Demonetisation made you sweat a pond;
The big corporate defaulted on its bond.
Limitations were imposed on your account;
Yet you ignore liquidity & focus on the amount?
Investing is pretty much like the perfect dinner – a well-diversified spread of dishes with nutrients in line with your health requirements. This is pretty much what you must seek in investments in the form of a diversified portfolio in line with your investment objectives & risk profile.
But imagine, you are hungry, and this appetizing meal is well-laid out in front of you and you take the first bite only to realize that the blessed chef simply forgot to add salt.
Quite often than not, you decide the asset class that fetches you the best returns but miss out on checking a simple attribute – liquidity.
Like salt, one realizes the value of liquidity only when it goes missing. What’s worse, by the time you realize it, you’ve typically reached the point of no return.
Recent times are a wake-up call for investors chasing returns in isolation, without considering other key attributes including liquidity risk & the importance of diversification.
We all know about PMC bank that was recently mandated to freeze depositor accounts or allow withdrawals subject to a significantly low threshold – irrespective of the amount held in the account. In similar news, DHFL could not repay investors who had parked their money in DHFL-issued fixed deposits. Such news triggered a slew of reports on people who lost health, and life in extreme cases, simply because most had their life savings parked entirely in the affected accounts and couldn’t come to terms with the fact that there is a possibility that they can never see their money again.
Developing situations made my cousin Anjali take a step back and re-think of the multiple financial decisions she had made and how could she possibly strategize well-enough to avoid, or at least mitigate, the risk of not being able to access her money while ensuring it appreciates optimally.
Here’s the list of actionable she shared with me saying that this would help her minimize risks and maximize returns on every penny deployed:
- Park money required to meet immediate liquidity in the savings account of a large bank
- Invest money needed for short term needs in very high-quality bonds/debentures – in many of them so that if one of them were to come under stress like DHFL, rest of the bonds continue to cover for the losses
- Deploy money needed to meet long-term objectives in multiple well-researched, high growth potential equity shares.
- Keep monitoring the holdings daily and keep managing the portfolio hoping that my knowledge suffices to take the right investment decisions.
Well, life was simple & she was confident till point 3, but point 4 made her open yet another pandora’s box wondering aloud if she really had the knowledge and time to actively manage the portfolio? How would she buy bonds & debentures reserved for institutional investors? Could she manage multiple trading accounts? Does she have the wherewithal to gain access to insights reserved typically for large institutional investors?
“I don’t think managing money is going to be as simple as the one, two and three. I know what’s required, but there’s no way I could do that myself. If only there was a way…” she rambled to herself as an idea struck her like lightning.
“Mutual Funds?”, she asked with a hopeful gaze.
“Precisely” was the only word I uttered as she picked the drift.
Mutual funds are typically pooled investment vehicles managed by highly qualified funds managers and regulated by SEBI – known for its typically low tolerance for compromised governance. Mutual Funds have a category-suite vast and expansive enough to suit almost all investor needs. While the fund manager’s role is to maximize wealth optimally, the role of a financial advisor is to help the investor with an efficient combination of well-managed mutual funds.
Informed decision making, predictable liquidity, and solid diversification are at the heart of mutual funds as a product.
Reply to this e-mail to know more about how you can utilize various mutual funds to achieve a variety of financial goals you have.