With the ease of internet access, people want all work to be done online. Even the financial market has also seen a steep rise in the automation. Technology is doing most of the work which used to be done by humans. Robo advisor has taken a place of financial advisors in the financial services. In this article, we will discuss:
- What is robo advisor?
- How does it work?
- What are the benefits of robo advisors?
- Can robo advisors replace humans?
- Who should use robo advisor?
- Best robo advisor in India
What is robo advisor?
Robo Advisor is an automatic financial adviser that provides financial advice to investment management online with moderate to minimal human intervention. It provides automated digital financial advice based on the predefined criteria and algorithms. The software uses pre-defined algorithms to provide your suggestions on asset allocation, buy/sell decision, optimize portfolio etc.
The first robo advisor was used in the year 2008. This is basically for the people who want to manage their finances with low management cost.
With the help of robo advisor, a common and middle-class person can also use the services for managing their finance and investment. These services are otherwise very costly and the only handful of people can afford it.
The main aim behind the robo advisor is to bring the financial services to the wide range of people with low cost as compared to the traditional human advisors.
According to a Business Insider Intelligence forecast, robo-advisers (with some element of automation) will manage investment products worth $1 trillion by 2020, which will go up to $4.6 trillion by as early as 2022.
How does robo advisor work?
Robo advisor is basically a software collecting important data points from the client like their earnings, financial liabilities, financial goals, saving ratio etc. Based on these data points it offers financial advice to the user. Like what are the asset class you should invest in? for how long you should stay invested in the particular scheme to achieve your financial goals?
There are actual humans behind this software who tracks the market regularly and adjust the algorithms regularly based on the market condition. Let’s check the comparison between, Traditional advisor and robo advisor.
- Requires high minimum investment
- Execution is slow
- Research is based on the individual’s knowledge
- Low cost
- Requires low investment
- Real-time execution
- Research is based on the data inputs
As you can see the robo advisor is beneficial to an individual who wants to invest on his own at the low cost. Robo advisors can automatically select the investment schemes and build a diversified portfolio based on your financial goal and risk appetite.
Not only that, it automatically makes changes to the investment based on the market condition to ensure you achieve your goals. If you have a knowledge of the stock market, you can use this robo advisor to build your portfolio.
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Best Robo Advisor in India
Let’s have a look at best robo advisor in India.
The best mutual fund platform is the one which helps you to invest in the best funds as per your requirement and needs, cost-effective, has portfolio re-balancing facility, has an exit strategy as per market condition.
Upwardly is having all the above features and is one of the best robo advisory company which can help you to invest as per your financial goals. Its online portal is easy to understand and use. You can get your KYC done online through Upwardly.
Define your financial goals and choose the funds which suit your financial goals. Start SIP, STP, lump sum conveniently. you can redeem online directly to your bank account. The portal suggests you the best mutual funds based on the ranking system and past performance.
It offers various funds like equity, debt and balanced funds so that you can create a diversified portfolio with an ease.
The best part I like about Upwardly is they provide the goal-based investing facility. You create your long-term financial goal, know the amount you would be required at that time and start investing for that goal. It is as simple as that.
5Paisa is another robo advisory company which offers mutual funds investment through its portal. Here also you have to select your goal, give inputs about your profile like your age, income, family members etc. and the portal will throw suggestions for you to choose the best fund as per your profile and goal selection.
It becomes so easy to choose the fund once you have a clear idea about your goal and the amount you need to achieve that goal.
Once you choose the goal, it will ask you to fill in simple details about yourself like your age, the amount you want to accumulate for your goal, time horizon etc. After giving answers to all the questions you will be asked to login/sign up.
Once you do that your account gets open and it will give you suggestions based on your goal and profile.
This one also a robo advisory company which offers goal based mutual fund investment. you have to select your goal, then enter the amount you want for that goal, enter the period after which you want this goal to be achieved.
It will fetch you the target amount you need to invest each month in order to achieve your financial goal. It also suggests you the mutual fund schemes based on your goal and time horizon.
Pros and Cons of Robo Advisor
Low Cost: The main benefit of robo advisor is the low-cost service and wide reach. Compared to traditional advisors, robo advisor offers low-cost financial services because it uses the technology which requires to build once. It eliminates human intervention in making financial decisions. The robo advisor is available 24X7 accessible from across the globe which makes it super cheap and easily accessible.
For an average investor, the cost of the traditional advisor is way high so he cannot afford it. An average cost of financial planning in India is somewhere around 15000 to 20000 per year. So for the small investor who invests say Rs. 1 lakh and gets 15% (which is the best in the industry) i.e. Rs. 15000 in return, but has to pay Rs. 20000 as the advisory fee. So the case is commercially non-viable for the investor.
On the other hand, the regular advisor does not prefer to take clients with investment portfolio less than 10 lakhs. Because there is no significant benefit for the regular advisor with the low investment amount.
So for a small investor, robo advisor is a blessing. They can make the decision based on the suggestions provided by the robo advisor at free of cost no matter how small is the investment amount.
Algorithms: The robo advisor uses in-depth market data and logic to derive investment suggestion which is faster and more accurate than the regular advisor. It uses the real-time data points, investor’s financial goal, and risk appetite to decide best investment option for the given time frame.
These type of software are designed by the reputed companies and there is a functionality to update the data on a regular basis so that you can take the most accurate decision on your investment.
Since this is an automated software, it eliminates the risk of human emotions in taking decisions. This is very helpful especially when you have invested in some stock which is not performing good and you are making a loss, then this software will analyze your action and might sell it with a loss. This is to ensure that you have a proper stop loss in place to avoid any huge loss in the trade.
The algorithm has an ability to backtest the performance of the scheme so that you are 100% sure that you are making a decision which has a proven record.
Some robo advisor offers portfolio rebalancing and tax harvesting to ensure you are on track to achieve your financial goals within the stipulated time frame.
Not personalized: The robo advisors are the robot and is working as per the set algorithms. It is not offering personalized services based on the need of an individual. Based on the data inputs, it gives you the predefined suggestions for the given criteria. Every human is different and so their needs.
You might have more than one goals may be for short-term and long-term. The robo advisor will give you suggestions based on the goals set by you. But it may not be able to cater your money-related issues and concerns.
The traditional advisor can suggest you the way to deal with the money-related issues with the suggestions like passive income or second source of income. Some situations are only understood by the humans and no robot can replace human at a certain task.
In the time of adverse situation, robo advisor will not sit beside you and listen to your talk. While on the other hand, the regular advisor will listen to your queries and gives you the assurance that the market will rise again and you will not lose your money. He makes you understand that the up and downs of the market are inevitable and suggest you hold yourself back for some time until the market stabilizes.
Not fit for all needs: The robo advisor is good for initial financial planning but may not suit for the extensive financial planning. It will not take into account other investment avenues like real estate, commodity etc. It also fails to do the advance retirement planning as it involves customized financial planning. It also not be helpful in doing 360-degree tax planning for an individual.
Robo advisors are not human and can’t be trained to deal with any real-life crisis like we have in the year 2008.
Secondly, all robo advisor available on the market right now is different based on the different algorithms. So it may confuse you if you check more than one robo advisor for the same query. Both will fetch you different results based on the set algorithms, so which one is accurate and appropriate for you is a question.
Most robo advisor uses mutual funds and index funds. It doesn’t take into account direct stocks. So it will not give you a complete picture of your investment planning.
Hence it is advisable to check these criteria and find out which one is best for you.
Who should use robo advisor?
As such, there is no restriction on the use of robo advisor. It is up to you whether you should use it or not? There are many factors which decide whether you should use robo advisor or not. These are investment amount, investor’s profile, risk appetite etc. Robo advisor is still a new concept in India and only time will tell whether it can fully replace the regular/human advisor or not?
The option is good for the young Indians who lack knowledge but want to invest some amount regularly with the simple and time-bound goals.
What to look into Robo Advisor?
You must consider below points before you choose robo advisor for yourself.
- Algorithm strategies for a different scenario
- Select the best fund (mathematically and time-tested)
- Portfolio re-balancing facility
- Have an exit strategy to maximize return
- Have an accurate return calculation
There are many robo advisory companies available in India, choose the one after considering the above points. Having a robo advisor helps you start your investment journey easily. But there will be a point when you need a human advisor to guide you in taking your financial decisions.
I personally have a mix of both robo advisor and regular financial advisor for my financial planning. It helps me contemplating the best options for my investment.
Nowadays, there are many online platforms which offer direct mutual funds which help you to invest into direct plans of mutual funds without shelling any commission. It will give you around 1% to 1.5% higher returns as compared to the regular plans. The only thing I don’t like about these portals is they don’t offer any advisory services. As per me, it is the must service to start with investment journey.
What is your take on this? pls. let me know in the comment section.