Money Talk. Complex math puts off investors

Investors are generally intimidated by calculations projecting that huge amounts are needed for retirement, says Hansi Mehrotra, founder of The Money Hans, a financial education site.

She also feels that women are not risk-averse but more risk-aware and that the investment industry should package products with simpler and clearer ways of explaining downside risk. Excerpts from a chat with BusinessLine :

In the current upbeat market, how can investors plan for their long-term goals?

Investors should plan for long-term goals irrespective of market sentiment or valuations. I suggest investors think of it as a house. The foundation includes things that you can’t afford to lose — invested in cash/FDs and own house. The pillars are growth investments for long-term goals — invested in shares. Slab is when you need income, say, when you are ready to retire — invested in rental real estate/REITs and bonds. Fun roof is for aspirational goals — invested in own business or a new skill to change career.

Assuming long-term implies more than seven years, it is safe to invest in a portfolio of shares and three to four equity mutual funds in the growth pillar of the house analogy. If markets appear expensive, investments can be staggered over time through SIPs.

For very young investors, would you think the traditional wisdom of buying a home is valid?

Yes, it is still valid because in a way, buying a home is forced saving and leverage. But that should be weighed against the house price, which can be expensive compared to rent, and the likelihood of staying in that place. If young investors move and have to buy another home, the transaction costs are high and must be factored in.

What may be different for women investors, compared to men?

Women need more financial planning because they tend to earn less and live longer. You could argue that they should invest more in shares and perhaps annuities, for retirement.

They are more risk-aware, not really risk-averse. They want to know the downside to an investment. In fact, not just women, even HNIs prefer risks given without jargon such as beta and standard deviation . The investment industry must package the products accordingly, rather than create any new products.

Investors are told they need many crores for retirement. Do these numbers intimidate them to the point of not doing anything about it?

Yes, they probably do. We need to make the game ‘winnable’ by getting them to list all their needs/wants/wishes, assigning rough costs, and doing a rule-of-thumb calculation to estimate how much retirement costs. If the numbers are too big, people give up. Simpler math and smaller goals makes the game winnable.

A simple rule of thumb is that you need 20 times your current annual need to retire. So, if you spend ₹50,000 per month i.e. ₹6 lakh annually, you could aim at an investment portfolio of ₹1.2 crore.

In a low interest rate environment, what are the suggestions for seniors who need to maintain regular income but cannot take undue risk?

Retirees need to diversify income sources, even more than younger people need to diversify their growth portfolios, as they can’t afford to lose any capital. So, they should look at a combination of real estate rentals, indexed bonds, infrastructure bonds and stocks.

Unlike developed countries, annuities are not well developed in India and do not give reasonable returns. Dividend paying stocks are an option to consider but it is important not to compromise overall returns. You may be better off buying stocks that go up and can be sold periodically to give income.

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