Use Robo-Advisors to Get the Most Out Of Your Finances
Robo-advisors are a type of financial advisers that offer finance related advice besides carrying out online portfolio management tasks for users. A unique aspect of this concept is that there is no human interference involved. The advice offered is digital and is based on mathematical algorithms and rules. With an abundance of robo-advisory services online, managing your investments is no longer an uphill task. But have you ever wondered why these services are so popular? Here are all the reasons -
- If you are someone who neither has the willingness to manage his own investments, nor the right portfolio size to approach a professional human investment manager, then taking this middle ground would be the best bet.
- The management fee is hardly 1% to 2% of the total value of your portfolio. That is a way to less as compared to what is charged by human investment managers.
- It’s difficult to see your portfolio go out of whack because a portfolio gone out of balance is of little use. Robo-advisers prevent this by ensuring regular rebalancing of user portfolios.
- By investing through index based ETFs and offering tax loss harvesting (TLH) facilities, robo-advisers make sure your investments are tax efficient.
- Initial investment requirements are low.
These are only a few of the benefits robo-advisors offer their users. There are numerous others that you can easily avail once you have figured out what kind of mutual fund investment you would be interested in- lump sum or SIP. If you don’t know what lump sum and SIP are, and wish to acquaint yourself with these concepts before zeroing in on one, then following the information below will help you immensely. Read on -
Lump Sum Investment Robo-Advisor
Before we learn how a robo-advisor helps an investor come up with the best lump sum investment plan for their needs, let’s delve into what a lump sum investment is -
- Lumpsum investment -
A lump sum amount, in the literal sense, means a complete single sum of money. And an investment is said to be of the lump sum nature when it is made one time or at one go.
That means, when an individual invests the complete amount available with him in a mutual fund, he is said to have made a lump sum mutual fund investment. It is one of the two major ways of investing in a mutual fund, the other one being SIP.
Lump sum investments are generally made by big aggressive or experienced investors usually in stocks mostly linked to assets which seem to appreciate over a longer period of time. This makes such investments a real profitable deal for investors, except on occasions when the volatility is too high.
Advocates of lump sum investment enumerate the following benefits of this investment method –
- The benefits -
1. If you have some additional fund at hand, why let it sit idle? You can invest it in a lump sum fund.
2. With a one-time payment provision, the lump sum investment scheme allows you to just relax without worrying about any future instalments.
3. Goals that are far into the future can be met with this investment method. In fact, lump sum investments are best suited for meeting such far off goals.
Now, if these benefits look exciting to you, then why not seriously consider making a lump sum investment? If you don’t know how to go about it, then seeking help from a robo-adviser would be the best bet.
The figure below shows you how easy it is to use a lump sum investment robo-adviser.
All you need is to enter relevant details and the adviser comes up with the best investment plan suited to your financial goals. And because the results take investor-specific details into account such as age, amount to be invested, the time period of investment and risk tolerance, you never get a ‘one size fits all’ solution; rather every solution you receive is tailored to your needs and goals.
One thing that, however, needs to be kept in mind about the risk tolerance aspect is that higher risks yield higher returns. And this is not something we say on him. This is an established principle, a theory popularly known as the ‘Risk-Return Tradeoff.’
According to risk-return tradeoff, potential returns increase with an elevation in the risk factor. To put simply, low risk uncertainty levels are linked to low potential returns, and high-risk uncertainty levels are associated with high potential returns. So, according to this theory, money invested can trigger profits only when the investor accepts the possibility of losses.
Coming back to your robo-adviser generated lump sum investment plan, we see that not all of your investment remains stashed in equity funds. Look at the figure below- while 93% of the total investment is in the form of equity, a substantial 7% also lies in debt funds.
For people who know less about equity and debt funds, the following briefs should be of help -
- Equity funds - Equity funds, also called stock funds, are a kind of mutual funds that invest the shareholder’s money chiefly in stocks.
- Debt funds - It’s a type of mutual fund where investments are in the form of fixed income securities like treasury bills and bonds.
Now, if you are wondering what would be the pattern of distribution for the part of your lump sum investment present in equity funds, then here is a figure that shows the breakdown in a comprehensive manner -
While 20% of your equity investment remains in equity oriented balanced funds, a whopping 30% stays with large cap equity. While another 20% goes into mid and small cap equity funds, the remaining 30% investment amount reaches a diversified equity fund.
So, from the discussion above it may be inferred that your investment isn’t entirely going to be in a high-risk equity pool, a portion of it also remain invested in less volatile debt funds.
Now, look at the impressive return projection figures below. These projections are for the recommended portfolio, corresponding to the mentioned time period in the investor profile above.
The figure clearly shows that the projections for the minimum expected growth, expected growth, and maximum expected growth are all high when the amount invested is large. The figure also highlights how the growth increases over an extended duration of time.
Even past records narrate a similar story. In fact, the track record of lump sum investment traced so far, as seen in the image below, can give you sufficient reason to say ‘yes’ to this investment scheme.
The graph indicates that in the past few years, mutual fund investors who had their money invested in lump sum had seen a similar investment growth pattern as witnessed by people who had their funds locked in fixed deposits.
Going by the effectiveness of lump sum investments as portrayed in the above graphs, you may be advised to make a lump sum investment without apprehensions. However, if you are someone with a small amount of investible money at hand, looking for short term results, then the lump sum mutual fund investment option is certainly not for you.
For interested investors, here is a recommended lump sum portfolio.
SIP Monthly Investment Robo-Advisor
With a more flexible approach, SIP has been able to impress a lot of small-scale investors over the years. Here is what it is, and what its benefits are -
SIP Monthly Investment -
SIPs allow you to invest a fixed sum of money in mutual funds, but in a systematic or step-by-step manner. So, when you opt for a SIP plan, you break down the amount to be invested into several smaller monthly or quarterly parts to be accordingly paid over a period of time. SIP also allows you to benefit from the process of financial compounding. Besides, your investing cost gets averaged out over time.
Here are the most important benefits of investing in a SIP fund -
The benefits -
- It’s an extremely disciplined investment approach.
- You have not required to time the market.
- You are exposed to the benefits of rupee cost averaging as well as the power of compounding.
- It doesn’t go heavy on your pocket.
- If you start early, the benefits you reap are more.
With so many amazing benefits on offer, there is no reason why you shouldn’t consider SIPs more seriously. If you are looking for the right SIP monthly investment plan tailored to your needs, then you can take help of SIP Monthly Investment Robo-advisor, for the most appropriate solution.
The figure below shows how effortlessly you can come up with the best SIP investment plan customized as per your financial goals.
The best thing is that the particulars are easy to fill. All your robo-advisor asks for is your age, amount to be invested, your financial goal, the time period of investment and the risk tolerance preferred. The results obtained are reliable because they are devised to fit your needs and expectations. Setting the risk factor could, again, be tricky here. But you must remember the above rule of ‘higher risk- higher return,’ in this case also.
Yes, you don’t mind taking a little risk, if SIP succeeds in meeting your financial goals. But can SIP meet your goals? Of course, if you are looking to invest for retirement, children’s future including their marriage and higher education, buying a house, setting up a business, the creation of wealth and supporting parents.
Here is the goal summary for the investor profile above. Have a look -
If you thought your robo-adviser would offer you a vague summary of your long-term savings and financial goals, you couldn’t be more wrong. The summary you are provided with indicates not just your financial goal at the current purchasing power of the currency, but also the goal you should actually aim at, keeping in mind the effects of inflation over the total period of investment time.
Effectively, your goal should be high for a longer term of investment, considering how inflation is likely to influence the economy in the times to come.
Below, you find the investment breakdown for the above SIP investor profile. The figure shows that you will have 96.5% of your SIP investment in equity, and 3.5% of it will be in debt funds. So, you see here, SIPs are not pure equity funds; an element of debt also exists.
Now, let’s have a look at the figure below. It simplifies the equity allocation from your SIP investment- 10% of it goes into the equity oriented balanced fund, and the rest 90 percent gets equally distributed among large cap equity funds, mid and small cap equity funds, and diversified equity funds, each with a share of 30%.
Now, don’t you wish to have an overview of the SIP return projections? The figure presented below summarises the projected returns in the mentioned time period recommended portfolio.
Here, you can see that by following the portfolio recommended by us, you witness a steady rise in returns as the number of years grows. That means you expose yourself to higher returns over a longer period of time.
Let’s see what the past trends say. The graph below that encompasses SIPs performance through the years 2007-2016, gives a clear indication of its success over the years. While the growth remained minimal during the initial years, it grew exponentially through the mentioned span of time, reaching its peak at the closure of the investment time period.
If you think, you are the best fit for a SIP investment, then you can have a look at our top recommended portfolio below. This portfolio has been created taking the age, financial goals, risk tolerance and investment amount of the investor into consideration.
To sum up, we would say robo-advisers are the order of the day. When put to the right use, they can take the hassle out of investment management once and for all. Moreover, what investors want at the end of the day is genuine, unbiased, worthwhile, and most importantly tailored financial advice. From bank advisers and brokers, all they end up receiving is ‘generic’ guidance. If you are a potential investor, looking to receive efficient, transparent yet cost-effective financial management services, then saying ‘yes’ to robo-advisers would be the best bet.