Are you money wise?
Do you have enough time to plan your finances? Do you know at which stage of maturity you are in as an investor? Do you wonder about how mega stars like Shah Rukh Khan or Amitabh Bachchan manage money? Major differences in approach emerge as a person grows wealthier, matures and knows more about financial products. Today, we will track the progress of the investor.
The way a professional on his first job with a little surplus money approaches his finances has lots of fundamental differences from how someone with a considerable wealth looks at the issue. The objectives, goals and aspirations in life are vastly different.
Nipun Mehta of Unitis Tower Wealth Advisors Pvt Ltd, a wealth manager for ultra high net worth clients, says that the major worry for the high net worth (read rich) client is the preservation of his capital. "He will not worry about getting a 40 or 50 per cent return from the markets. He would rather ensure that the accumulated wealth is safe and secure, never mind if the return is lower than what someone else is making," says Mehta.
Mehta listed out six areas where differences appear when a person matures, accumulates more wealth and knows more about financial products. Investors also seek advise from different kinds of advisors during this investment maturity lifecycle.
Typically, the first person a youngster seeks financial advise from is a broker. At the next stage is the mutual fund or insurance seller who is selling a product. In the next stage comes the individual financial advisor who advises on different products and also sells a few of them. The certified financial planners are occupying this space and options are growing. After this the investor moves on to the advice offered by private banks.
At the end of this curve is the wealth manager, who specialises in managing money and tries to find the best product for an investor without being the agent for anyone.
The fundamental aspiration of a person just on a job is to maximise his wealth. His aspirations may be to buy a car or a consumer durable or may be even a house. As one progresses through life, these aspirations change as some of the earlier aspirations are met and new ones emerge. With a family starting, new needs also emerge and when retirement is on the horizon, one feels the need to preserve what one has achieved.
The approach to risk is also fundamentally different. The young and restless are eager to experiment. Says Ashish Kapoor of Investment Shoppe, "The young are more adventurous. There is a desire to make a quick buck and to get a kick out of it." For someone who is already wealthy, the desire is to preserve the wealth.
Early in one's career the investment horizon is really short and investors want to see their money appreciate in the short term. Later in life this horizon increases to retirement and beyond. After retirement, the investment horizon changes again. A high net worth investor may plan to retire at 50 or 55 and plan to earn a regular income from his accumulated wealth from that age.
That leads us to the fact that liquidity requirements are also different for different people. The high net worth investors normally do not want any earnings from their investments and seek to use them for retirement. However, earlier in life the young investor with a small surplus might want to use the returns of investment for various things that he wants to acquire. He may also want to create a cash flow for kids education too at some stage in life, which the richer client may not need as he will be earning enough to provide for such needs.
Usually the first-time investments are in equity. For others these are in debt and fixed deposits. However, as one matures and grows wealthier more and more asset classes are added to the portfolio. It starts with insurance, mutual funds and then goes on to private equity funds, art and many other areas.
Estate planning and beyond
A high net worth individual also worries about what will happen to his wealth after his death. He tries to develop a way to divide it equally among his heirs and in order to do so might want something to be sold or converted into a more liquid asset. Such activities are far away from the mind of a new investor.
Kapoor says, "I have seen some interesting things, especially the tendency of a young man who inherits a lot of wealth and going berserk with risky investments. Even young professionals do risky transactions, but inheritors often keep on losing money without showing much respect for it."
And Mehta adds that there is usually nothing that one kind of investor should learn from another as needs are also different and it is normal for investors to behave differently with their money when they aspire for different things.
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