Thursday, September 25, 2008

Rationale for investing in Mutual Funds


It was a year since we got the car. After a disastrous stint at the driving school, which made me feel as if the clutch was the most important part of the car, and driving lessons on Sunday, which disturbed the tranquility of my holiday, I took the simple decision - driving was not for me. I hated the thought of not being able to drive. I sat in the car and looked longingly at men who zipped past. My friends disbelieved that an otherwise confident me, was refusing to drive for the fear of the road. Sitting in the front seat of a car has the ability to increase the fears of people like me - every situation looks risky and every maneuver of fellow drivers very skillful, that I simply cant get it.
Then came my dear friend Babaji, our new driver. Babaji was excellent behind the wheels and loved his job. He loved speed, but was safe to be with. After 6-months of being driven around by him, I asked tentatively, if he could teach me to drive. I told him that I am scared of the roads and worried about accidents. He talks very little, but on this issue, he went on a mini-lecture. He told me that I have to know few rules, exercise judgment and that’s it. Trust me; he got me to drive on the main roads, 2 days after our practice sessions in the deserted roads of Navi Mumbai. It is 3 years now, and I can’t thank Babaji enough, for making me confident to take the driver’s seat.
Now it was my turn to do something for Babaji. So I asked that I teach him what I know – investing. Babaji was not ready for this. He was not able to save much, and did not want to risk his small savings in markets. He reads a lot of newspapers, and told me that there it looks so complex and that he does not want to take any risk. We were on the way to office when I was convincing him, and there was big traffic jam in front of us. Babaji exercised patience as he switched from first gear to second and back. Soon as the road cleared, he sped to save time, overtaking vehicles and using every little space he got. I told him, investing is exactly like driving the road. You have to exercise judgment, you have to assess the scenario and decide, and that’s it. If I can drive, Babaji can surely invest!
The financial markets have many investment options, some are slow some are fast, just like vehicles on the road. There are regulators, licenses and signals in the markets, just as it is in the roads. Before anyone can collect money from investors, regulators have to approve the products and information given to the investors. Babaji quickly pointed out to me, that it does not always work. I told him that it does not always work on the roads either. There could be a truck driver without a license, who is learning to drive on the road. There could be vehicles that have not been serviced. The road itself may have potholes, or even be closed for repairs. Just as you cannot have a perfect road with perfect cars and drivers, you can’t have perfect markets; you have to figure out the way and exercise judgment.
To those who find this tough, there are buses and trains. Public transport that takes you at designated time, from one place to another for a fixed price. That’s what mutual funds do in the financial markets. They offer you specific products at specific prices. You can conveniently choose what you like, at the cost you can pay, and go to the destination you want. I told Babaji that investors tend to be confused on what they want. They get to the market not knowing where they want to go; they get into a bus and expect it to speed like a taxi, and they get off the bus if they find there is a jam, not realizing that they have to take another bus to go to their destination If investors used the same judgment Babaji used on roads, they will be safe in a market that has risks. The logic is the same. The financial markets also have rear view mirrors, maps and most importantly, brakes. So you only have to choose what you want to do and how. Babaji is not fully convinced and remains worried, but overtakes another truck. When I tell him that I find it so risky, he tells me that he knows what he is doing and I must not worry. That’s what it is, you need to find a trustworthy driver like Babaji (for your car and AIMS for your investments), who drives safely and skillfully, has a license and will reach you to your destination, every day, day after day. It is not even required that you learn to drive. If you do, it is an added skill you can use, when there is a need. But some choices ask that you hire and use the skills of others. After all you do not have to own a plane to be able to take a holiday!

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