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HOW MR. KUMAR BECAME A CRAFTY INVESTOR

Mar 17, 2018 / by Prasunjit Mukherjee

Mr. Kumar was a crafty investor. If the starting amount was a criterion – he was a pretty small investor but he had made up his mind to not remain a small investor forever. He had plans and he wanted to work his plan to get him out of low investments, lower returns and no vision. He had decided to entrust all his tax savings requirements into the mutual funds that allowed him tax savings, and there were plenty of them. But he had made up his mind to do a few things differently. He wanted reason to guide him in this difficult mission…and so created a few ground rules.

1. Never take the money out of equity funds for all his investments in tax savings:
This meant that he would not treat the 3 year lock in as his maximum tenure, but as his minimum tenure. This money would never be spent on anything, barring extreme emergencies and would always be earmarked for very long investments into the equity space through mutual funds only. Thus, after the mandatory 3 years were over, he would look for equity mutual fund options to park; if at all the reason for quitting his initial investment fund was there. If not, the money would continue to stay invested in the same scheme.
2. Immediate past returns were not his ONLY GUIDE for investment.
Returns, he had understood was an outcome of doing many different things well, like managing risk and volatility, patiently and with foresight creating a portfolio that sufficiently mapped the prime investment sectors and so on and so forth. Further, there were also high chances, given the immediate past exuberance in the equity markets, there would be returns providers who were extremely lucky or could be returns toppers just because of fluke chances like a few scrips going up irrationally. Given this milieu, it dawned on him that he would be far better of looking for schemes that were consistently providing a larger JENSEN’S ALPHA. And this is how he chose the schemes that he would invest in.

3. Always take the dividend option in lock in schemes.
Three years is a very long span and so many things can go wrong to upset the applecart. Fund managers change, fund houses close shop/are sold, sub-prime and other crises that we do not understand much of, happens. Through all of these situations it’s imperative that a small outlet be availed to ensure a minimum return annually in the locked in environment.

4. Never use the dividend money for any other use but investments only.
AND THIS OUTLET is the DIVIDEND OPTION. Always ensure that in a lock in scheme, the dividend option is availed of. This ensures that in the case of a huge run up in the market, the pressure valves are regulated and the dividend comes into our pockets, working as timers for partial cashing in. This money is then used to invest in some other appealing equity mutual fund scheme. The power of compounding works best if the entire proceeds are used, including dividend payouts.

Using these very common beacons to guide his investments, Mr. Kumar is well on his way to his desired destination. I am sure there are a few lessons in there for each of us.

One response to “HOW MR. KUMAR BECAME A CRAFTY INVESTOR”

  1. Thank you for the article. If I may, I would like to suggest using a different colour for the headings since the orange colour makes it difficult to read. Black should be good, if you’d like a suggestion. Thanks!

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