Many of our investments are not traded or under-traded, in fact they are not assets but liabilities
Discussion between three friends:
Policy: Where did you get these chocolates, they are excellent.
Ramesh: Made by my niece, she is good at it.
Niti: How much did they spend?
Ramesh: She doesn’t sell them. This is for family and friends only.
Niti: Oh, I thought I might order them. My neighbor also makes good chocolate; She sells them at ₹450 per kg.
Ramesh: Would you like to consider buying from Mrs. Mehta, she sells them for ₹385 a kg and does home-delivery as well.
Niti: Yes, sure, give me her number, I’ll try them.
Peter: I like things made by Mrs. Fernandes. She charges ₹525 per kg but they are amazing. Worth the extra amount.
Let’s see what happened here. Ramesh’s niece does not sell chocolates; They are not in the market. He does not face any competition. On the other hand, Mrs. Mehta and Mrs. Fernandes sell them, they are in the market and therefore subject to market risks. Similarly, when we invest, we enter the market. Investment can be in equity market, bullion market or real estate market.
Even when we invest in fixed income securities or bonds, we are still exposed to the debt market and subject to interest rate variations. The value of our investments can go up or down depending on market conditions. This is called market risk.
Mrs. Bhattacharya has always believed in investing in the stock market with a long-term perspective. She came to know about this from her late husband.
She used to invest in stocks of good companies and did not regularly monitor their price movement. She used to review the overall situation only once a year. Since she was not in the market after purchasing the shares, the market risk to her portfolio was only hypothetical.
Similarly, Manoj Jain had bought a tax-free bond of the Government of India, which had a maturity of 10 years. He was clear from the beginning that the investment was for post retirement and he would keep it till maturity and not trade in it.
Mr. Jain had decided that after investing he would move away from the market and hence interest rate movement in the market would not affect him. As investors, we need to be clear while investing. Once we invest in any type of instrument, we are subject to market risks. Depending on the speed of those investments in the market, the value of our investments will change. However, after the investment, if we decide not to sell or buy more, we are technically out of the market and the market risk will have no effect.
need strategy
If we are clear about our strategy, we will know whether we are subject to market risk or not and can take appropriate action.
A warning is needed here. Please make sure there is a market for your investment. This means that if you have to liquidate for some reason, there should be an option to sell. Investing in something that is not liquid and cannot be bought or sold in the market is a huge risk.
Many of our investments are untraded or under-traded. In fact, they are not assets but liabilities. They are useless investments in our net worth, which are of no use. Some of my clients have made some foreign investments. One such client has invested in an instrument whose ‘fund manager’ had invested that money in the film industry. I used to pull his leg and ask if he was getting at least a movie ticket. The last time we met, his wife said: “Now we watch everything on OTT, so even if we get a movie ticket, that might not be of any use.”
(The author is a financial planner and author of Yogic Wealth)