Friday, September 12, 2014

Wealth Management in Indian Context

Indian society is going through a massive shift in terms of social, cultural and financial landscape. The changes have been more emphasized in last decade. The old rules of the game are no longer valid.The standard way of living till couple of decade back was to do a job and accumulate capital all along. The money was usually kept in Fixed deposits. When the retirement was near, invest the money on a retirement property and hopefully live on pension for the rest of life. The lifestyle used to be modest and aspirations of the society was low. There was not much influence of media and Internet. Villages were quite immune to the cities and cities themselves used to evolve slowly. The impact of consumerism of western world was very low.
Things started changing post 90's after liberalization. With foreign investment we got exposed to the foreign cultural and social notions. The aspirations started increasing. Everyone wants best for them.
All things come in a package of good and bad. The high aspirations led to people stretching themselves beyond their means. Earlier the trend was to accumulate and then spend. It shifted to Spend and then pay the loan. With such a huge demand coming from all sections of society primarily driven by loans, inflation started breaking all barriers. A 9% growth almost getting nullified by a double digit inflation, in fact making things worse. The traces of capitalism started showing up in the divide between rich and poor getting more pronounced. Overnight we got millionaires just by selling their land, which their ancestors will holding for ages. The same millionaires becoming paupers in no time because of no money management in place. It's a very fragile situation in society and needs strong wealth management at every level. It's a society which has turned from buying even homes on accumulated wealth to a society which buys even shoes on EMI. With notion of pension vanishing in thin air and cost of living inflating faster then anyone's imagination, it's a tough world to live.
How can the situation be rectified?  Money management has to be done at every step for a good financial health. The management of finances has not remained a trivial job. With Fixed deposits not even matching with inflation, it requires the investment and debts to be handled carefully with right level of risk elements build into it. We require discipline. more than anytime in the history. With all kind of fancy instruments in market, the scope of getting cheated has also become higher. Ponzy schemes are in abundance and it's very difficult to differentiate them with real once. Can we identify them? Not 100% but yes we can notice certain traits which should provoke us to investigate further. These seems come in all form not only from street side vendors but from fancy corporate houses. The Housing crisis of 2008 in USA was not done by street side vendors but the most educated finance managers of the biggest banks of the world. If we summarize the 2008 crisis then it was a simple mismanagement of risk. The management of risk was replaced by greed.
In fact, the most important aspect of investment is the balance of risk and reward. No one can predict anything about this world, but the bottom line is: With all our risks turning against us can survive? This should be the basic mantra of anything and everything. And if we look closely we will see that it is not valid in finances but in every other walk of life. We are always balancing the risk and reward in our life because we all know that the outcomes are uncertain. The moment we start believing that outcomes are certain, the problems start there.
Let's understand some of the things that has made wealth management difficult in current Indian scenarios:
  • Inflation: An inflation trajectory which is not predictable can have huge impacts on all the planning. Inflation can silently make people rich or poor. It's important to do proper hedge against inflation or atleast keep adjusting ourselves as the inflation changes it's trajectory.
  • Too much choices and information: Everyone wants us to buy their products. Be it Mutual funds, fixed deposit schemes, insurances, ULIPS, tax saving bonds. We have to careful in choosing our investment portfolio.
  • Higher Aspirations: We all want to have a comfortable lifestyle and dream of big house and car and a great vacation regularly. Can we afford it? The affordability is not a simple function of Cash Poston and income levels at the moment. The decision on spending on such thing has to be taken in context of the future cash flow needs. It's easy to buy a big car by taking loan, but am I really eligible for it?
  • Future Cash flow needs: The needs are not only which we know but which we may not know. Kids education and marriages are known factors of life but illness is not known. Definitely we cannot hedge ourselves for everything in life but we should consider a certain level of possibility of those factors playing out.
Wealth management in simple terms is just about managing the cash flows and making sure that investments are growing and debt levels are taken care of. If we look into the different dimensions of wealth management then they are:
  • Expenses
  • Liabilities
  • Income
  • Investment/Assets
  • Taxation
  • Insurance
  • Estate.
Keep always the focus on expenses and liabilities. The can be controlled most.  Income is also another important factor which should be tied to the ability to grow once skill sets and hence grow the income levels. Investments usually is a matter of choice and one should know how to choose one and how to monitor it. Usually there is lees one can do beyond that. Taxation one should be aware of. Insurance is risk management tool and do not see it as an investment tool. Estates are highly illiquid but should be factored as part of portfolio.

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