Safety first – be it buying a car or making an investment decision | The Financial Express

Safety first – be it buying a car or making an investment decision

If you have a long term goal then you can take a little risk due to the time horizon involved but for the short term, risk is best minimised.

Safety first – be it buying a car or making an investment decision
When you invest, it should always be with a goal in mind.

By Zubin Daboo, Marketing Head, Epsilon Money Mart

A couple of months ago I ran into one of my old college friends at a mall and as college friends will, we sat to catch up over a quick lunch. The main topic of conversation was him asking for advice on buying a new car. After we discussed the merits and demerits of many cars over lunch, much to the annoyance of the people at the next table – he finally decided on one model and he promised to take me out on the first drive in the new car.

As assured, he called me yesterday for the drive and went down to discover a completely different model from the one we had discussed! When I asked him about his change of heart, given that his current car was significantly costlier than the one chosen over the lunch, he replied “Yaar uska safety rating accha nahi tha”.

Safety Matters

That statement got me to thinking that it’s not the mileage, the size of the car or the capacity of the engine but the safety rating and features that changed his mind. That is also correct. Everyone would always put the safety of their family and their own selves above everything else. Even if it means stretching the finances a fair bit so that safety is not compromised.

Therefore, I found it truly ironic, while chatting with him during the drive, that someone so focused on safety had blindly invested in a fund on the recommendation of his colleague and the promise of high returns in the near future, without even consulting his CA or anyone else who could have given him some helpful advice. So much for safety when it comes to investments!

Especially in Investments

When you invest, it should always be with a goal in mind. One’s marriage or children’s education, marriage, saving enough for retirement etc. If you have a long term goal then you can take a little risk due to the time horizon involved but for the short term, risk is best minimised.

Imagine if you are retired and have 100 per cent of your savings in one asset class and there is a huge market crash in that asset class – could be anything – equities, gold, even fixed income. When your principal is hit then meeting those monthly expenses post retirement becomes a huge challenge. Hence when it comes to investments it is better to err on the side of caution and stay safe. Here the ‘Don’t put your eggs in one basket’ adage is best kept in mind. Diversify across asset classes – so the investments in other classes can help offset the fall in one.

So for safety – FDs: Is it?

No. or not necessarily. The first step of investing is actually to not invest!

The first step, before anyone undertakes any kind of investment, is to gauge one’s risk profile. One needs to know if one is a conversative investor – then yes, FDs could be one of the myriad Fixed income options available out there, or if one is an aggressive investor – then fixed income forms a very small part of one’s portfolio. Due to a higher risk appetite, one can invest in equities for higher potential returns.

Only once you know your risk profile should you take the plunge. Take my friend’s case. He is a conservative or a moderate risk taker. High risk instruments are something he needs to stay away from. Markets will fluctuate, that is their very nature and when they go down my friend will be in trouble since he will not be able to take the current loss in his investments – even though there could be potential gains on the horizon. As a low or moderate risk taker he needs to invest as per his risk profile. I shudder to think what would happen to him if he had invested in crypto!

Safety First – Always

When it comes to investing one could follow something called a ‘Glide Path’. A glide path is nothing but a journey the investments will follow from the start of the goal to the end. If one has a long term goal like retirement planning, which is in say 20-25 years away then you start investing in equities and slowly move to fixed income, so by the time you have reached your retirement a massive part of your investments has transited from equities to relatively safer assets like Bonds. Therefore no matter the nature of the market your investments are protected and you can lead a tension-free retired life.

After all, safety (especially of Investments) is always first.

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First published on: 11-10-2022 at 08:08:30 pm
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