Why you should make your money grow
Posted by: Uma Shashikant on Mar 06, 2017, 06.30 AM IST
Investing inertia is a widely prevalent condition. Most of us are aware that we should put our money to work, protect our future and that of our families, have enough when we retire, and that all this will not happen miraculously on its own. However, when it comes to taking action with our money, many of us are procrastinators. So why do we postpone our money decisions?
There are at least four well known explanations. First, we think we do not have enough money to warrant taking serious decisions. There is the EMI for the house to pay; there are unexpected expenses that come up; the child will soon go to college; or that entrepreneurship dream will need funds. Whichever life stage we may be in, there is a nagging suspicion that we may not have enough to follow through on a systematic and detailed plan. Taking a few ad hoc decisions about one product or the other, seems easy. We end up with a long list of investment products we bought from time to time. Or we find that against a take-home salary of Rs 1 lakh, we have subscribed to four SIPs of Rs 2,000 each.
Second, we are overwhelmed by the choices. Too many choices, especially with high penalty for choosing wrong, pushes us into inertia. We worry about the regret that invariably comes with having chosen a wrong product. We might have bought a large cap fund, or a blue-chip stock only to find later that mid-caps did better, or that the new unknown IPO that we did not choose, actually did better. We then end up with wide-eyed admiration of how people made so much money by choosing right, and then quietly reconcile with our inability to make the right choices. Over time we prefer letting our money idle, rather than having to deal with the regret of making a wrong decision.
Third, we dislike the loss of control investing entails. Even with the best plans, preparation and pre-work, our choices may turn out to be bad calls. Markets are volatile by nature, and predicting how they would behave in the future is not a science. When faced with risk and volatility, doing nothing seems like a good choice. We like to think that the money lying in the bank account is at least not losing nominal value.
Fourth, we do not have the patience for dealing with the investment process. While technology has hugely simplified the operational aspects of making an investment decision, we still have to deal with the set-up process, complete forms that seek information, sign papers where needed, and remember to record account numbers and passwords and access credentials. Instead we postpone decisions that take a few minutes of perseverance.
Therefore, in that quest for investment decisions that will efficiently take us on a grand path, without stinging us with pangs of regret or fears of loss, we settle down to the easier route of escapism. We simply decide to not decide. What can we do about it?
There is nothing like the best choice, the best route, or the best time when it comes to investing. To invest is to channel your savings towards diversified assets that will work for you over time. Do not visualise your investment decision as some grand plan, but just a series of small steps.
We can begin with the basics. We can work on it as we go along. There are only four asset classes we should bother with: equity, debt, cash and gold. The EMI for the house, or the house we already own debt-free is adequate investment in real estate. What we have idling in the bank is our allocation to cash. If we have a monthly chit going with a jeweller, or have the scheme to buy a few grammes of gold each Diwali, we have that in place too. Our bank deposits, Provident Fund, VPF and PPF are our debt allocation that are mostly already in place.
The crux of the problem thus, when it comes to inertia, is the reluctance to invest in equity. Or the regret of choosing wrongly; or the greed of missing the next big thing; or the fear of losing it all. There is some story or the other in the media about multi-baggers and stupendous returns.
Investing in an index fund that tracks the Nifty seems like a very lame thing to do. But it is a good first step. Yes, there are funds and stocks that do better than the index. But the problem is that there is no fool-proof method to choose them over the others that do worse. To protect ourselves from wrong decisions we could make with stocks and funds, we need a staid, low-cost product that will put our money to work in the equity markets, in a diversified portfolio of blue chip stocks. The index fund is that choice. Set that as a default basic, into which you will invest when you are in doubt. Or when you see balances in the bank and have no time for research and analysis.
Then layer that choice with one, at the most two, diversified equity funds that invest in both large and mid-cap stocks. Choose those with track record and stable performance history. You will not need a separate mid-cap fund and you do not have to worry about which one of the two segments is doing well at this time. The managers will take care of that allocation.
If you still feel the need to meddle, take chances, or see if you can get lucky, do dabble in IPOs, stocks, sector funds, and all else that generates noise and excitement in the equity markets. Only do not allow this segment to take up a lot of your money to begin with. Make sure you have enough to afford this segment that can turn either way. As your wealth grows, your ability and willingness to take risks will grow, and hopefully you would have invested long enough to do more with this segment.
You will only need to set up systematic investment plans to ensure that your money moves into the chosen products. You can do a one-time set up with your bank or your adviser. Or move money electronically into the chosen products whenever you wish. Investing is an interesting activity, once you begin to involve yourself with the few decisions you have made. It is not as tough as you imagine and your money deserves better than lying idle.
(By Uma Shashikant, Chairperson, Centre for Investment Education and Learning.) This article appeared in Economic Times dated Mar 06, 2017, 06.30 AM IST