“Good evening, everybody. It’s great to be here with you today. Swamiji just explained how meditation can help you relax and de-stress. I would like to take that one step further and talk about how you can become financially independent and further reduce your stress.”
Siddharth spoke briefly about the importance of being financially independent and how it was important that they enjoy this journey. He also talked about asset allocation and the basic principles of financial planning.
“We’ll start by thinking about how we can simplify our finances thereby reducing a lot of stress in our lives. Let me start by asking you a simple question: What don’t you want as investors?”
The audience seemed a bit confused. Whenever they had attended such sessions in the past, it was always about what investors wanted. This was the first time someone had asked them what they didn’t want. There were a few moments of silence. Then someone said, “I don’t want an empty bank account,” amidst laughter.
“Yes, you are on the right track. What does it mean for you as an investor?”
“I don’t want to see any loss on my investment,” someone else answered.
“Excellent. That’s the answer I was looking for,” Siddharth exclaimed. “Let me tell you a short story.”
“Once, Rahul Dravid, the famous cricketer, was going in to bat and had a look of intense concentration on his face. A TV commentator asked him, ‘You are very focused; I am sure you must be thinking of whether you will score a century or a double century in this match, correct?’ ‘Not at all,’ answered Dravid. ‘You are completely wrong. Actually, all I am thinking about is how I should not get out on the first ball. And once I achieve that, then all I think about is how I can score my first run, then five runs, then a double-digit score, and then 25 runs, 50 runs, and so on. If I can do that, then the centuries and double centuries will come.’
“And that is the ideal approach for us too. As an investor, your top priority is to not get out on the first ball, which means that you should not lose money. Because once you get into a hole financially, it’s very difficult to come out of it. And, after an unpleasant experience, you will not want to be an investor again. This is the concept of always putting risk before return. Understood?”
“Yes,” the audience answered in unison.
“Great. I am glad we got that out of the way right in the beginning. Now, let’s come to the scoring runs part. What do you want as investors?”
“I want high returns,” said a young person.
“Okay. But what exactly does ‘high’ mean?” Siddharth quizzed the audience.
“15 per cent, 20 per cent, 25 per cent,” he heard various answers. The young people in the audience especially seemed to have the highest expectations for returns.
“That’s like saying you want to score a century or double century in every match. It may happen a few times but definitely not in every match. Similarly, you may see these high returns once every few years. But, do you really think you can get these kinds of returns consistently? How many of you have made such high returns on your investments consistently?” he asked.
There was silence in the audience.
“Let me tell you something. Only a handful of investors in the world have made these kinds of returns over the long term.”
“So, let me ask you again. What kind of return do you think you can realistically get over the medium to long term?”
“8 per cent, 10 per cent, 12 per cent;” again he heard multiple answers. This time, the middle-aged people in the audience made their voices heard. They were indeed more realistic than the youngsters.
“Actually, it’s not an absolute answer. For most investors, getting a return that is 2 to 3 per cent per annum higher than the interest rate on an FD is a realistic target. If they can achieve that, they can easily beat inflation and protect the value of their savings, which should be their primary goal. And if they are patient, they may even see some better returns over the medium to long term, which will be sufficient to build wealth and meet their goals. And for most investors, a balanced asset allocation is the ideal solution to achieve this,” Siddharth said.
“But how do we get a balanced asset allocation?” an extremely enthusiastic lady in the first row asked Siddharth.
“That’s what this session is about. And, I will try to make it as interactive as possible instead of a one-way monologue. So, please feel free to ask lots of questions as we go along,” Siddharth replied.
“Now, for a majority of the population, mutual funds would be the ideal investment product to achieve a balanced allocation with the least hassle,” he continued.
“They are ideal because they can give you diversification even if you have a limited sum of money to invest.”
“How do they do that?” the lady persisted.
“Mutual funds can do that because they combine the savings of a large number of investors, which is then managed as a single pool of money.”
“But who manages the money?” the audience wanted to know.
“Mutual funds are managed by professional fund managers who make the investment decisions so that individual investors do not need to worry about which stocks, bonds, commodities or other assets to buy. Mutual funds charge a small fee from investors for this service.”
“Can’t we do this on our own?” a youngster who was taking notes asked Siddharth.
“You can try. For example, many people try to invest directly in stocks on their own but only a few are successful while the rest may end up with losses. However, the majority of the population does not have the time, interest or capability to research investment options, make a decision on the best choices to invest in, and time the entry and exit right. Mutual funds enable them to get the benefit of a diversified investment portfolio with minimum effort.”
“You mentioned that mutual funds would help to de-stress our lives. How do they do that?” asked a person sitting in a corner.
“Investing in mutual funds is advantageous as everyone can get on with their lives and focus on their
line of work while ensuring that they protect the value of their savings and build wealth. For example, professionals in jobs, folks who have their own businesses, doctors, athletes, etc., can focus on their core competency while leaving the job of investing to the professionals. That way they have one less thing to worry about, and that implies lower stress, right?”
“But what if we don’t have large sums to invest? There must be some minimum limit, right, because of which many of us won’t be eligible?” a lady asked nervously.
“Not at all. In most funds, one can start investing with as little as a few hundred rupees a month.”
“Once we invest, will we be able to get our money back when we want it?” the questions continued.
“Of course, unlike many other investment options, mutual fund investments are highly liquid and can be redeemed whenever you need your funds. Most of the mutual funds don’t have any lock-in period although they may charge a small exit fee if one redeems within a year of investing the money.”
“How difficult is it to start investing in them?”
“Mutual funds are very convenient to invest in. You can invest online with a direct debit from your bank account. Similarly, when you redeem, the funds are deposited directly into your account in up to three working days.”
“How can we invest in mutual funds? Can you explain the process in a little more detail?”
“You can invest directly through the asset management company or AMC, or through a distributor. You can go to the AMC’s website and select the fund you want to invest in. The advantage of going directly is that it has a lower expense ratio or fee. The disadvantage is that you need to be knowledgeable about mutual funds, be able to evaluate their performance, select between thousands of funds and decide which ones to invest in or exit. Here, having a financial adviser will be beneficial as they can help you invest directly in a select set of funds that will be a good fit for the financial plan that they would have prepared for you. Here, you should note that a financial adviser has a fiduciary duty towards their client and is expected to take decisions in the best interest of their client.”
Excerpted with permission from The Financial Independence Marathon: Unlock the Power of Your Money, Vinod N Bhat, Penguin.