When Raghavendra analysed the size of his retirement kitty, which he was building for the last 15 years by investing purely in fixed-return instruments, he was in for a rude shock. He realised that the corpus wouldn’t sustain for more than 5 years, considering his post-retirement needs. It was then he started a couple of Systematic Investment Plans (SIPs) in multi-cap funds. By the time he retired, his move, in the nick of time, had helped him build a sizeable corpus.
If analysed closely, Raghavendra’s move can be attributed to a common human emotion – fear. It was the fear of depletion of the retirement corpus sooner than expected, that prompted him to invest in equities and opt for multi-cap funds. It is fear of the unknown and not being able to accomplish major life goals which have a profound impact on our investment decisions.
But why fear? Let us find out.
Fear: A strong determinant of investor behaviour
A powerful force guiding your choices and approach in investment, fear can manifest from a lingering concern when you are unable to find answers to:
The reason to invest
Are you joining the investment bandwagon with a clear objective or just because someone else did? The opacity of purpose generates fear. Being aware of essential life goals and the time-frame within which you want to achieve them can help you discard the fear of uncertainties.
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A holistic view of major life goals will help you to formulate your investment plan with full confidence. Today, various online applications are available that help you estimate the funds required for financing primary financial goals. Some advanced tools also factor in inflation while making such calculations.
Your risk appetite
As an investor, you should be aware of your risk appetite, also called risk tolerance. It is the degree of variation in investment return that you are willing to accept. If you fail to predict your risk appetite accurately, fear will always accompany you.
For a correct evaluation of your risk appetite, you should have a sound understanding of the internal and external factors that influence market movements. In today’s globalised world, this includes development happening overseas.
The right investment avenue
There is a myriad of investment avenues where you can park your hard-earned money and compound it to build wealth over the long term. However, each one of them serves a specific purpose and must be chosen with care, after factoring in your objective and risk tolerance.
For example, if you wish to build a sizeable retirement corpus like Raghavendra, equities are your best bet as they have the potential to deliver inflation-trouncing returns in the long run. On the other hand, if capital protection is your goal, you should opt for debt instruments. Note that equities are volatile in the short term and if you the feeling of losing money makes you feel jittery, then you must opt for debt investment products.
Investment sage Warren Buffet once famously remarked, “Buy it thinking you will hold it forever.” However, that’s easier said than done. Often in fear of making a loss or losing out on a market rally, investors tend to make irrational decisions, which later become a roadblock in achieving financial freedom.
It’s important to avoid being the victim of herd mentality and decisions for market transactions should be based on facts. Optimum return is guaranteed by holding on to the right instrument for the appropriate tenure.
Fear driving investing behaviour also arises when you are unsure about your liquidity needs at different life stages. It is this uncertainty that results in parking money in instruments which have a long lock-in period.
However, financial prudence calls for being aware of situations, where you might need access to funds and invest accordingly. For instance, to tide situations such as a sudden job loss or a medical emergency that put a brake on regular income, investing in liquid funds can be an ideal bet, which provides higher returns than a bank savings account.
The final word
The game of investment can be complicated at times. But in a booming economy like India, the fear of investment should not keep you from reaping the benefits of a promising and well-developed financial market.
(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)