Risk and reward are the two faces of the same coin and as such need to be dealt with holistically. From an investor’s perspective, the aim is always to maximise returns and minimise risk. One of the factors that considerably skew risk-reward is investor behaviour and emotions that often influence investment decision-making and can lead to suboptimal investment choices.
At Nuvama, we strongly believe that optimally dealing with emotions can help investors enhance the risk-reward of their portfolios. This can be accomplished by substituting emotion with agile processes and patience. However, before investors think about the process, they must identify a few imperatives including the purpose of wealth creation, time horizon of the goal to be achieved, ability to take risk, tax implication upon realising the income/gains, etc. Further, investors must also take into consideration the cost of investment which is not just the actual expenses incurred but also the time taken for the execution, which is also known as the impact cost. Inarguably, cost of investment will also impact the alpha generated on the portfolio as it always has a compounding effect.
To overcome most of these nuances the wealth industry is gradually shifting towards the systematic management of clients’ funds where the underlying investments are made in instruments like stocks, mutual funds, bonds, REITS/INVITS, etc., basically instruments that are available in unitised format. This happens to form a large portion of the client portfolio, tentatively in the range of 70-80% of the overall clients’ financial assets.
Asset allocation views are formulated by the institutions based on the fundamental and technical aspects of the clients’ goals and risk profile and the market. For instance, Nuvama has created a platform by the name of Infinity, which manages the core portfolio (goal based, long term) of the clients in plain vanilla instruments. Post the fundamental and technical analysis carried out by in-house research chaired by the dedicated fund manager, the behavioural aspects are discussed by an internal committee including veterans and subject matter experts from various domains including risk, credit, equity, etc. Post discussions, the views are condensed down to the model portfolios across various risk profiles. Investments are made in the most cost and tax efficient manner to maximise the benefits from all the spheres.
In a developing country like India, the fiscal and monetary policies are usually supportive for the long-term growth of the economy. The financial market regulator (SEBI in our case) and the government are always looking for ways to maximise financial inclusion across the breadth of the investors. This is enabled through the introduction of more innovative products, robust compliance and regulatory norms, increased efforts on the investor awareness front. For example, within the debt asset class investors have the option of investing in vanilla debt products, medium risk debt instruments, and other options like private credit, performing credit, etc.
From a cost and fund management perspective the passive mode of investment is gaining a lot of attention from investors. The Asset Management Companies (AMCs) have introduced a lot of instruments in both debt & equity space. For instance, if an investor wants to take a long-term view on Nifty 50 Index, she can simply invest in an Exchange Traded Fund (ETF) at a cost which is substantially lower than any actively managed fund. Similarly, the innovation is seen by the introduction of strategies which invest in a gamut of 25-30 stocks from the large-cap universe, having lower volatility and higher return from the benchmark. These strategies are known as smart beta, where the underlying companies are index constituents but the weights of the companies can vary in the portfolio basis selection criteria. The aim of the fund manager is to generate some alpha, i.e., generate returns that are higher than the benchmark index while mitigating risk, as measured by beta.
In the backdrop of such a shapeshifting landscape, it becomes imperative to be agile in an attempt to capitalise upon intermittent opportunities while reducing overall portfolio risk.
So, is the change constant in Investment landscape?
