In 1984, when I first started analysing shares to try and create a defined thought process for identifying investments in stock markets, the daily trading volume on the Bombay Stock Exchange was US million a day. By 1994, when I was part of the first wave of FII money flows into India, daily trading volumes had galloped to US million a day. By 2005, daily trading volumes increased to US billion a day. Though trading activity in stock markets, by itself, is no indicator of what all one can buy, it is certainly a good indicator of how much one can buy. Clearly, the choices of how much one can buy have increased manifold.
But even the "what can one buy" has changed dramatically. For much of the 1980's and 1990's, India offered few asset classes to individuals and institutions looking to participate in the long-term growth of India's economy. And within any asset class, there were just a few investment opportunities. Take the example of the stock market. True, there were the 6,500 shares listed on the BSE but investors largely bought the top 30 shares - Bajaj, G E Shipping, JK, Lever, Reliance and Tata. A few dabbled in smaller shares that moved with "khabar" and news flow - S I Viscose was one such counter. Interestingly, 19 of the BSE-30 Index companies in 1994 are not part of the BSE-30 Index today or are not in business anymore. Century Enka, Century Textiles, and Indian Organic fall in these categories. And many companies that are a large chunk of the BSE-30 Index were just about setting up their businesses in 1994. HDFC Bank, Infosys, TCS, and Zee were in their infancy ten years ago and are now established and respected businesses.
The choice widens.
And if you were not the sort of investor who liked to invest in shares directly but preferred to invest via a mutual fund, the number of funds out there will dazzle you. In 1994 there were probably 10 Asset Management Companies selling maybe 100 various mutual funds. Each of those mutual funds had underlying exposure to equities and debt in various mixes. Today, there are probably 1,000 mutual funds from 30 Asset Management Companies.
What is true for stocks and mutual funds is also true for real estate. In the boom of 1994 a lot of NRI money went to projects set up by a few developers in a few key cities. Today, there are a lot larger projects being set up by some of those same developers and many new developers have thrown their hats in the ring. And these developments are happening in many new cities and areas. The projects are for more diverse uses than those launched in the previous 1994 boom - the traditional apartment complex, the retirement communities, the commercial projects for technology and call centre operations, the retail developments for India's emerging new middle class, and the entertainment complexes and lifestyle developments. SEBI has recently set the guidelines for real estate mutual funds, so investors will be able to buy exposure to a broad portfolio of real estate projects very soon.
What do you want: Greek food or Chinese?
But a larger choice of assets (equity, real estate, debt funds, gold, venture capital) and more choices within each of these asset classes doesn't necessary mean that the investment decision has been made easier, nor does it mean that it has become more difficult. Think of investing as, say, eating your food on a daily basis. There are probably 100 new restaurants that have been set up in your city in the past decade. You don't go and eat at all of them. You may have tried 20 of these restaurants but, if you really think about it, you probably frequent 5 of these restaurants a lot. And just because you eat at these 5 restaurants, chances are that you order the same kind of dishes. Your body, taste buds, and mind are making some conscious decisions here. You eat the food you want and not everything that is on the menu. Sometimes you may try some new food and sometimes you may try a new restaurant. And it is good to try new things because not every great food has yet been discovered or tasted by you.
Now contrast the way you select your food with the way you invest. Every time some fund house launches a new fund offer (NFO), you probably subscribed to it. Every time a new fund house was born you decided to try it out. Every IPO out there in the market got a cheque from you. That does not sound like a disciplined approach to investing but more like trying to be part of some herd.
Most investors fail to understand the basic principle of making an investment - saving today for something more tomorrow. A mutual fund or a stock is not an end in itself but the means to an end. Your "end" objective is to have some money saved up for the future so that you can retire, work less, and yet pay your bills from that savings pool. Buying a mutual fund, land, or a share which has little relevance to your end result is like going to a Greek restaurant when you want Chinese food! And if you eat too much or the wrong food, you will suffer. Similarly, if you buy the wrong mutual fund or the wrong mix of assets your future will suffer.
Easy steps to select.
Going to a restaurant is sometimes a family decision, sometimes a single person decides. The best decisions are made when everyone's suggestions are taken. Think of investing for your future in the same way. One weekend, instead of going to the mall or to a movie, list out the things you would like to do for yourself and others in the future. Encourage others in the family to do the same.
Combine the lists and delete the nonsense stuff like one Ferrari for every child. Group the list into 2 i.e. one-time purchases and ongoing expenses. Put a price tag on each of those items and get a total for each of your groups. All the one-time things you may need to buy should be purchased by you before you retire, while you are still earning. So if you want to buy a house, do that before the age of 35 or 40. But the ongoing expenses for looking after the house, that money will still be needed by you long after you have stopped working. You need to save and invest for both groups, though and over time what you use that money for will change.
Initially you will be saving and investing to buy those big items, later your savings and investment will change to pay for the ongoing expenses. These are all very individual needs and there is no one formula that may fit your needs. Although working on this is simple, the most difficult part is sitting down to do it. The malls and movie theatres are a big distraction.
The easiest part of the investment process is where to keep your money. Yet, while simple, you need to ask the correct questions and understand what you are doing and make sure it matches what you need. The Asset Allocator on www.personalfn.com is a great place to start. And while you do not need to review these decisions every month, you must review them every six months. And spend a whole day on that review.
India clearly has evolved over that past decade and investment opportunities are being thrown at investors as if everyone is some sort of guaranteed return. Booms have a habit of turning to busts. But, across investment cycles, the smartest investors have had the simplest philosophy - they have stayed disciplined and focused on what level of risk they are willing to take to get to a certain level of return. With all the wider choices of investments out there, careful assessment and caution is the key.
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