Save first, invest later
Many readers write in asking for guidance on investing in shares. Many want a short list of stocks that can be bought for the “long term” or want some names for investing without any time scale in reference. A smaller number ask for names of mutual funds where one could invest. And of course, there are some who want to share the names of stocks they have invested and want a view on each.
Investing is a very personal choice. And everyone has his own risk appetite as well as knowledge of where they want to invest in. Some of us know and understand the concept of equity mutual funds, some of us can talk about companies and stocks and some can even talk ratios and analyses. Each one is bound to take a different path to investing his or her savings. For me, more important than the return is to understand what I am investing in. And personally, I will never invest in a product that I cannot understand. For instance, while I may like to trade in shares, I will not touch the derivatives segment in the markets. I used to like the ancient badla system on the BSE, but I am extremely uncomfortable with the F&O segment. I don’t understand it and hence I won’t not risk my money by investing in it. All of us will either save or invest, so long as we have money to spare after meeting all our expenses. The object behind savings and investment is to keep aside our money till it is either needed by us for some future spend or we want to leave behind some wealth. We can save and invest during our “earning” years.
My distinction between “savings” and “investment” is simple. Savings is that money which I keep aside for some emergency needs or unforeseen needs and some known obligations that will be due in a period of five to ten years. “Investment” is that money that is left over after my “savings”. In other words, unless, there is some emergency, I am never going to need that money. Yes, once my investment grows to a sizeable sum, I may have plans to use some of it. However, this money is invested after providing for all my known cash outflows.
When I am putting away money for “savings”, I am conservative and will not risk my capital. I will keep my money in what is commonly known as “debt” instruments (fixed deposits, bonds, liquid funds, etc). Here I have fixed commitments on anticipated dates. If I put it in stocks or derivatives or anything that is subject to market movements, my commitments could be in jeopardy.
As an example, if I have a commitment of, say, `1 lakh payable in five years, I will start to put aside around `1,500 away each month in to a liquid fund. This will ensure that I have `1 lakh around the due date or before it. I cannot put `30,000 in a share today and calculate that at the end of three years, it will be 3X and so on. It is possible that it could be far higher than 3X or even lower. The company may do well, but the stock market mood could be wrong. Or some economic factors would have changed, etc. Thus, anything that is subject to fluctuation (shares, real estate, gold, diamonds etc.,) that cannot be predicted, cannot be considered as “savings”. It will be considered as “investment” in my diary. This group is the one that causes most grief to folks out there. Many use the “investment” option for short-term play, including leveraged play and come to grief. When you are buying something with a view to selling at a gain in a short period, you are essentially trading in prices. In a shorttime frame, the earning power or the value of an underlying asset is not going to change fundamentally. What changes are just expectations. Thus, when you make a “trade” you are expecting that you have boarded the train that still has some way to go. When your trade starts “working” in a liquidity driven bull market, you feel that your investment IQ is high. The level of risk taking increases. Often, without knowing the product.
Thus, understanding risk is an important need. The other important thing is to identify our own wants. How long can we spare the money? What are our known commitments? Sustainability and longevity of our “earning” is also equally important. All these will help you deal with savings and investments in an appropriate manner.
The writer is a veteran investment adviser. He can be reached at balakrishnanr@gmail.com
FOR ME, MORE IMPORTANT THAN THE RETURN IS TO UNDERSTAND WHAT I AM INVESTING IN. PERSONALLY, I WILL NEVER INVEST IN A PRODUCT THAT I CANNOT UNDERSTAND.