We first need to understand the meaning of the term Robo advisory, the purpose it serves and why we need it.
Therefore, I will try to explain in 3 parts:
What are Robo advisors exactly- Robo Advisor is providing a digital platform with no human oversight, automated, algorithm-driven financial planning services. A typical Robo advisor collects information from customers about their financial situation and potential goals through an online survey and then uses the data to advise and automatically invest the client’s assets.
The concept is quite self-explanatory. The underlying idea is that as humans suffer from the impulse of greed and fear, they make irrational investment choices. Robo advisors help us solve this by adopting an investment strategy based on rules and an algorithm.
Why do we need Robo advisors to manage our investments?
There are two main reasons for that:
Active management of your portfolio
To get alpha returns for your investments while keeping risk to an acceptable level, you need to manage your portfolio actively. Consider how many factors are involved:
- Is my portfolio full of underperforming funds and should I turn to high performing ones?
- How and when do I make changes?
- How do I know what the best funds are at the moment?
- Need to rebalance my portfolio? If so, how do I do it?
In most situations, people will not have the answers to these questions, and even if they do, they will not have the ability to handle their portfolio actively. So unless you are a person eligible to be represented by the ultra-high net wealth management industry veterans, you need a Robo advisor who can proactively handle your investment.
The trap of greed and fear
Even if you have the skills and resources to handle your investments effectively, you are still at risk of greed and fear. For example, during an accident (fear), you can sell all your equity or start taking ultra-risk bets in the booming market (greed).
It is here that Robo advisors arrive. In pursuing an investment strategy guided by an algorithm, they do not deviate from the “rules” of the procedure. If you are not an expert in market timing, you are better off following a rules-based investment approach.
What is the best Robo advisory service in India?
Now we come to the third party. Well, the unfortunate truth is that there is not much to choose. Robo’s advice is mostly misused in India. Robo Advisors is not the same as an online investment platform. Robo Advisory is allowing algorithms to run the show – rebalancing from asset allocation to fund selection.
So what makes a right Robo advisor?
- Algorithm-driven strategies for different levels of risk.
- It is a reliable and efficient technology to execute strategies.
The following points should be fully protected by a good strategy:
- What is the optimal asset allocation and what are the best funds to make that allocation. Is there an underlying algorithm that decides optimal asset allocation?
- What is the correct fund collection method? Is it driven by a mathematical model that has been proven time-tested?
- At any point in your investment horizon, are you still investing in the best funds of the time? If not, does the strategy provide a way to transfer the best funds?