By Dhirendra Kumar
Imagine a cricketer coming in to bat, and on reaching 28 runs, taking off his helmet and waving to the crowd as if he had hit a century. Why did he do that? He did it because his batting average till that point was 27.6 and he had set himself a target of exceeding that average. So when he scored 28, he felt he had succeeded.
Not about cricket
That was a joke. However, it was not a cricket joke but an investing one. No batsman in the world would celebrate a paltry score, but there are plenty of investment managers who would. Some fund managers think if they have exceeded any given measure of average performance then they have achieved what they set out to do for their customers.
This thinking has permeated down to the customers as well. As a saver, what is it that you would have set out to do? To beat an index or some average? A lot of investors feel that as long as they have done that, they have achieved something. If they are the debt investors, they feel exceeding the fixed deposit rate is the benchmark and if they are the equity investors, then they feel that exceeding the Nifty or the Sensex return is the measure of being a successful investor.
This line of thinking is reinforced by the media and analysts. The end of the year is approaching and soon, you will see newspapers, magazines and websites fill up with articles, tables and graphs about what fared well during the year. This is of use only to those who always invest on 1 January and redeem their money on 31 December. In other words, it’s useless.
An individual who invests or chooses investments based on such benchmarks, could end up making some decidedly suboptimal investments. One could exceed all types of frequently used average benchmarks and still be a loser. Exactly like the cricketer I referred to earlier.
Which race are you running?
What is the real benchmark that an investor should follow? What should this be based on? The self-evident answer is something that aligns with your own needs. ‘Need’ here encompasses the way you would invest as well as what you eventually expect from the investment. Most of us have a certain amount of money that needs to be invested every month. From a returns or safety perspective too, regular monthly investments are the best. I looked up the investment performance of monthly SIPs in equity funds on Value Research Online and found that almost every single fund had beat the public benchmark.
Having said that, the only benchmark that makes sense is one that is unique to you, one that is based on your needs. A general benchmark makes no sense. How much money will you need in the future? Are your investments on track to achieve the target? Did you actually achieve the targets in the past? These questions, or rather, the answers to these questions, are all that matter. If the answers are mostly in the negative, then it doesn’t matter if your investment beat the fixed deposit rate or the Sensex. That’s not the race you were running.
Often, in many other endeavours, as long as one maintains some motion, some activity, one gets to the target. Savings and investments are not like that. This is the hard part. Savings and investments are about having an idea of the amount one will need in the future, then investing for it, and then knowing, en route, whether one is going to get there. Unfortunately, there is no easier alternative.
(The author is CEO, Value Research)