Investments are prone to market risks, ensure they aren’t dud

Discussion between three colleagues:

Niti: Where did you get these chocolates from, they are excellent.

Ramesh: Made by my niece, she is good at it.

Niti: How much did they cost?

Ramesh: She doesn’t sell them. This is only for family and friends.

Niti: Oh, I thought I could order them. My neighbour makes nice chocolates as well; she sells them @ ₹450 per kg.

Ramesh: Do you want to consider purchasing from Mrs. Mehta, she sells them for ₹385 a kg and home-delivers it too.

Niti: Yeah, sure, give me her number, I’ll try them out.

Peter: I like the ones made by Mrs Fernandes. She charges ₹525 a kg but they are amazing. Worth the extra amount.

Let us examine what has happened here. Ramesh’s niece does not sell chocolates; they are not in the market. She does not face any competition. On the other hand, Mrs. Mehta and Mrs. Fernandes sell them, they are in the market place and hence subject to market risks. Similarly, when we invest, we enter the market place. The investment could be in the equity market, bullion market, or real estate market.

Even when we invest in fixed income securities or bonds, we are exposed to the debt market and are subject to interest rate variations. The value of our investment can go up or down based on market conditions. This is called market risk.

Mrs. Bhattacharya always believed in investing in stock market from a long-term perspective. She had learnt about this from her late husband.

She would invest in stocks of good companies and not monitor their price movement regularly. Only once in a year she would review the overall situation. Since after purchasing the stocks she was not in the market place, the market risk to her portfolio was only notional.

Similarly, Manoj Jain had purchased a Government of India tax-free bond, which had a maturity of 10 years. He was clear from the beginning that the investment was for post retirement and he would hold it till maturity and not trade in it.

Mr. Jain had decided that after making the investment he would move away from the (debt) market and hence, movement of interest rate in market place would have no impact on him. As investors, we need to be clear while investing. Once we invest in any kind of instrument, we are subject to market risks. Based on the movement of those investments in the market, the value of our investment will change. However, after investment, if we decide not to sell or buy more, we technically move out of the market and there will be no impact of market risk.

Need for 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.

There is a need for a caveat here. Please ensure there is a market for your investments. This means, 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 much bigger risk.

Many of our investments are those that are not traded or thinly traded. In reality, they are not assets but liabilities. They are dud investments in our overall wealth, which is of no use. A few of my clients have made some exotic investments. One such client has invested in an instrument, whose ‘fund manager’ had deployed that money in the film industry. I used to pull his leg asking whether he was getting at least movie tickets. The last time we met, his wife said: “Now we watch everything on OTT, so even if we get a movie ticket that may not be of much use.”

(The author is a financial planner and the author of ‘Yogic Wealth’)