Dream11 IPL 2020 edition has already started. Everyone is looking forward to a change and entertainment this IPL, after watching depressing COVID-19 and macroeconomic news broadcast. For a country like India with over 1.38 billion, cricket is almost a religion. Nothing enlivens people as much as cricket …and the excitement is very palpable: in the stadium, on the streets, and at homes.
But as we enjoy cricket, there are some valuable investment lessons the game teaches us. Here’ how…
Determining winning score = Setting and accomplishing financial goals
In a game of cricket, “how much do we need on the board to win this match” is a thought that goes through every captain’s mind. And it is important to make a winning score for a tough fight.
In personal finance parlance and investing as well, while you endeavour to build wealth, setting clear financial goals are necessary. Without a goal in mind, your wealth creation journey is directionless. Therefore, set S.M.A.R.T (Smart, Measurable, Achievable, Realistic, and Time-bound) financial goals.
Only when you properly define your financial goals––big or small; short-term or long-term––it will serve as a roadmap to achieve them. Along with it, your performance on the field by devising a sensible winning strategy and focus will help you accomplish the envisioned goal/s. Every astute player keeps a watch on his opponents’ moves as well. So, in investing as well, keep a watch on your opponents: the main ones being the pace of real inflation (which erodes the purchasing power of hard-earned money) and the market googly (volatile market conditions as a result of the undercurrents).
Choosing team players = Diversifying the portfolio
To win any match, the selection of right team members is crucial. It is important to have a fair balance of players ––the big hitters, the slow and steady batsmen, all-rounders, fast bowlers, spinners, swift fielders, and a super agile wicketkeeper. Relying on only good batsmen or bowlers does not help. If the batsmen fail to score a decent total, the bowlers and fielders can make up for it by trying to take early wickets. The same principle is applicable the other way round. So, everybody in the team has a special role to play and are the assets of the team.
Similarly, when investing, every investment avenue has a role in the portfolio. The investment schemes must be chosen considering age, personal risk profile, investment objectives, financial goals, the investment time horizon before goals befall, and the risk-return trait of the investment avenue.
Holding an appropriate mix of asset classes (equity, debt and gold) and investment avenues therein, ensure that the portfolio is productive, robust and well-diversified to make a winning score. While the equity component can help in capital appreciation and overcoming inflation (i.e. score big runs), debt and other traditional avenues helps to minimise downside risk when the markets turn volatile (i.e. play steady). Thus, each asset will work in a different way to enable you to achieve your goals.
For this reason, like the captain of the team seeks a prudent counsel of the coach, you too follow a consultative approach speaking to your financial advisor and add only those investment instruments that best suited for you.
Format of the game = Investment strategy
Any cricket enthusiast would vouch that the strategy changes from one format to the other (T20, ODI, and Test). A standard strategy may not help for an ODI, Test, T20 or IPL. Each needs a different strategy.
Similarly, when you are addressing financial goal/s, you need to recognise your investment objective; the corpus you need to build; your personal risk profile; and the time left (balls left) to achieve the envisioned goal/s. This will then help devise a strategy and decide on the right asset mix and investment avenues that may be needed to achieve the envisioned financial goals.
For example, if you are young, without dependents and in a higher income bracket, you can follow an aggressive approach towards investment, take risks, and allocate a higher portion to equity-oriented products. On the other hand, say you are older, have dependents, and/or nearing retirement; it would prove prudent to be conservative and play cautiously by deploying hard-earned money in bank fixed deposits, small savings schemes, liquid funds, and Banking & PSU Debt Funds.
A good head start works in favour of the team = Investing early in life helps accomplish financial goals
A good head-start sets the direction of the game and works in favour of the team to win the game.
In the same way, when you invest, the sooner one starts the process of saving and investing early, and at times, invests a large lump sum; a big corpus can be built abetted by the power of compounding to achieve the envisioned goal/s. Rightly, “the early bird, gets a bigger worm.”
The compounding principle works in our favour in accumulating a substantial corpus when you start early and astutely build on investments.
Pacing up the innings = Systematic investment plan
Winning teams know the key to success in cricket is to pace up the innings as the match unfolds, maintaining the required run rate always. In an ODI, the first 15-20 overs give the batsman a chance to tackle the other team’s bowling strategy. This means a good batsman will try to make as many runs as possible (with boundaries and sixes) in these 15-20 overs to boost the team’s winning total.
Similarly, for your investments to grow, the earlier you start saving and investing regularly, systematically, and prudently; with more investment time horizon you can compound wealth better.
Moreover, if a conscious effort is made to save and invest more; the pace of wealth creation (compounding) could get accelerated further and potentially may help you accomplish the envisioned financial goals sooner.
Systematic investment plan (SIP), a convenient mode of investment in mutual funds, is an efficient way to address financial goals (and potentially proves to be a rewarding strategy in itself to compound wealth with the rupee-cost averaging feature). And with step-up SIP you can accelerate the pace of wealth creation and accomplish the envisioned financial goals sooner. Ideally, make your pay-day, your SIP day and consider parking increments and bonuses in mutual funds.
Follow the rules of the game = Be a disciplined investor
Just being a good player is not enough. Following the rules is equally important. Perceptibly a good fast wicket-taking bowler may take a wicket of the batsman from the opposite team, but if the bowling action is incorrect, the umpire would rule it as a ‘no-ball’ giving the benefit to the player of the opposite team. To taste success, getting the action right and being disciplined is essential no matter what the pressure is during a crucial point in a match. Hence maintaining composure to avoid making mistakes and being disciplined is part of the game of cricket.
In investing as well, while the market factors and volatility may provoke you, be focussed on your goal/s. Be a disciplined investor, investors for the long-term particularly in equities to overcome volatility, and potentially earn decent returns. As long as you are holding suitable and worthy investment avenues in your portfolio, you need not worry. Remember how you handle hard-earned money, and the discipline you follow in investing marks your financial success.
Communication with fellow teammates = Communication with family members
Cricket is all about teamwork. Although one player may be conferred the title of ‘man of the match’, the other players equally play a pivotal role in the success (or failure) of a team in a match. If the coach, captain, and other team members do not effectively communicate with each other on and off the field, it weighs on the team’s performance in a match.
Likewise, when financial goals are addressed, family members of a household must engage in sensible money-talk, recognise each other’s views and then congruently make sensible investment choices to achieve the envisioned goals. The wellbeing of the family is not just the responsibility of the head of the household but equally the other members in whatever way they can.
Have a back-up plan = Have a contingency reserve
Cricket can be full of highs and lows. The theatre of emotions is what makes it interesting. Sometimes a tide turns, a crucial wicket is lost, and strategy implemented requires a change. Therefore for the captain, having in place a ‘Plan B’ is essential to win the game.
Similarly, our life too is full of highs and lows. If any unforeseen financial emergency like loss of a job, health or debt trouble, etc. occurs, one must have a backup plan. Such events often drain your finances. Hence, building an adequate contingency reserve (around 12 to 24 month of regular monthly expenses, including EMIs) is necessary to deal with emergencies.
Know where you stand = Review the portfolio
Keeping a tab on the target score/the scoreboard and run rate to defeat the opponent team, the captain guides the teammates to play and win. S/He assesses the number of wickets in hand and plans a strategy.
Similarly, review the investment portfolio to ensure whether you are on track to accomplish the goal. This will serve to be in the interest of your financial wellbeing in the long run and ensure that you achieve your goal.
Good coach = Guidance from an efficient advisor
The way the winning of a team can be attributed to coaching prowess of a good coach and the captain, who are experienced and get the best out of the entire team. Similarly, seek an efficient advisor who handholds his/her clients in creating a robust financial plan with a holistic approach.
An efficient financial advisor keeps an eye on the clients’ needs and risk profile, identifies strengths and weaknesses of individual investments and manages them correctly, is unbiased, and is research-oriented.
To sum-up, cricket is a sport that is played with a passion to win. Similarly, with the same passion, focus on accomplishing your financial goals by making sensible decisions. Believe in the power of compounding and keep investing for the long-term. In the end, you will win.
(Jimmy Patel is the MD and CEO of Quantum Mutual Fund.)