Every sportsperson, after winning a match, thanks her coach. This is because no matter how good you are or how much you know, it has taken someone’s hand holding to bring out the best in you. Most of us are accustomed to receiving advice and have acknowledged its role at different stages in our lives— from our parents and elders during our childhood, to our teachers through school years, and to the many ‘gurus’ who shape our personal, professional and even spiritual lives as we grow old.
However, in the investing world, financial advice has not got its due.
In this age of Google, anything we want to learn is just a click away—how to invest, cure a disease or even fly a plane. But think about this—when you have anything beyond a common cold, do you Google the symptoms and medicate yourself? This is unlikely because most of us realise that it requires expertise in medicine, which we don’t have. Similarly, for investing, while we may have an idea about the type of investment to own, most of us lack insight and expertise.
One of the main reasons for financial advice becoming increasingly important is that investment products are becoming more dynamic and complex. Twenty years ago, when we were traditional fixed deposit investors, the investment decision revolved mainly around comfort with the bank, rate of return and tenor of the investment.
However, mutual fund investments are not plain vanilla debt and equities, but are much more nuanced. There are products with different cap ranges, asset allocations and credit qualities in fixed income, and there are different tools and methods for accessing these products. For instance, SIPs, an easy method of investing, became famous only because financial advisers helped investors to experience their benefits over a five- or 10-year period.
The same holds true for many of the newer concepts in mutual funds like arbitrage funds and balanced advantage funds. This will continue to hold true as capital markets and investment products evolve.
The second thing to keep in mind is that investing is not just about making money but also about avoiding mistakes. Investment decisions are often coloured by emotions, attitudes and experiences. The most common cognitive bias of investors that affect their investments are loss aversion, panic sell, and following the herd. Many of us have invested in real estate because everyone was doing it.
There are many stories about how investors have mistimed the market by investing in equities in 2007 and redeeming them later at the bottom in 2008 or missed out on the bull run in 2013. Financial advice can help us step back from the excess noise, news and information which can cloud our investment judgement on a day-to-day basis.
Finally, financial advice should not be confused with financial sales. Investing is not a single transaction but a life-long journey, which is unique to every investor.
Our investment journey begins in our mid-20s, as we start working, and continues till the golden years of retirement. Hence, one would require constant financial advice to plan a dynamic strategy for different life-stages.
In fact, investing is a very meritocratic activity because two investors can have very different beginnings, but their journey is what will define their investment outcome. While we use words like ‘risk profile’ a lot, there is no one right answer to the right risk profile and no single right way to invest. Just as we have different personalities as consumers, similarly we have different personalities as investors, and advice can align our investments to our financial personalities.
My profession takes me to different parts of the country to meet investors and the most common questions I am asked, particularly from new investors, are: what is the right fund to invest in? How can I know which fund house is safe? Should I buy a small cap or a large cap fund? The question I wish I am asked more often is ‘how should I get good financial advice?’ Once that is answered, the rest will just follow. They say a good coach can change a game, but a great coach can change a life. Investing is not any different—good advice can impact an investment, great advice can change your life.
Author: Radhika Gupta, Chief Executive Officer, Edelweiss Asset Management Limited