Don’t chase unrealistic returns

L et us start with a simple example. You want to travel by road to a location which is 500 km away and thus you can easily estimate the numbers of hours it will take.

Most of us have cars and thus we can estimate the time based on the average speed at which the vehicle will travel. Now for this journey, you want to hire a commercial vehicle and the driver says that you will reach that place 2-3 hours before what you estimated.

Is it realistic? For sure not and if you accept such a claim what is likely to be the result – may be a life-threatening accident. The above example aptly applies even to investment returns.

There is something called “market returns” which will vary based on the asset category which you have chosen. Under equity, the returns can be higher, but equally the risk will also be higher.

Now assume considering all factors if the best market return is hovering around say 20% per annum, and now comes an investment offer where someone is promising an 80% p.a. return. What does that mean? Always remember, if somebody is promising super normal returns on your investments – think twice, there could be a problem.

However, normal human psychology drives a person to make fast bucks within the shortest possible time. If we fail in managing this temptation of making fast bucks, for sure many times we will be making wrong investment decisions.

One must understand that investment returns are determined by many factors which among others include – the prevailing interest rates [for short as well as long term placements], economic outlook, prospects and inflation rate etc.

Therefore, one has to take into account the so called determining factors while expecting returns on their investments. If we ignore the determining factors and look for getting super normal returns, it is quite possible that one would fall prey to many unregulated and risky investment options promising abnormal returns to its investors.

There are many examples of such mishaps across the world, where many investors lost the base capital itself in their quest for getting super normal returns.

Therefore, one has to be very careful while taking investment decisions on one’s hard earned money. Any investment decision should be judged keeping in view the three important factors viz.

Safety, Liquidity and Returns. While as an investor, it is quite customary to expect the best returns in a prevailing situation, however here the ‘best returns’ means outperformance of the corresponding benchmark index of a target market and not super normal returns which normally are nowhere near to the referred market index.

Now the mute question remains – as a normal investor how you would know the benchmark market index to which one should refer while making an investment decision.

This is not very difficult to gauge if we know our target market. Suppose one is interested in investing in the equity market [i.e., listed shares], then the performance of the chosen stock over a period can be compared with the corresponding performance of the concerned Stock Exchange index.

Similarly, if one is interested in investing in debt instruments then depending on timelines the applicable benchmark index can be studied e.g., for short-term investments one can refer to the prevailing rates on instruments such as call rate, 182 days T-bills rate, 1-year bank deposit rate etc., while for long term investments the referred benchmarks could be the fixed term bank deposit rates or prevailing rates on a fixed term Treasury Bonds/ Corporate Bonds etc.

As an investor, you must also ensure that the instruments/ schemes where you intend to invest are also regulated under the applicable laws of the Country.

The so called Ponzi schemes are normally not regulated by an appropriate Regulating Authority and are thus bound to bring misfortune to their investors. Some of these are even outlawed.

Therefore, before making any investment, gather the desired information from the available sources so that your investment decision passes the litmus test of – Safety, Liquidity and Returns. It is good to remember that in any investment transaction, return(s) is only one part of the story, while the other important factors like the safety and liquidity of your investment should not be compromised in your search for getting extraordinary returns.

Notwithstanding the above, the role of an investment adviser or stockbroker can’t be ignored as their expert services can always be availed to make judicious investment decisions. People think that earning money is the most difficult job in the world.

However, managing the money well is equally difficult as it requires a lot of planning and strategy to ensure that your money earns more money for you and not otherwise.