The obsession with products
I have Crocin, paracetamol, combiflam, avil, cetzine, gelusil, and digene with me. Do you think this is a good mix? Should I add more or reduce anything from this?
A question like this sounds ridiculous right?
So how can a question asking if a mix of HDFC Top 200, Franklin Bluechip, Reliance Taxsaver and any other fund is good or bad, be logical?
You must have bought those medicines at some point in time for a particular problem. At any other time how can you know whether they are needed unless you know what the problem is. They can be held in your first aid kit, but you cannot self medicate using these for everything. We cannot give Crocin syrup to an adult, not that it will not act, but it will be ineffective as the strength and dosage both will be low. Similarly a crocin tablet for a baby might not be right as the strength of the medication differs and might harm the baby (unless of course you have sufficient knowledge to get it down to the right dosage that has a safe strength)
Some ailments might have standardised treatment procedures, but even those will need to be modified to suit the constitution of the person, allergies etc, else they might do damage instead of benefit. If the medicine needs to be administered inspite of known side effects, because there is no other solution, then the patient will have to accept those side effects and live with it.
Similarly just choosing some random products from the investment universe is not a solution. Even though there might be processes/solutions which are overall very good, like SIPs, they need to used with understanding of the overall impact on the finances. Even if a fund is good in itself, it might not be suitable for a particular person depending on his or her constitution or circumstances. Unless a goal is defined, the risk profile of the person is known and the tenure of investment is known, it is difficult to create a good investment portfolio. So try and answer the above questions before you get down to select products.
The obsession with guarantees
Can you guarantee that you will be alive tomorrow? Is there any guarantee that no natural or manmade calamity will strike you ever? Can you guarantee that your child will be as brilliant as you or more? Do you have any guarantee of holding your job till retirement? Will an arranged marriage last or a love marriage last? Will either of them last?
There are no guarantees in life. So why seek guarantees in investment products? There is no zero risk, it is always comparative risk. Products that offer guaranteed returns carry their own risks, even though those risks are often not very visible or have very low probabilities.
Everyone knows equity investing has risks. But not many consider the risks in fixed income investments or real estate for that matter. The risks are there, though not very obvious to the lay person.
You may look at bank fixed deposits as safe havens and would probably go that extra length to lock into company fixed deposits with some assurance. But not many look at the other side and see that they are trading lack of volatility for the risk of inflation. The rate of return is fixed, you know what you will get on the date of maturity. But do you think that will be enough for what you will need? To analyse a little further, you really think there is a guarantee on your principal? If the bank goes bust, your principal is secured only to the extent of Rs.1 lakh per person per bank. Beyond that it is open to risk. What if the company is unable to repay the principal; there have been many such cases.
Even in case of government bonds or corporate, there is always a remote chance that the government or the company fails, and you will not be able to recover your principal. In the meantime interest rates keep fluctuating. There is an inverse relationship between interest rate and returns on bonds. So when the interest rate goes down, your bonds will appreciate, while the interest rate goes up, your bond price will fall. This is the interest rate risk.
Small savings products like NSC and PPF used to have guaranteed returns, but now that too is gone, The rates will change every quarter.
So where is the guarantee and safety in fixed income products?
Due to the guaranteed/fixed return, you get lulled into this false sense of security.
What is more risky, living with ups and downs of equity or running out of money when you need it the most?
So if there is risk everywhere what do you do?
You can become a hermit and leave these worldly worries behind.
Or you can understand the risks and learn to live with what is palatable to you and suits your temperament. That is living by risk tolerance.
Or you can understand the risks and understand that your risk tolerance level will not let you get to your goals, and live with a little more risk. There is a standardised treatment procedure-it will have side effects-and you have to take it to get cured. That is living with risk required.
Put a little bit of money in everything that can possibly get you to your goals. That is asset allocation.
Getting too scared or too greedy and running behind ‘best’ products is not going to help the cause. It will only increase the anxiety and make you run in circles without you achieving anything.