Use only 'mad money' to invest in fads

Investors with a compulsive need to participate in any ongoing action should do so by having a 'mad money' allocation-money they can afford to lose

“Should I invest in the Zomato IPO?” Questions like this one have become commonplace as many new age companies queue up to raise money from the stock markets.

Such queries start rising when the market turns bubbly. It is not restricted to the initial public offering (IPO) market. Investors also want to know whether they should invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Then there are always the latest investment products from life insurers. 

The barrage of queries made me think. It seems like another lifetime on March 19, 2020 when I wrote in this column urging investors to be courageous and maintain their asset allocation despite the all-pervasive fear psychosis prevailing then. I advocated a graduated increase in equity allocation. There was no way anybody could have predicted that this advice would be vindicated so quickly. In less than 18 months, life has turned full circle and investors cannot have enough of equities.

These investment-related queries can divided into three kinds. The first, and the easiest to handle, are the ones regarding the latest investment products from life insurers. Against all odds, some high net-worth investors still nurse the hope that insurers will offer a beneficial investment product. “Tax-free returns”, “safe product”, and “not dependent on the stock market” are some of the buzzwords used to market them. We do not waste any time analysing such products since there is no way they can provide both — a safe investment product and a decent return — with intermediary commissions and other costs being so high.

The second set of queries relates to the new fixed-income products that have come into the market — REITs, InvITs, and some exotic ones like peer-to-peer (P2P) lending, factoring, and invoice discounting. These are higher-yielding fixed-income products that obviously carry higher risk. On REITs or InvITs, our advice is to take such exposure to the extent your asset allocation allows through appropriate mutual fund schemes. The fund house can analyse the risks involved and spread it across the multiple instruments available in these categories. The other products are still in the “guinea pig” stage and make sense only for large investors with high risk appetite. 

Queries around investing in the IPOs of new age companies are the most common nowadays as the frenzy within this market builds up. Most retail investors flit from one IPO to another, assuming that any allotment is akin to winning a small lottery. Ideally, retail investors should invest only through appropriate mutual fund schemes that invest a part of their corpus in IPOs. The benefits of diversification across many holdings and fund house expertise will help retail investors reduce risks and enjoy the benefits of these investments.

Retail investors should avoid ad hoc investment decisions based on talk in the media. They may score a few victories but will eventually burn their fingers. When investing remember that “more is less”. The fear is that retail investors could be left holding a bunch of stocks valued at much lower than their cost price and may get turned off the stock markets for a long time. It would be much better for them to stick to an asset allocation plan and invest only through mutual funds. Investors who have a compulsive need to participate in any ongoing action should do so by allocating a fixed amount to what is called a “mad money” allocation — money they can afford to lose. This way they can indulge in the market frenzy without jeopardising their entire financial plan.

The writer heads Fee Only Investment Advisers LLP, a Sebi-registered investment adviser