You may have watched the ‘Mutual Fund Sahi Hai’ investor initiatives that attempt to spread awareness about mutual funds. One such initiative suggests you should buy overnight funds as ‘net practice’ before investing in other (read equity) funds.
Here, we discuss why you cannot get ‘net practice’ for investing to achieve your goals.
Routine versus non-routine
Like most individuals, you may be good at grocery shopping, typically grabbing a discount when you see one. But there is a reason why your skill at grocery shopping cannot be replicated in your investment decisions.
We are typically good at taking decisions for routine issues because good decision-making comes out of experience. And, experience comes from learning (including taking bad decisions). So, if you buy groceries every fortnight and make bad decisions (buying a day or two before the store offers discounts), you can eventually understand the store’s discount policy and accordingly adjust your future purchases.
Unfortunately, it is not often that you buy a house.
And, you retire only once. You may rightly point out that all of us pursue several goals during our lifetime. Suppose you are investing to achieve two goals — buying a house five years hence and funding your child’s education with a 10-year horizon. Also, suppose you make mistakes in managing down payment-for the house. Can you learn from these mistakes and manage your child’s education portfolio better? Not necessarily. Why?
Not all goals you pursue at any point in time will have the same priority. For instance, funding your child’s education portfolio may be more important than buying a house. So, the risk you are willing to take and, therefore, your choice of investment products to achieve high-priority goals, will be different compared to your choice of products for low-priority goals.
Of course, this does not mean that you cannot learn from your investment experience. But, you have to appreciate that no two investment experiences will be the same.
There is another way to convince yourself to invest in equity funds. Suppose you decide to invest only in bank fixed deposits to achieve a life goal. Imagine the amount of money you have to save every month, given that your post-tax return on bank deposits is less than 4%.
Higher savings, an option?
Would you like to cut your current consumption and save more? Or, do you want to stick with current consumption and invest in high-expected-return-investments such as equity funds? From a behavioural perspective, cutting your current consumption is more painful than the likelihood of suffering losses on your equity investments in the future.
Also, there is a possibility of regret if you do not save enough to achieve your life goal.
So, think of investing in equity funds as a requirement to achieving your goal. To test the waters, you could, perhaps, invest in index funds before you are ready to invest in active funds. Finally, remember this: you (typically) only invest once for each life goal.
(The author offers training programmes for individuals to manage their personal investments)
