's lying ahead, we need to explore ourselves to find our true strength. Before we take the risk of shifting from Content Department to Sales Department of our organization, how do we come to know what are we really good at. Risk and return go hand in hand, you want to become rich, you must take the necessary risks. Among the two major financial asset classes, Equity and Debt, Equity is generally associated with risk and Debt with safe and steady returns. Indian investors have been playing too safe with their investments, our investments are dominated by Debt, our portfolios are largely concentrated with FD's, PPF, RD's, traditional insurance policies (since we get a fixed amount on maturity), Post Office Schemes, etc. Even young investors in the early stages of their careers aren't assuming any risk.

As highlighted earlier, there is a direct correlation between Risk and Return. The problem with being too conservative is it leads to sub optimal returns over the long term, which is not a sustainable approach for realizing long term goals.

Many investors religiously invest in PPF for their Retirement. Let's understand the Risk Return paradox through an example in this direction. Let's say an investor (aged 35) invests Rs 10,000 every month in PPF for his Retirement goal. This guy would get Rs 91.48 Lacs when he retires (when he'll be 60). Had he invested in a product with a better return potential like an Equity Mutual Fund, if he would have been SIPing this Rs 10,000 in a diversified equity fund, he would have got Rs 1.7 Crores when he retires. And Rs. 1.7 Crores looks way more reasonable to fund ones post retirement life, (which may stretch upto 30 years) as compared to Rs 91.48 Lacs. An extra 4% return could have funded another decade of this investor's retirement.

On the other extreme end, there are some investors who understand the paradox and take supernormal risks to get extraordinary returns. There are investors who do commodity, future trading, intra-day trading, etc., but these are the ones who lose the most money.

So, the question that arises here is, how much risk should you take?

The risk you should take is dependent upon a number of factors, viz.

• Your financial position: income, expenses, assets, liabilities;
• Family responsibilities;
• Your age;
• The time you have in hand for your goal to arrive, etc.

However, the risk quotient is always subjective, it varies from case to case. The Risk should be in conjunction with the returns you need. The real risk arises when the value of your investment is less than the value of your goal, what happens in between doesn't matter in the end.

The Golden Rule is Young Investors should take more Risk and the Old Ones should take less risk. But what if the retirement FD of the old investor is not enough to last him for the next 20 or 30 years. Will it be prudent for the investor to continue invested in the 8% FD providing safe and stable returns? Probably No. He needs better returns from his retirement corpus, to provide for his expenses till he's alive. For this, he must expose his corpus to some risk, to earn the return he requires to survive.

The bottomline is, if there is a difference between your risk appetite and the risk you require, you need to bridge the gap. Sometimes, it is ideal to take risk even at 60. We must understand that in order to create wealth/have the required money to actualize our dreams, we must take the necessary risk. Great things never come from being in your Comfort zone, because in the end, we only regret the chances we didn't take earlier.

So, are you taking enough risk?

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Today mutual fund SIPs have become very popular. With growing financial awareness, more and more persons are today investing in equity markets through the mutual fund SIP route. To those who do not know, SIP stands for Systematic Investment Plan which helps you to invest a fixed amount at periodic intervals (daily, monthly, quarterly) over a period of time in your chosen mutual fund scheme/fund.

However, it has been found that while investors open to starting SIPs, it becomes slightly difficult when it comes to increasing the SIP amount by cutting down on your expenses. That is something people are not really doing today. Another challenge after starting the SIP is to repeatedly increase the SIP amount. People tend to not increase this amount for many years altogether. We have to realise that due to inflation, the real value of money decreasing. This effectively means that you are saving less tomorrow than today with a stagnant SIP value where it should be increasing with your income levels. By not reviewing and increasing your SIP from time to time and investing below potential, you are loosing heavily on the wealth creation opportunity. We will see this lost opportunity later in the article.

As a solution to the problem of stagnant SIP amount is Top-up SIP. SIP Top-up is a facility wherein an investor who has enrolled for SIP, has an option to increase the amount of the SIP Instalment by a fixed amount at pre-defined intervals. Thus, this facility enhances the flexibility of the investor to invest higher amounts during the tenure of the SIP. The Top-Up SIP can be registered at the time of starting a SIP itself. Thus, you may choose to increase the SIP periodically, say half-yearly or yearly frequency, by any amount. This will automatically increase your SIP amount at the set frequency without you having to do anything further. The Top-up is like your commitment today for increased savings tomorrow which we as investors would be more comfortable promising today.

Let us now look at an example for the difference that SIP Top-Up makes in the wealth creation journey of an investor. Please note that this example is for illustration purpose only.

Scenario [A]

In this scenario, a normal SIP is taken with any Top-up facility. As we can see, the projected wealth is 3.08 Crores.

Scenario [B]

In this scenario, the investor increases his SIP amount by 10% every year over the previous year amount. We can see, the total amount saved is nearly Rs.8 crores, which is higher than original SIP corpus by over Rs.4.9 crores. The incremental benefit due to Top-up is in fact higher than the base SIP investment itself.

Why Top-up?

The reasons for having a SIP Top-up facility on your base SIP should be now very clear to everyone. Here are the key pointers to summarise the same.....

• Increase your savings along with increase in the income levels
• Sustain/increase your 'real value' savings due to inflation
• Reduce unnecessary spendings due to income raise due to committed increase in savings
• Achieve challenging /big financial goals and/or reach financial goals faster
• Operationally easy and simple

Conclusion:

We would highly recommend that you choose the SIP Top-up facility while starting any new SIP. If you already have an existing SIP, you are not too late and you can speak with your financial advisor to guide you in availing this facility.

Indian investors are typically well diversified when it comes to asset classes. A normal person can be found willing to invest in gold or fixed income or small saving instruments for his/her financial needs. He/she can now also be found trying his luck investing in direct equities. So can we say that the investor is doing the right thing here by investing directly into such different asset classes?

The answer is No. Traditional investment avenues are sub-optimal choices plagued by many drawbacks and challenges. Let us explore these traditional ways to hold assets more closely:

Gold: The traditional method is holding it in form of physical gold. The physical gold is typically in form of jewellery. Another way of holding it is through Gold bonds although it is still not a popular way to hold gold. Here are the drawbacks of holding gold in traditional /sub-optimal ways…

• The first drawback of holding gold is first of purity. We are really not sure if we are getting the right quality of gold we are buying and often have to rely on the brand and/or the certification given/quoted by the seller.
• Next drawback is the cost of making or making charges charged on jewellery. This cost is like a sunk cost and would not be realised when gold is resold back.
• Physical gold has the drawback of liquidity, both at the time of buying and selling. High initial purchase cost makes it difficult for everyone to buy gold. Selling also is not easy, especially with Gold bonds where there is a five year lock-in period.
• The last and the most important drawback is of security with the risk of theft, loss always looming over you.

Debt: Indian investors have a great love for holding debt or fixed income products in their portfolio. This is typically in the form of bank fixed deposits or bonds or the popular small saving schemes of the government. Here are the general drawbacks of holding such assets, the traditional way...

• The traditional debt products are not very liquid. Bank fixed deposits are locked away for at least few years of your choice. Small saving schemes of government, like PPF, KVP, NSC, etc, have high maturity years.
• The next drawback is of penalty levied when a pre-mature withdrawal or closure is made. This penalty frankly does not make any sense and is like punishing the investor for any sudden requirement which cropped up.
• The most important drawback is related to inefficient taxation, especially in the case of fixed deposits. Returns from bank fixed deposits are interest income and as such have to be added to your normal income every year and taxed at your income slab – which normally would be 30%. Banks also deduct TDS on interest income from fixed deposits.

Equity: With rising markets and growing awareness, investors are attracted towards investing in equities. Most investors typically are lured towards investing in direct equities through share brokers. Investing equities though is full of challenges and not an easy thing to do as a retail investor. Here are the drawbacks of directly investing in equities...

• Stock selection is not easy. It requires lots of expertise and knowledge about the company and the industry. To develop this expertise and knowledge, one may need to put in years of time and effort.
• Monitoring your stocks and other opportunities in the market requires a lot of time and effort. It requires dedicated effort on your part.
• Direct equity investing is highly risky as your portfolio would be concentrated in few stocks.
• The last drawback is in form of emotional challenge you would face on a daily basis while making the decision to hold, sell or buy with the increased volatility. This would add to your stress levels too.

As we clearly understand now, traditional ways of investing in some our popular asset classes is really not appealing and has a lot of drawbacks. The real question now is - what would is the ideal /right way to invest?

While there is no right way for everyone, surely there is one option that removes the drawbacks as discussed above. And the answer is Mutual Funds.

How can Mutual Funds remove the drawbacks?

Mutual funds can be understood as an investment vehicle which pools money from many investors and invests into asset classes of choice. A fund manager and his team then manage the assets professionally as per the fund /scheme objectives. It is important to note that a mutual fund is not an asset class in itself as the underlying can be any asset class or product like gold, debt or equity. As an investment vehicle, we can see mutual funds offering many advantages or benefits to its' investors. These are...

• Professional Management: There underlying investments of a mutual fund is managed by a qualified, experienced and skilled professional fund manager and team with lots of resources and information at their disposal.
• Diversification: The investments in a mutual fund is spread across different issuers (for debt) and stocks (for equity). This reduces risk as the relative weight of any bad investment is small.
• No buying limits: One can effectively start making investment in any asset class with as low as Rs.500. There are no upper limits though.
• High liquidity: Most schemes (open-ended) are available to buy or sell on a daily basis to its' investors. You can effectively sell anything and receive money in couple of days.
• No Lock-in: Mutual funds typically do not have any lock-in periods and you can invest for any duration and withdraw at any time.
• Choices: Mutual funds offer a huge choice of products and underlying asset classes. You can choose your scheme as per your risk appetite and investment horizon. A person can choose to invest in say liquid debt funds for a few days or equity funds for long term horizon.
• Tax efficient: Compared to fixed deposits, debt funds are much more tax efficient. First, there is no interest income but capital gains. If you hold the investment for least three years, you will benefit from long term capital gains of 20% with indexation benefit. There is no TDS as well.

Having known the advantages of mutual funds over traditional investment routes, you should at least explore mutual funds further. Please note that mutuals are not risk-free and are subject to market volatility. On the other hand, they also have the potential to add deliver higher returns. We would recommend that you consult a mutual fund distributor or advisor for proper guidance for your investments.