We are starting a new series on Investment Advisory where we find a significant change needs to be adopted in Investment advisory where the traditional process needs a re-look and new process.
Who has told only Investment to have a compounding impact? The 8th wonder of the world is equally devastating for any investments. The modernisation of the loan and credit market has changed the Greed factor of every individual irrespective of age. Consumption has taken a new definition where necessity has been replaced with neighbour’s competition. Loans often get converted into EMI for reducing the burden of payment and slowly EMI compounding begins in life.
EMI Burden stiffens when the EMI compounding begins. Paying the minimum balance only to keep the Bouncers away from home is not a prudent solution. This compounding of the rate of interest on delayed payment and instalments becomes one of the devastations. It has been found that the delayed cost of liability becomes more compared to the original expenditure.
I find the current risk profiling questionnaire and process to be a complete waste of time and little focus on the behavioural aspect of risk profiling. Well before we jump upon the same we have few other things to accentuate. Most of the risk profiling questionnaire of Fin-tech and wealth platforms is complete jerk. It is just a law-abiding risk profile as per SEBI norms. It lacks the major and important critical component of risk profiling.
Risk profiling is the prime tool where we need tweaking from the traditional mode of calculation to the behavioural aspect of risk profiling where several things need to be taken for ascertaining the correct risk profile and also the behavioural aspect of how an investment portfolio can get affected in the long term. It has been found that most of the investment portfolios end up with short term profit booking or focussed towards short term model since at the back end behavioural aspect of expenditure and way the expenditure is conducted plays a critical role. In risk profiling, we need to know the behavioural aspect of consumption to ascertain the birth seed of risk perception of a client more correctly.
We have discussed and heard a million things regarding investments, asset allocation, risk profiling etc. Risk profiling misses one of the key factors which are EMI. EMI is such a lovely and adorable thing that one has to sell his investments and assets to pay the EMI. EMI burden has destroyed families, life and even suicide and mental disorder.
All of us have heard over the years that one needs to have provisions for 6 months of uncertainty or liability planning. Well for millennial its waste of opportunity of having money in liquid format and for others it has become a habit of reckless investment decision.
EMI is a critical component of risk profiling which is hardly taken into consideration. EMI can dilute and destroy the purpose of wealth creation over the long term. The burden of EMI can easily throw aw3ay all financial planning and all investments products out of the box. Risk profiling is concentrated often o the extent of loss one can bear and how much portfolio loss can one hold (duration). Many financial advisors will debate how EMI can be part of risk profiling rather it would be part of financial planning. Well, Covid -19 and its impact on real-life speaks that EMI or any Debt burden needs to be taken consideration in risk profiling to ascertain the depth of the risk already taken by the client before investments begin.
While calculating the risk profile of the investor one needs to know the behavioural aspect of expenditure so that one gets to know how his decision of consumption will impact the investments in the long term.
Covid -19 and EMI has been a big lesson for 2020. It has been found that in real life investors in this 9 month have struggled to pay their EMI and debt. Illiquid investments are another reason for this collapse of investments. Investments cannot be a blank game of future investments. The liquidity factors and EMI composition plays a critical role in risk profiling. It has been found that investment in penny stocks, Insurance policies (other than term policies), ULIPs does not come into rescue for EMI debt burden relaxation.
In this covid -19 it has been found that where single earning person EMI debt had more problem where after the death of the single person the burden of debt has been passed to the parents. Before investments begin one need to plan for the EMI or debt reduction strategies and then begin the investment planning for the long term. Provisions for uncertain times at least 6 months needs to be made where the same corpus needs to be kept in liquid format and not clubbed with any investment products.
The behavioural aspect of risk profiling plays a critical role before one starts with investment theories. If EMI behavioural pattern is not ascertained then obviously the whole investments will go for a wild toss. The risk profiling needs a relook.
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