Mutual funds are presumed to have become a commodity these days. Investment platforms show past returns, give star ratings which become a point to select the product for investors. (Also Read: Concept and types of mutual funds)
Moreover, diversified products like this are not liked by many aggressive investors especially in the Bull market times, who then look upon direct stocks, which are expected to offer high returns individually, with the high volatility of course.
But who cares for risk when your money is getting multiplied. Risk only bothers when you see the market falling on a daily basis without any visibility of reversal. (Also Read: Risks doctors are exposed to and how to manage them)
Insurance products are quite expensive and not advisable to invest in. Only Pure term, health, and disability insurances should be bought. (Also Read: Why Personal Accident Insurance is important for doctors?)
So, if not these traditional or common products which look like commodities these days, what else the Investment market has to offer for those investors who want to have ‘Tadka’ on their portfolios?
Many young doctor clients ask me this question when I tell them that though there are some products available that may bring some excitement and spice to your portfolio, overdoing the same may put your complete financial profile at high risk. Still, you should know what is available around you to make an informed decision.
Let me brief you about some of those instruments in this article.
Smart Beta Funds:
Yes. These are Mutual funds, but most of these come up with a concentrated portfolio strategy sans a Fund Manager. These are Passive low-cost Funds that follow an active index developed specifically for this strategy.
Most of these funds come in an ETF (Exchange Traded Funds) format but nowadays to increase the penetration and reach the masses, many FoF (Fund of Funds) have come up which feeds into these ETFs and gives investors exposure to such strategies.
Technically, Beta is the measure of market volatility (price movements) represented by an index, similar to Standard Deviation. While Standard deviation represents volatility as compared to the average returns of the fund, Beta is in relation to the fund’s index or benchmark.
A beta of 1 means the fund’s volatility is the same as the index.
When the index is tweaked based on some strategy, beta becomes smart, which is when a better risk-reward ratio is obtained: higher returns as well as lower volatility (than the index); that is, alpha.
The goal of Smart Beta strategies is to tweak the weighting of stocks in the index, which is primarily based upon market capitalization, on characteristics or factors that the fund manager feels could outperform the index, or a combination of them, such as:
- Low volatility i.e. giving higher weighting to low volatile stocks,
- Value, i.e. stocks available at a discount,
- Growth i.e. those stocks having high growth potential are given a higher weightage,
- Quality, i.e. business of high quality is given more weightage, etc.
There are many ETFs and Index funds available these days with a low-cost strategy, which can be a part of your Core or Satellite portfolio based on their structure.
So, when doctors have their core portfolio ready which is diversified and focused towards long-term goals, the Smart-beta funds can be considered for a more concentrated approach with the idea of gaining Alpha.
REITs (Real Estate Investment Trusts)
Now with the coming up of REITs and InvITs like investment structures, there is no longer a need to buy Physical Real estate just for the sake of earning Rental or Capital Gain. (Also Read: Why real estate investment is riskier for doctors?)
REITs, or Real Estate Investment Trusts, are companies that own, develop, or invest in commercial properties, such as office buildings, shopping malls, hotels, data centers, and warehouses.
This company’s primary source of revenue is Rent from the property or Interest from the loan to build these properties.
They issue shares in the market to generate capital, just like any other company. Therefore, a retail investor can indirectly invest in the properties, which they cannot afford on their own.
REITs are similar to mutual funds in the sense that they pool money from various investors and invest it in different real estate projects.
The income generated from these properties is distributed back to the investors in the form of dividends. Moreover, REITs are listed on the stock exchanges, just like any other shares, and can be traded or invested there. Additionally, investors can earn capital gains when they sell REIT units.
The minimum investment amount for a REIT is Rs.50,000.
Of Course, you must be thinking about how to ensure the rentals keep coming to you just like if you have invested in the Physical property on your own. So here are the Income distribution rules of REITs, as prescribed by SEBI.
REIT Income Distribution Rules:
- The REIT must generate at least 51% of its revenue from rentals or leasing of properties, excluding gains on the disposal of properties.
- 90% of the net income, whether it is derived from rental income, interest income, etc., will be distributed to shareholders.
- During the financial year, these distributions are declared twice a year, i.e. every six months, and transferred within 15 days of the declaration.
- If a property is sold within a year from the date of sale, the proceeds can be used to purchase another property. If this is not the case, 90% should also be distributed to shareholders.
AIFs (Alternative Investment Funds)
An alternative investment fund, or AIF, is a private investment vehicle that is different from conventional investments such as stocks and bonds. Funds are collected from a limited number of sophisticated investors in order to invest in private equity, venture capital, hedge funds, etc.
AIFs may be invested in by residents, non-residents, including PIOs and OCIs, and foreigners, but there is a limit of 1,000 investors per AIF scheme (not applicable if an AIF is registered as a company). A minimum investment of 1 crore is required per investor.
This product comes in 3 Categories, and depending on the same invests in start-ups, early-stage ventures, social enterprises, small and medium-sized businesses, infrastructures, as well as sectors or areas that the government or regulators consider being socially or economically desirable. Also, these are into complex derivative strategies and structured products. Some come up with structures like Pre IPO investing also.
Doctors who like to go beyond the routine investment structures and understand the complexity well can look upon such a structure that demands high investment requirements. However, do not get lured by the past returns if shown by any product. As the product is not simple so prediction of any future return will always be difficult.
P2P lending, also known as peer-to-peer lending, is an online platform that allows individuals and small businesses to borrow and lend money directly to each other without the involvement of a financial institution like a bank or an NBFC.
The loans given out through these platforms are unsecured, and the majority of the borrowers are unable to obtain financing through traditional means. Usually, short-term loans last a few days to a few months, and are taken for consumption, emergency purposes, or to repay any existing loans like credit card bills. The loan amounts are usually small as well.
P2P platforms offer easy access to loans. As compared to Banks or NBFCs, there are fewer formalities, and the disbursement process takes less time. (Also Read: How doctors need to plan before taking loans)
The following P2P lending platforms can be found in India: Faircent, Lenden club, Liquiloans, Monexo, etc. Two popular fintech startups also launched P2P platforms in August 2021: Cred and Bharat Pe.
No point in guessing that Unsecured loans are High-interest Paying and Highly risky.
If you are in search of new and different investment options, you will stumble upon the above four and many others too but should you really go for these or not, that is the question.
In fact, some of these products are high paying to the sellers also. This is why looking at the high Investing potential of doctors, they are pitched by Bankers and other agents.
Keeping a portfolio simple for the long term is a very difficult task. Just like your patients, doctors are also prone to spoil their financial health, with these exotic investments or sometimes even in search of safety. (Also Read: How and when Doctors behave like patients)
In reality, if you actually want to build up wealth over a period of time then it’s wise to stay with simple, understandable instruments having a mix of equity and debt exposure and stay invested for long. (Also Read: All-weather investment portfolio for Doctors)
Applying a Core and satellite approach to your investment portfolio will satiate your urge to have exotic products without bothering your goal-oriented approach.