Return Chasers!!

That'd be an apt term to describe the current generation of investors. Every conversation hinges on high returns from an investment - be it the traditional gold or the contemporary derivative products. While it is only natural to look for returns from any investment, the point that investors are increasingly ignoring these days are that high returns are inherently highly risky as well.

How do we chase returns?

• It is alright to take high risk as many people do so (small cap stocks)
• Capital will be safe since land never loses its value (real estate)
• It is brilliant to venture new (unknown) domains as returns from all known investment avenues are unattractive (EMU farms)
• Not many people are aware of this investment, so it pays big to be an early investor (MLM schemes)
• My agent told me this investment is absolutely risk-safe (Ulip policies)
• My broker said this is a capital protected safe bet scheme with high potential returns (NSEL commodity futures)

Why do we chase returns?
It is interesting to analyze the motivations behind chasing high returns. A good majority are drawn by the money multiplier effect in a short span of time. But only those with an eye for "margin of safety" or experience in the asset class get to make high returns and exit. The rest sit on paper loss or incur high liability for a much longer tenure than originally intended.

What is a good return?

• A 30% return in 6 months of investing in 1 stock / Rs.15k return on a capital of Rs.50k
• A 15% return by flipping an early booked apartment in an upcoming residential area in 12-18 months / Rs.6L return on a borrowed capital of Rs.40L (actual invested capital is Rs.8L, so net return on investment is 75%)

Individually they all look cool. But when you look at the broader scheme of things, the stock forms only 0.25% of your entire portfolio (say worth Rs.2 crore) and hence the 30% return translates to a portfolio return of 0.08%. However the apartment capital forms 4% of your portfolio but translates to a portfolio return of 3%. The point here is that none of these magical one off returns are repeatable in a consistent manner year after year to produce such stellar results. One should not forget to consider the downside scenarios where by the stock could lose say 50% of its value and the apartment may not be readily sell-able due to macro level risks such as a poor economy or litigation issues with builder.

How do I know what is a good sustainable return?
Consulting a Financial Planner would be beneficial to answer this question. A financial planner would be able to best advice if a particular asset and the return it offers are best suited for you. There is no one-magic-number-return that fits all - just as the goals are different for each individual, the return requirements too vary based on individual needs. The planner analyses your age, investment priorities, investment horizon (tenure), your risk profile (vs) required levels of risk to be taken to achieve your financial goals and recommends a customized portfolio with the right asset mix so that it generates adequate returns to fulfill all your planned objectives.