Keep the big picture in focus while investing

It’s important to think through your goals and investments completely. Piecemeal decisions are costly in the long run

Madhu T TNN

AMAJOR fall in the stock market never fails to rattle investors, especially newcomers. Sunny Thomas is no exception. He has been investing in stocks for barely a year, and found it hard to remain unaffected by successive declines in the market. He rushed to his agent and cancelled his systematic investment plan (SIP) in a mutual fund scheme. “I have decided to open a systematic investment plan in a tax-saving scheme this year,” he announced. “The market was okay initially, but when it became volatile, it made me very nervous. So I decided to stay away from the market, and called my agent to stop the SIP,” he added. Says a mutual fund manager: “It’s unfortunate and sad that people make important investment and financial decisions based on market swings. Sometimes, they’ll pull money out of their fixed deposit to buy shares when the market at a historic peak. At other times, they’ll sell in a panic when the market is in the dumps. In both cases, they end up losing money. Adds an investment advisor, “It’s not just stock investments; other financial decisions are made similarly, too.” He offers the example of a client of his, who recently wanted to shift to a fixed rate home loan, from a floating rate one. “I told him that rate hikes were highly unlikely, and advised him against switching, but he was adamant. He said he didn’t want to lose sleep over the possibility of further increases in his monthly repayment amount.” Financial experts aver that such cases are largely due to a lack of understanding and conviction. Do your homework “I thought of investing in tax-saving scheme because a friend made a huge amount of money on it in the last three years,” says Thomas. Was that the only reason why he decided to invest in the stock market? “To be frank, yes that was the deciding factor. I don’t understand much about the stock market and never thought of investing in stocks. But when you see someone making money from it, you are tempted to take the plunge,” reasons Thomas. But financial advisors emphasise the need to understand a product before investing in it. Says an insurance advisor: “Taking inspiration from people is fine, but you should also try to educate yourself before taking the plunge.” ‘Solutions’ that change the problem Reversing or taking a decision in response to breaking news could prove costly. Listen to this story of an investor who decided to reduce her family’s medical cover when she learnt that that the renewal premium had gone up by a few hundred rupees. “She said she couldn’t afford it, and was willing to settle for half the cover, instead. I advised her against risking her financial health for just four hundred rupees, but she was not convinced,” says her insurance agent. As luck would have it, her husband had to be admitted to hospital for an emergency, and the insurance cover proved inadequate. The unfortunate investor had to pledge her jewellery to cope with the financial crisis. No head or tail Most people don’t think through their goals and investments patiently, says the investment advisor. “They make piecemeal decisions. One time, they may say: I have Rs 5,000—let me put them in a mutual fund scheme. Another time, they would think, ‘I want to save tax, so I’ll put some money in the Public Provident Fund’,” he says. “The most dangerous aspect of this kind of decision-making is that you’re unlikely to know the details of his investments, nor have a clear idea of the big picture,” he adds. Coming back to Sunny Thomas, what would his decision have been if he had done a spot of homework and learned that a taxsaving mutual fund scheme has a three-year lock-in period? That means no tax deduction (subject to a maximum of Rs 1 lakh) unless he keeps his money in the scheme for three years, in accordance with Section 80C of the Income Tax Act. Perhaps if he knew this when he made his decision, he wouldn’t have panicked about short-term market fluctuations. He might have reasoned that the SIP was actually a good deal—it would average his acquisition cost, as he would benefit from every dip in prices. The solution, according to investment geeks, is to set different life goals first, and then choose instruments that serve those goals. The rule of thumb is to opt for safest avenues (such as fixed deposits and short-term mutual fund schemes) to achieve immediate goals. Opt for riskier instruments like stocks, equity schemes of mutual funds to meet your long term goals. And, last but not the least, don’t lose sleep over short-term fluctuations in the market.