Are you BORDER-line greedy?
financial investment

It began in the summer of 2004 when I started working with families on decisions concerning their finances. And the head of the first family I began working with was a Chartered Accountant and Chief Financial Officer in a large Multi-national company (MNC) in Bombay. Our discussion, which lasted about forty-five minutes, was about whether he had saved enough for his kids’ education, and his retirement and whether he should buy another house or invest in Mutual Funds.

This meeting set me thinking about why a successful man in such a senior position needed guidance from someone like me, who had finished his MBA just a year ago. The answer (as some of you might have experienced in your lives) is simple: we don’t devote enough time to our personal affairs as much as we do to the pressures at work and the lack of understanding of the many options that one could consider. I think there is one more factor which in my experience is the most important. The guidance available from various sources is usually not impartial, a situation similar to how we would not like our doctor getting a cut from the neighbourhood chemist for every medicine prescribed. 

Now, seventeen years later- with a pot belly, more than a few grey hairs and work stints in several parts of banking and in running a business, I still think the basic principles of maintaining discipline in one’s financial life remain the same.

This column does not intend to provide financial advice. What I aim to do in this series is to set you on a path where you can make informed decisions regarding your financial life and evaluate the various options in an easy-to-understand manner. 

As with any therapy, let us begin with a diagnosis. So, let’s kick this journey off and I hope you enjoy it!!!

Let us take an example:

1. Kelly: I read in the newspaper that the shares of Moodle Ltd. have risen 20% in the last three months. Let me take a personal loan and buy some shares.

2. Jimmy: I sold my ancestral land for a high price, now, let me put this money in shares that will surely give me at least 30% annual returns.

Do any of Kelly and Jimmy sound like you? If yes, then the bad news is that you are borderline greedy. However, just as in the case of border-line diabetes which can be managed with exercise and diet, the good news is that border-line greed can also be controlled with awareness of some facts.

High returns come with high risk: returns from different types of investments are compensation for the risks involved. That means you should expect higher returns from riskier investments. But what does risk in investment mean? It means that the return is unpredictable, not fixed and can fluctuate in value, especially at a time when we need our savings back. Consider this: what can you say with certainty- the stock market will rise 15% in the next year, or a bank fixed deposit (FD) will give you 7% in the next year?

It is hard to predict that the stock market will rise by that much and even if it does, it’s impossible that markets only go up. On some days, it will go up and on other days, it will be down.

Invest in shares if you are ready to see the share market going up and down, can stay invested for 5-10 years (i.e. not dependant on this money for immediate needs) and keep your expectations at 10-12% annual returns. And the most sensible way to invest in shares is with the help of professional Mutual Funds.

Do not fall for schemes/ investment options that lure you with the promise of higher returns.

On how much and when to invest: Start saving early in your work life and invest. Without complicating the decision, it is generally good practice to invest more in share market-linked investments during young age and as one approaches retirement, more and more savings should be invested in investments that give predictable returns such as FDs.

In general, what you are likely to spend on (for example, on a wedding or surgery) in the next year or so must be parked in investment options that do not fluctuate in value (for example, bank FDs).

On taking a loan to invest: It is a really bad idea to take a loan to invest unless you are buying a home. For example, a personal loan from a bank comes at nothing less than 14-16%. As we noted above that the best one should expect from investing in stock market-related mutual funds is 10-12% (anything more is good luck!). Why would anyone borrow at 14-16% to get returns of 10-12%?

On inflation: as savers and investors, we also need to consider whether returns from our investments keep pace with the rising prices of what we spend in general. Fixed return instruments such as FDs fail miserably on this front.

On staying away from complexity: if a financial product is too complex to understand or the returns from it sound too good to be true, I would personally stay away from it. An example of such a financial product is Unit-linked Insurance Plan (ULIP). In simple words, ULIP is an insurance plan that invests some portion of your premium paid in the stock markets and also provides life cover but far more complex to keep a track of than investing in a mutual fund scheme and buying term insurance separately.

The facts discussed above will help you ask the right questions next time you need to take a money-related decision.

Gaurav Gupta is an ex-banker and now a researcher with an interest in financial inclusion and livelihoods in the informal sector. Views are personal and do not represent those of EastMojo or the author’s employers.

Also Read | Lost dreams: How CredForce duped investors of over Rs 250 crore

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