Leave a room for Error
The most important part of every plan is planning on your plan, not going according to plan. The book – Psychology of Money asserts this statement by narrating the story of a successful card counter. The book affirms that though card counting is statistically proven, the game does not guarantee your win every time you play it. According to the book, the sagacity in having room for error knows that uncertainty, randomness, and chances are part and parcel of life. How do we prepare ourselves to face them in reality? Is it that we can face it or lose it all? The only way to deal with these unforeseen circumstances is to increase the gap between what you think will happen and what might happen while still giving you the ability to fight another day.
Subsequently, we shouldn't see the world as black or white. Instead, we should focus on the grey area- that pursues things where a wide range of potential outcomes are sustainable, and that is the smartest way to proceed while leaving room for the error.
As humans, we usually tend to overlook the importance of room for error, especially when it comes to money. It's typically seen as a safe bet for individuals who don't want to take too much risk or aren't sure of their own opinions. However, it can create wonders if used correctly.
This concept of leaving room for error is more likely associated with Mutual Funds. The investors of mutual funds primarily invest in equity mutual funds to seek higher returns. These mutual funds get invested in the stock markets. Imagine a group of 10 people coming together and contributing certain money for the same goal. The primary reason why people fund their money in Mutual Funds is they can rely on the Fund Managers, as these Fund Managers take decision on behalf of these folks who have little to no knowledge about the stock market.
Furthermore, inexperienced investors prefer mutual funds because of the dual benefits of inflation-beating and tax-efficient returns over the long run. This is how an investor can invest in Mutual Funds while still taking risks and leaving room for errors.
Want to invest in Mutual Funds? Know the steps right here:
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. The author explains the importance of saving money today to yield extraordinary results tomorrow by explaining how crucial it was for us to save oil long back in 1970s when the world looked like it was running out of oil.
One of the most prominent ways to invest in Mutual Funds is SIPs. Simply put, an SIP stands for Systematic Investment Plan, and it is a method of investing in mutual funds on a regular and systematic basis. The method of investing is similar to that of a recurring deposit (RD) with a bank, in which you deposit a set amount of money (into your recurring deposit account), but the key difference is that your money is invested in a mutual fund scheme (equity and/or debt schemes) rather than a bank deposit. SIPs can be started with as little as Rs.500 each month, whereas lump-sum investments usually require at least Rs.1,000.
SIPs are a better investment option if you have a small but consistent quantity of money to invest. Lump-sum investments may be more advantageous for individuals with a large investment amount and a high-risk tolerance. By investing in SIPs, the investor invests in a time-bound way without having to worry about market dynamics and stands to benefit in the long run owing to average pricing and the power of compounding.
Why do investors invest in Mutual Funds?
You can build wealth by investing, but Mutual Funds helps to make investment decisions for you. Ask any investment professional, and they'll tell you that diversity is one of the most important techniques to reduce portfolio risk. Spreading your investments across several holdings, rather than investing in just one company, industry, or investment vehicle, will help you limit potential losses.
The convenience of mutual funds is another reason why people select this investment type. Rather than buying individual shares, you can delegate the decision of how to allocate the equity portion of your portfolio to an investing expert. Some investors find it easier to buy a few shares of a mutual fund that fits their fundamental investment criteria than to investigate firms and buy their stock directly. Mutual funds are used by investors who prefer to leave the research and decision-making to others.
Top Performing Mutual Funds:
According to the data sourced from the Value Research on The Economic Times, the ICICI Prudential Technology Fund has performed exceptionally well in the year 2021. It showed exorbitant returns of approximately 75.74%. This fund was launched on March 03, 2000, and has shown a decent return of 12.49% since the launch. As of March 31, 2022, the assets associated with this funds are 8,477.72 Cr.
On the other hand, as per the data from the Value Research, the topmost performer of Mutual Funds in 2021 was Quant Small Cap Fund, with an exponentially high return percentage of 88.05%. This fund was launched on November 24, 1996, and has shown a return of approximately 11.07% since its launch.
A little more about Mutual Funds:
The book further outlines that you must leave room for error if you want to be in the game for the long term. You can tolerate a variety of possible outcomes with room for error, while endurance permits you to stay long enough to benefit from a low-probability event. Not accepting that there is a difference between what you can physically withstand and what you can emotionally suffer is a key flaw in most people's perception of room for error.
For example, if you invest Rs. 1 lakh in an FD for ten years, you will receive Rs. 1.79 lakh (assuming 6 per cent returns). However, if you invest the same amount in large-cap mutual funds, you will end up with Rs. 3.40 lakh (assuming 13 per cent returns, which is the average of all large-cap mutual funds return in 5 years). This represents about 190 percent of FD returns.
Let's say you have enough money stashed up from the last two years. So, you quit your job to pursue your dreams, confident that as soon as your savings account dries out, you'll be able to find work. Technically, you can do it, and you won't be in debt in the process. When you've spent 30% of your money, on the other hand, you may start to feel nervous and unhappy. If that is the case, you might as well give up your aspirations and go back to work, even if you have a year or more left on your financial runway.
Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.