SIMILARITIES IN YOUR INVESTMENT AND CAR JOURNEY

An investor embarks on his investment journey to attain his financial goals. Metaphorically, we can compare his journey with a car journey where he or his chauffeur drives the car to reach his desired destination (financial goals). It is imperative for a traveller to plan meticulously for a hassle-free and smooth journey. Similarly, an investor must also plan his investment journey meticulously to avoid a bumpy financial ride.

Start Early – an early start in the morning helps to beat the rush and traffic on the way and helps you to reach the destination on time. If an investor starts investments early in his career, then he avoids the cost of delay. If Mr Early invests ₹10,000 per month from the age of 25, then he would have invested ₹36 lakh by the age of 55. However, Mr Late who starts at the age of 35, will have to invest ₹ 15,000 per month for a similar investment. However, the cost of delay is heavy for Mr Late whose wealth, till the age of 55, will grow to ₹ 2.27 crore at 15% assumed rate of return, whereas, Mr Early’s wealth would be ₹ 7.01 crore – a staggering difference of almost ₹ 5 crores.In case, Mr Late wants to catch up with Mr Early then he will have to make a monthly investment of ₹ 46,240.

Many Halts –if the traveller takes many halts during the journey then he will reach the desired destination late or must Overspeed to make up the lost time. Ideally, a halt every two to three hours is advisable to help the chauffeur and the passengers freshen up. Similarly, an investor who stops his SIP frequently will miss attaining his financial goals. We considered an example of a 10-year investment journey, wherein Mr Regular did not stop any of his monthly SIP instalments but Mr Halter took three halts wherein he stopped his SIP for 12 months each in between. Behaviourally, an investor normally does this due to a cognitive bias called regret/loss aversion. So, Mr Regular accumulated 6.401 units by investing ₹ 12 lakh through ₹ 10,000 monthly SIP and his corpus value was ₹22.78 lakh. On the other hand, Mr Halter could only accumulate 4102.628 units by investing ₹ 8.40 lakh through ₹ 10,000 monthly SIP and his corpus value was ₹ 14.60 lakh. Suppose, Mr Halter had taken only one considered halt of 12 months to watch the falling market and review/rebalance his portfolio then he would have accumulated 5775.831 units and his corpus value would have been ₹ 20.55 lakh.

Investor and Financial Advisor Relation – typically the driver controls the car with the accelerator, clutch, brake, and the steering. He decides when to drive fast or slow down, change gear or the turn the steering. In the same way, based on the market inputs, his experience and advice from his financial advisor the investor makes the final call regarding his investments. His financial advisor is his co-driver, cum navigator who guides him from time to time about what lies ahead in the driver’s blind spots, the turn ahead or the traffic jam conditions prevalent. A good financial advisor should not be commission driven and render dispassionate advice that has a financial rationale.

Equity the Accelerator – like the accelerator of a car through which the driver controls the speed, the investor controls his portfolio growth through its equity component. If he finds that the markets are falling, then he should top up or invest more to buy low akin to the driver pressing the accelerator to speed up when he finds that there is less traffic and roads are free. However, if he over speeds then it might lead to a crash and so should the investor beware of over-investment in equity, which is not commensurate to his risk profile. If the driver does not maintain adequate speed or goes very slow then he runs the risk of late arrival at his destination. Analogously, if the investor does maintain adequate resources in the equity component of his portfolio, proportionate to his risk profile, then he runs the risk of missing his long-term financial goals that are mostly achievable by wealth creation through equity.

Liquid Funds like Fuel Tanks – when you commence the car journey, you fill up adequate fuel depending on the distance of your journey. Likewise, before making a systematic investment the investor sets aside adequate cash in his bank account to start a SIP or invests it in liquid funds to start an STP. The main advantage of systematic investment is that it helps the investor to achieve rupee cost averaging as he buys more when the markets are low and vice versa. Parking the funds in liquid fund vis-à-vis leaving them in the bank accounts give the investor some additional advantages as follows: Firstly, their average annualised returns are 6 to 7.5%, unlike bank savings accounts that vary from 3.5 to 6%. Secondly, the total returns earned during the financial year through the bank interest are taxable as per the investor’s applicable IT slab rate within the same financial year; whereas, the short or long-term capital gains from the liquid fund are taxable only on redemption. Thirdly, there are no TDS applicable on liquid funds whereas banks deduct tax at source for interest earned in a financial year from savings and fixed deposits more than₹ 40,000.

Fixed Income Instruments Keeps the Portfolio Grounded – fixed income instruments pay investors fixed interest payments until its maturity date. At maturity, the concerned bank/corporation repays the principal amount invested. Bonds are the most common types of fixed-income products, which can be issued by governments and corporations. In the event of a company’s bankruptcy, it pays fixed-income investors before common stockholders. Therefore, these are safer investment options vis-à-vis equity and some even carry a sovereign guarantee. In other words, they keep the portfolio grounded and lend it safety, much like the four wheels of the car. The driver controls the drive to these tyres through the gearbox, which changes the ratio by enmeshing or delinking different sizes of gear wheels when the speed increases or decreases. Likewise, the investor also changes the cash flow into his fixed income instruments depending on his requirement of capital protection or wealth creation. Some of the commonly used financial instruments available in India in this category are the bank and post office deposits (Fixed deposits, Recurring deposits, Senior Citizen Savings Scheme, Provident Fund), government and corporate bonds and fixed deposits, mutual fund fixed maturity plan schemes, National Savings Certificate, Kisan Vikas Patra andNon-Convertible Debentures. Most of these instruments fall under the exempt-exempt-tax (EET) category, are liable for TDS and their returns taxed as per the applicable tax slab rate of the investor in his hands. Only the PF enjoys the exempt-exempt-exempt (EEE) status for taxation and its returns non-taxable in the hands of the investor.

Retirement Planning – Retirement planning is probably the best way to exemplify the above metaphors. Please see the first table below to understand that it is better to start the investment journey early to avoid paying a heavier SIP later. The second table exemplifies that to meet the desired financial goal, an investor must adopt an aggressive approach during his early years of career. This way he will invest smaller monthly SIP instalment or one-time lumpsum amount. If he is overcautious and adopts a conservative approach then his lumpsum investment more than quadruples and his monthly SIP instalment more than triples. In the case of a moderate investor, the lumpsum amount more than doubles and the monthly SIP instalment increases more than one-and-half times.

Source: Retirement planning calculations are as per the retirement planning calculator link below:

https://mftoday.my-portfolio.in/GoalPlan/retirementPlanning.aspx?rc=326&bid=10246

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Disclaimer: Dear Investor, By clicking on the submit button you will be redirected to our secured website. This link is provided only for the convenience of our visitors. The site has the necessary tools to help you understand your risk profile, asset allocation, and goal calculations. You will also be able to open a folio and transact online in mutual funds.