Saturday, November 26, 2011

Where the MONEY & RISK Flows?

Their was a time when diversification was the prime strategy to alleviate risk. Diversification now stands to be safest bet for investors and a worst game for the financial market players. Diversification has resulted loss in pooling of funds for one single particular segment of financial products. Earlier Stock market was the alone place where all the funds used to get invested. Later on it shifted to fixed deposit offered by banks and by corporate. After this the era of Mutual funds came up where the book of diversification got released. From their journey went to other financial products with the theme of diversification. Distribution of risk is the bottom line of diversification. Rather than placing all the eggs in one basket distribution of the eggs in different basket is the main line of investments in financial markets in today’s world.

Today we have various types of financial avenues through which pone can do his investment planning’s. When mutual funds came into the streets of financial investments diversification was taught to the investors. It was made in order to increase the awareness among investors that through diversification risk can be mitigated and investors can get healthy return over the time.

In a recent study it has been found that today investors are moving away (in fact moved away) from direct equity investment. We find investment in Gold ETF which got an welcome fund inflow. The assets of gold exchange-traded funds in India, the world's largest consumer of the yellow metal, surged nearly three times at the end of October from a year earlier due to strong investment demand and rising prices.

Total assets of gold ETFs jumped to 90.90 billion rupees ($1.8 billion) as at Oct. 31 from 30.97 billion rupees a year earlier, showed data from the Association of Mutual Funds in India. In term of return we find in the one year time frame, all the Gold ETFs schemes have generated a return in the range of 32.62% to 33.76%..With unexpected fluctuations in the market, investors are always keen to park their portfolios in safe havens. Hence, Gold ETFs turn out to be a good investment option for investors to hedge their assets against the uncertain global market scenario. Where as at the end of October, spot gold prices in India were up about 38% (Return from investment in 1 year) at Rs.27,350 per 10 grams from Rs19,840 /10 grams last year.

Small savings has plunged by 66% where as insurance premiums by 15% in volume terms. Diversification of funds has resulted less flow of capital towards equity market. Today we find so many options neither of doing investments that no single product is able to have a monopolistic affects neither on the investors nor of that product itself. But there is one area where investors are still not well educated that is related to Risk management in financial investments. High inflation has compelled investors of various ages to go beyond the danger lines of risk. Over leveraged deals have been executed and still being continued.

Inflation has forced senior citizens to go for high levels of equity investments which is quite opposite of the principal of risk management in investment. Investment in equity should be based upon the age level of an individual. If some one age is 30 then the thumb rule of investment will be 30% in debt and 70% (30 age-100) should be in equity. But with the rising inflation making living cost to go up by many times has forced senior citizens of the age of 60 and also other within the age of 45-55 to do 100% investment in equity. Small savings schemes have failed to beat the hit of inflation over the returns being generated by them. Living till the age of 60 will be very soon a burden if proper financial planning and risk mitigation and management in early ages of life is not being adopted. For this we need quality financial planners and advisors on the streets. Unfortunately what we get now is simply Agents or advisors who are blood hound dogs. SEBI very recently is going to change the qualification for becoming financial advisors & planners. Hence no fools can become advisors for the sake of commission.

Diversification has made every financial product to be competitive and become oligopolistic rather than becoming monopolistic. We are yet to see how the new breed of financial advisors will educate investors for risk mitigation and management.

In my next article I will depict the story of Option strategies for doing Investments.

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