Investment by objective

Mid-May 2009: The India story is back. Markets are shining. And after for the first time in history being closed due to hitting the upper circuit,6,000 on the Nifty is just a wee bit away.

If one were to invest based on popular sentiments about the markets,it would not be long before our investments were in complete shambles. Market participants oscillate between boundless optimism and bottomless pessimism. The market defeats these expectations with every turn.

Take these last six months. When the equity markets were being battered and a lot of investors were moving into cash,it was with the expectation that they would re-enter it at the bottom. Surprise,surprise. The bottom came and went and we never realised it. While the indices are up 50-60 per cent over their March lows,the cash lies un-deployed. Because they missed the current rally since March,a lot of investors are preparing to enter the markets now a risky gambit at a time when with the Sensex at 14,300-odd,valuations in a lot of stocks are beginning to look stretched because of the poor earnings of the last few quarters.

So,whats the panacea? How do we make the markets work for us instead of losing money to it all the time because of our greed and fear-driven instincts?

The answer could lie in investment

by objective.

Whats your objective?

Whenever an investor asks me to suggest an investment plan,my first question is: what are you investing the sum for? The answer must be something more concrete than I have the money and markets are down. It is really important to peg any investment you make to a goal. This holds especially true for investing in volatile asset classes such as equities,foreign exchange,and commodities.

Your goals could be defined in terms of your life objectives,for instance,buying a car or a house. Alternatively,it could be linked to market levels.

Let me explain the concept of investment by objective. Lets say you are planning to buy a new car that costs Rs 12 lakh. You have only Rs 6 lakh in hand. You could make the down payment and pay the rest in the form of EMIs out of your salary. That would be the easy way out. Alternatively,you could earn the money by investing.

Imagine that you begin investing the money in the equity markets say in an index fund with the goal of buying a car. When you reach the goal of Rs 12 lakh,you sell all your investments and cash out. Rather than stay on in the market in anticipation of a little more gain,you take the cash and run while the going is good.

A second way of defining your objective would be in terms of deciding on an acceptable level for market indexes or stocks at which you would sell. For instance,you could decide to sell when the index or the stock is up 50 per cent. Again,when the objective is met,quit rather than stay invested. The market is a technical animal that is a master at upsetting the applecart of the finest of investors. Its easy to fall into what I call the next 5 per cent trap. The best way to avoid it is to define your exit strategy at the time of investing and quit while you can.

Remember one salient feature of investing nothing lasts forever. If your fund or scrip is having a dream run,rest assured that its only a matter of time before the run comes to an end and some other fund or stock else takes over.

Cashing out also keeps you on your toes. When you are sitting on cash,you are forced to evaluate all available investment options anew. An infinite buy-and-hold strategy often lulls investors into a false sense of complacency.

Making money from money is a simple task but its not an easy task. Discipline and perseverance make the journey a

rewarding one.

The author is a Kolkata-based mutual fund analyst