By Manan Vyas
I love reading those newspaper columns.
You know, the one where a family talks about their financial goals, and receives investment advice from an expert. It gives an intimate peek into the hopes and dreams of middle class Indian families. When a couple asked for advice on saving up to start their own restaurant, I was intrigued. What do Indians aspire to? What are their goals? What was the wackiest thing someone had ever saved up for?
My friend Vivek had answers. He is a financial planner who spends his day advising people on their investments. I asked him he had advised anyone to buy Bitcoin when it was at $17,000 (it is now half that). He seemed insulted at the question. I asked him if he was the boring “buy more government bonds” type. This did not help either. The discussion was off to a poor start.
“The only way for you to get a realistic picture of financial planning is by spending a day with me. You can sit with me in my office as an observer while I speak to my clients” he suggested.
It was a generous offer. I accepted. I vowed to keep count of the number of times Vivek would advise someone to invest in cryptocurrency. (Answer: Zero).
D-day is here. The world of finance wakes up early, and Vivek is in his office by 8:30 am on most days. “The equity markets open at 9, so I prefer being settled by then” he mentions. I stifle a yawn and ask for directions to the coffee machine. Vivek turns his attention back to his monitors (he has several) as he analyses the market opening. I settle in into a corner with my coffee and notebook. A wallflower, if you will. The first appointment is at half past nine.
A young couple walks into the room. Vivek has given me no context. The woman is pregnant. I wonder if the upcoming baby is the crux of the meeting (it’s not). The man looked stressed. He’s losing hair and developing a belly. I wonder if he works in IT (he does). He notices me sitting in the corner and gives Vivek a questioning look. I’m dismissively introduced as a trainee. That suits me just fine. I’m fired up with curiosity.
The subject under discussion is a complicated one. The man, who I shall call Arun, wants to purchase a better car. His wife, who I shall call Priya, agrees with this general sentiment. So far, so good. Arun wants to upgrade to an expensive sedan, but with a baby on the way, budget priorities have changed. Moreover, they want to avoid taking on too much debt, and want to pay half the car’s price in cash. Arun wants to know if there’s a way to balance these.
Vivek is poring over a couple of spreadsheets on his computer. “The way I see the situation”, Vivek summarises, “You have two key priorities. You want to save Rs 30 lacs in inflation adjusted terms for your child’s college education, which will be a sum required in roughly 18 years, and you want to save up Rs 5 lacs to pay half the amount to buy your dream car”. Arun agrees with the summary.
I don’t envy Vivek. This may not be an easy problem to solve. “Given that you are still building your financial base, the best way to reach the required numbers is through Systematic Investment Plans”.
I had questions. Thankfully, so did Arun. “What is that?” he asked bluntly.
“It is a method of investing in mutual funds. You pick a fixed amount to invest each month, and this gets invested in the fund of your choice. There are several advantages to this approach, as opposed to haphazardly investing in equity markets. To begin with, there’s the financial discipline this brings in. With a fixed amount deducted each month, you know that your saving are increasing no matter what”
Vivek’s tone was akin to a strict school headmaster. I stifled a laugh. I suspected that Arun needed the discipline.
“Secondly, equity markets go up as well as down. With a Systematic Investment Plan, you are hedging the risk by buying each month, at different price cycles, thereby reducing your risk as a whole”
Arun and Priya are listening intently. I find myself more interested than I had expected.
“Coming to the actual solution. For your child’s education, you’ll need to save Rs 7,700 per month via a Systematic Investment Plan. We are assuming a return of 12% and an inflation rate of 6%. With this, you’ll be able to save Rs 29.97 lacs inflation adjusted. The actual amount saved will be Rs 58.9 lacs” Vivek says, tapping away aggressively at his keyboard. His eyes gleamed and the numbers rolled off of his tongue. Vivek was clearly enjoying himself.
“58.9 lacs with just Rs 7,700 a month?” Priya asked, as Arun let out a low whistle.
“The power of compounding” Vivek explained. “Small savings add up over a period of time, because the gains are reinvested back into the fund”
“Moving on to the car”, Vivek continued. “You will need to save Rs 11,500 over a three year period. We are once again assuming a 12% return, but we are ignoring inflation because of the shorter duration. The Rs 11,500 monthly investment will grow to Rs 5 lacs” he summarised.
This led to a hushed discussion between Priya and Arun. From what I could gather, the thought of saving more for the car than their child seemed distasteful. Priya took the lead. “What is the monthly investment needed if we change the savings timeline to 5 years for the car?”
Vivek attacked his keyboard yet again. It was gloriously violent. “Rs 6,050 a month” he announced with satisfaction. More discussion ensued. There was no immediate conclusion on saving for the car. But they wanted to start saving for their child right away. Vivek, satisfied with his efforts, pointed them to Aditya Birla’s self-service SIP portal and sent them on their way.
The next customers were a father-son duo. The father, Deepak, appeared to be a regular, and he had brought in his son Aditya for what appeared to be his first session.
Deepak explained, “Aditya has just graduated from his engineering course and wants to pursue his own start up in future”. Aditya explained that he wanted to gain professional work experience while building a capital base to pursue his entrepreneurial passion. “I don’t want to rely solely on venture capital”, he explained. Aditya clearly had vision. On his first job at the age of 21, he was setting up a nine year long investment timeline. “I’m aiming to start-up at the age of 30, after completing an MBA and gaining post-MBA experience” he explained.
When Vivek briefed the duo on SIPs, Aditya was quick to come up with a number. He lived frugally and saved up aggressively. He could invest up to Rs 20,000 a month, he declared. Vivek was impressed. Deepak beamed. The keyboard bore the brunt of more punching. When he was done, Vivek turned the monitor to duo. There was an audible gasp. I was amused. Vivek clearly had a flair for the dramatic. As it turned out, Rs 20,000 a month would yield Rs 28.7 lacs in inflation adjusted terms after 9 years. Ignoring inflation, the sum balloons to Rs 40 lacs. More gasps follow. There is an energy in the room. Aditya has whipped out a chequebook. He wants to get started right away. I make a mental note to check out SIPs myself that evening. Aditya is pointed to the self-service portal and sent off. I sense a bright future for him.
The next couple coming in looks like something out of Instagram. They are young, confident and sharply dressed. I discover they are both 30. They give me a cheerful nod. I like them already.
Kartik, as I shall refer to him, begins by laying out the objective. “We downloaded Instagram” he confesses. “And now we want to travel the world” he says, somewhat cheekily. His wife, Ananya, giggles. “The only problem is” Ananya notes, “We have not managed to figure out how anyone actually manages to afford it. India’s currency is relatively weak, so everything is a lot more expensive for us” she completes.
Their plan, it turns out, was to spend a year traveling around the world. Full time. I marveled at their enthusiasm, and thought about all the times I didn’t even leave my house on a Sunday. “Do you have a cost estimate for the trip?” Vivek asks haltingly. I get the sense that this has been an unusual day for him. His regular clientele is just focused on retirement planning and tax savings.
“We have a range” Kartik declares. “Between Rs 20 and 25 lacs” Ananya completes. I marvel at their chemistry. “And when do you plan to take this trip?” Vivek asks. “When we’re 40” Kartik replies. Vivek begins his familiar attack on the keyboard. The room feels tense, as Kartik and Ananya wait for Vivek to tell them if they can afford their life’s dream.
“If we ignore inflation, assume a return of 12% and target the higher end of your range at Rs 25 lacs, each of you will need to invest Rs 5,500 per month in SIPs,” Vivek said cheerfully. Relief fills the air. There are smiles all around. The day has been an emotional rollercoaster. Kartik and Ananya are ready to start a decade long SIP from the coming month. There is talk of increasing the trip’s budget after they understand the power of compounding. Vivek wishes them well and sees them out.
Once we are alone, Vivek is curious to know my thoughts. I point towards the structured nature of SIPs as a plus. “There’s a certain discipline to it. Plus, the power of compounding is not yet well understood by a lot of investors”. Vivek nods enthusiastically, but also points out that things were improving. Customers coming in over the past year were more willing to look beyond traditional products like gold and fixed deposit. Data bears this out, with the Indian mutual fund industry increasing its assets under management by over 25% in 2018. Self-service investment portals such as the one by Aditya Birla Capital have increased in sophistication, enabling savvy customers to kick-start their investments with lower effort.
I thank Vivek for his time, and promise to make him look suave for this story. As I exit the room, I spot something in the corner. It’s a broken keyboard.