The real task of investing is quite boring and simple; here's how to get over investing inertia

By Uma Shashikant

My niece suffers a fairly common problem in investing. She does nothing about her savings. She is one of the many prospective investors who are so overwhelmed by the process of investing, and the many decisions associated with it, that they end up doing nothing.

It seems preposterous! How can hard earned money lie in the bank, we ask. The answer usually is, at least it is safe. The fear is that a hasty decision to invest might result in a loss. Even if the interest rates are lower, at least they money is accessible and lies undiminished, is the argument. It is like not driving out since one doesn’t know the route, can’t drive or doesn’t have a car. We know that people move about despite all this.

Many fear the selling agent. When my niece walks into her bank on a rare occasion when she cannot transact online, she is invariably persuaded to buy some financial products. Sometimes unsolicited calls and messages come, recommending something as a do not miss investment opportunity.

Without a framework to evaluate the products, she is unable to decide. It has been on her mind to educate herself more about money matters. She reads but cannot implement what she reads. Every year she scrambles to file her tax returns and resolves to put her investments in order. Soon enough that is forgotten. How can she make progress?
Investment products are typically sold through distributing agents. She should be aware these agents will charge a commission that is earned from the money she has invested. Even if she transacted in mutual funds and insurance products from her bank account online, the bank is registered as the selling agent for such transactions.

She has two other choices. First, she can find a registered investment adviser. This is a fee-only entity who will not recommend or push products, but offer advice on personal finance. Second, she can directly invest in financial products, online or offline.

Using a distributing agent solves for a lot of paperwork, process related tasks, and brings a certain ease and speed in completing a transaction. Using an adviser brings about good quality direction and strategy to the process. But implementation remains with the investor. Using a direct approach means the entire process from strategy to implementation is with the investor. My niece has to choose what works for her.

Then comes the setting up process. Most investment products require the completion of KYC . This involves providing proofs of identity and residence to a designated service provider and updating the Aadhaar number. There is then the account opening process, which can be different depending on what route one has chosen for managing money. These are one-time efforts and have to be completed to make progress.

The 3-in-1 account that a bank will offer an investor is an example of an integrated process. Here the bank account, the demat account and the trading accounts are linked. This enables investing in equity shares apart from mutual funds and other products that the bank offers. An investment account for only mutual funds can also be opened.

Investing involves paying and receiving money for purchase and sale transactions, receiving interest and dividends, offering and receiving securities for market transactions, and keeping track of all this for purposes of payment, reporting and filing of tax information. My niece lost interest at this point. I had to persuade her that these are set up decisions.

Investors do not see these arrangements as a matter of keeping financial transactions in order. Many have multiple banking, broking and demat accounts and pay more attention to the proof of having made the investment. They think having a file or folder with the details of what they have invested where is adequate record keeping. Investments need monitoring apart from annual tax reporting. Organising them efficiently keeps these maintenance tasks simple.

The real task of investing is quite boring and simple. You want to create three buckets to put money into and draw as needed—liquidity, income and growth. Liquidity is the need for money, expected and unexpected. You expect a small return, nil to low risk, and you expect to access the money at short notice. Keep money in the bank in savings and fixed deposit, and in liquid funds.

Income refers to that bucket of investments that pay an interest income. PF, PPF, bonds, company deposits, debt funds are examples. You need this for two reasons: Firstly, your regular income is inadequate and you lean on the income from investment. This is the case for retired investors, for example. Secondly, you want protection from the risk that the value of your investments will fluctuate. These investments are stable. You are the lender when you invest: choose carefully. As a rule the best borrowers will offer the lowest interest.

Growth refers to investments that will appreciate in value with time. Equity shares, property, gold are all examples. These offer little or no income. They also fluctuate in value. But they offer long term appreciation, if chosen wisely.

Investment products are sadly packaged in a complex fashion, and the core product feature and process facilities are all mixed up. A PMS is not a product —it is a facility where a manager will create a portfolio and buy and sell on your behalf. A mutual fund is a similar arrangement. A trading account is only a facility, not a product.

Make your macro level decision of how much of your monthly savings will go into the three buckets. Choose conservatively until you get familiar. Invest when you have surplus money, draw when you need it. Don’t see investments as a tactical task where you must make a decision based on something new and novel. Don’t trade, speculate or time the market hoping to make a quick buck.

Established products with track record is where you begin. Invest in three or four chosen products for a year. It is easy once you get started. Cross that initial bar of inertia. Your money deserves better.

(The author is Chairperson, Centre for Investment Education and Learning)