Investing in markets is about knowledge and discipline. Knowledge answers the ‘how’ of investing. Discipline answers the ‘why’ of investing. Knowledge is needed to understand the mechanics of the markets. Discipline is needed to let you use the ‘mechanics’ gainfully while overriding your fear and greed. In my understanding, there are three primary ways of investing in the equities market using blend of knowledge and discipline in various degrees. We can take many investment lessons from our ancient traditions and epics. For one, I see an Ekalavya and a Kumbhakarna way of investing.
The Ekalavya way demands intense focus, dedicated self-learning, willingness to tolerate mistakes (and to bear their costs), and the self-criticism to learn from it. Here the investor learns the market fundamentals and complexities by him/herself. Such investors follow direct equity investment strategies developed on the basis of their own research. This method demands a lot of time, intense analytical expertise and in depth financial knowledge. The returns are also in line with the input. The sharper the knowledge and discipline, the higher the gains. But there is also a cost for those who use this direct approach but have not reached the optimum expertise level.
The Kumbhakarna way is simply to invest a lump sum into the equities market directly/through mutual funds for long term and then forget about it. In the Kumbhakarna way, the investor invests for the long term of 10-15 years and sleeps through the entire investment period. Such investors will find that their investments have grown multifold and the capital created has become substantial during the course. But it is a difficult to be so detached.
Not all can be as relaxed as Kumbhakarna or as self-driven as Ekalavya. Here investors need professional advice, portfolio management support and also a steady communication to keep them disciplined. Mutual funds and its distribution business come into the picture here. Here the investor allocates between various assets and funds based on the objective, plan and strategize on the basis of inputs given by the advisor. They utilise the product and market knowledge of the advisors to allocate between various funds and asset classes. Such investors utilise the dedicated focus of the mutual fund managers to manage their investment portfolio. Finally, the distributors play a key role in keeping investors engaged with the market and motivate the investors to ride through the volatility and help them create wealth. This is a vital social and economic function that our distributors play.
On a slightly different note I want to point out to our distributor brethren the importance of the art of storytelling in the advisory role. People have a tendency to remember and connect with difficult ideas, concepts and changes if they are communicated in terms with which the listener can connect easily. I have been approached many times by investors from remote areas who have recognised me as the person who gives Ramayana’s references towards investing. They still remember the ideas that I presented and the concepts that I clarified using the above mentioned example. The point is if distributors can develop their communication style linking it with the popular imagination of their clientele then they may be able to gel better with the deeper ethos of the investors. In the long run, investors would recognize such concepts with the distributors who said it and their recall value would go up.
-The writer is the Senior Relationship Manager - Institutional Sales of Kotak Mahindra Asset Management Company Ltd.