Insights

Investment Packs: The Process

May 28, 2020

Investment Packs: The Process

We, the advisory team at Paytm Money created and launched investment packs in March 2019, as a one stop solution to all your investment needs. Investment packs are the best fit for your long term investment journey, irrespective of whether you are a new investor or an experienced one, whether your goal is wealth creation or capital preservation.

In this article, we want to highlight the rigorous research and robust process we follow while creating these packs and how it has helped us tide over the various market crises in the last 15 months since inception.

While building the packs we take into consideration the three pillars of wealth management i.e. risk profiling, asset allocation and finally security selection. Let’s delve deeper into these pillars and understand how we refine these processes to come up with the optimum investment solution for you.

Risk profiling

Risk profiling is an evaluation of your willingness and ability to take risks. It is one of the most important indicators for us as it would finally decide the portfolio you will invest in. A wrong risk profile may lead you to take unnecessary risks which aren’t suitable for you and vice versa. So, identifying your appropriate risk profile is the first major task that helps us in setting the right risk and reward expectations for you.

Here are a few salient features of our risk profiling:

  • Optimized questionnaire to assess your risk profile with minimal jargons
  • All the questions and scoring mechanisms are backed by thorough research
  • Analysis of behavioral patterns of our large investor base to refine the questionnaire
  • Periodic reviews to make sure that it captures your risk profile accurately

Asset Allocation

The next step in the process is suitable asset allocation. To put it simply, asset allocation decides what proportion of your investments should be parked in various asset classes like equity and debt and further into sub asset classes like large caps, mid-caps, etc. This helps you in diversifying your portfolio so that under any given market scenario, the underperformance of some investments can be compensated by outperformance of others, giving you an investment journey suitable to your risk profile.

To ensure that proper weights are allocated to the right sub-asset classes, we:

  • Analyze various sub-asset classes in terms of the returns generated and risks involved
  • Rigorously research the historical performance and consistency of these assets and study their correlation
  • Focus on ongoing relative valuations of these asset classes
  • Explore various combinations of sub-asset classes to make sure that the portfolio delivers superior risk-adjusted returns

Here are a few examples of how this process helped you! Our focus on capital preservation for the low risk category ensured that investors’ capital was protected at all times in spite of the crises faced by the markets in the last 15 months.

Similarly, our view on relative undervaluation of large cap category relative to mid and small cap categories while building the packs made us focus on large and multi cap categories. We made sure that there is no exposure to mid cap segment and only a small allocation to the small cap segment, even in the aggressive pack. This conviction has worked well amid the challenging times the market faced while delivering decent risk adjusted returns in line with the investors’ risk profiles.

Security Selection

The final and important step in the process is security selection i.e. choosing the mutual funds in which your money will be ultimately invested in. Let’s understand the process we follow in choosing suitable debt and equity funds separately.

Debt:

Our view on debt has been pretty simple and straight forward since the very start. We believe that debt is supposed to provide safety to one’s portfolio and not generate excess returns by adding more risk. Thus, we have always given paramount importance to safety while choosing a debt mutual fund.

Here’s a glimpse of some of the important steps we follow to suggest a debt mutual fund:

  • Don’t just look at the credit breakup of a debt portfolio but dive in deeper to analyze the individual securities the fund invests in
  • Analyze each security in detail through qualitative and quantitative research rather than just going by its assigned credit rating
  • Are constantly in touch with fund managers to have a deeper understanding of their schemes
  • Monitor the portfolios continuously to ensure that the chosen funds do not take any unwanted risks

That is how we pick the safest debt funds for you. Since the IL&FS crisis in late 2018, the debt markets have witnessed a series of credit or default events. This has caused a sharp fall in NAV of many debt funds leading to an erosion of invested capital. Our robust processes have ensured that our chosen debt funds have not witnessed any such sharp and permanent NAV drop till date. This has helped us in making sure that investors do not face any unpleasant surprises with their hard earned money!

Equity:

Equities are meant to create wealth in the long term. Short term volatility is inherent in these schemes. Hence, equity schemes form major part of the portfolio of only those investors who are capable of taking on higher risks.

While choosing an equity fund, we

  • Analyze its long term historical risk adjusted returns and their consistency rather than just focusing on short term performance
  • Evaluate and rank it based on relevant quantitative and qualitative parameters
  • Focus on the fund manager’s experience and the fund’s history
  • Analyze the fund manager’s capability in generating excess returns using attribution analysis
  • Meet the fund managers regularly to understand their sectoral and stock convictions
  • Analyze all the funds regularly to ensure you don’t miss out on the best

This has ensured that all the funds in our portfolios have superior track record and are managed by stalwarts in the industry.

Conclusion

We understand the importance of advice in your investment journey and try to keep you updated on the latest market developments and nuances of investing and personal finance. The packs are constantly monitored and the funds are reviewed periodically so that you get the best and up to date investment advice. Thus, our rigorous research and robust processes make sure your hard earned money always works for you.