By Tensing Rodrigues*
It’s always good to halt after a long travel, relax and check the compass. In the language of the millennial’s check the Google Map. Am I on the right track? What’s true of travel is also true of investment. That’s what we want to do today. Go back to the basics of investment. Is my investment going the right way? And there is, perhaps no better time to do it then the lull between the storms when the elections are almost over and the results are yet to come!
No as we have said many times before, the investment has nothing to do with the elections or the results. The pause between the elections and the results is just an occasion, or an opportunity, to sit back and look at the investment made; and ask yourself if you need to do some mid-course correction?
It is best to begin with the goals that you set for your investment. That is, why did you invest? What drove you to invest? What was the motive of your investment? You did not invest for a pastime nor were you simply trying to get rid of the loose cash in your SB account. You had a purpose, you had a dream.
By and large, investment is driven by three motives; you can call them the transactions motive, precautionary motive and the income motive. The transactions motive to save and invest arises from the fact that the time patterns of flow of income and expenditure do not usually match. Most of us get our income monthly but we spend daily. Even for those of us who may be in business or profession our income does not come in exactly in keeping with our expenditure. That is the reason we use a savings account.
Similarly the time pattern of earning income during our lifetime does not always match the time pattern of our expenditure during our lifetime. In the early carrier our expenditure is usually low. As we set up a family and home it increases. It continues to increase as the family grows and its requirements increase. It peaks at the time of children’s higher education and settling down in life and then it may decrease. The income normally increases steadily up to a certain age (retirement, say for instance), and then it may fall sharply. That’s where we use the fixed deposit account, for instance.
In both these cases, because the time patterns of flow of our income and expenditure do not match we need to carry purchasing power from when we have more of it to when we have less of it. Investment is therefore used as a storage of purchasing power in the short or long term. This is what we call the transactions motive.
Precautionary motive to save and invest arises from your desire to provide for an unforeseen event. It is very similar to the transactions driver. But with a difference: While the transactions motive makes you save and invest for a foreseen and planned need in future the precautionary motive is about an unforeseen need in future. You only feel the existence of a possibility of a certain event occurring which may need you to spend. You do not want to be caught on the wrong foot if at all it occurs. And, with that in mind, you would like to make a provision. It could be a sickness, an accident, anything, or even a desirable event, like an opportunity to purchase something.
Income motive is very different from the rest of the two. When you are saving and investing driven by the first two motives you are trying to carry your purchasing power into future; investment is for you like a fridge where you can store your purchasing power or money. But when you save and invest for the income motive you are not trying to carry over your purchasing power into future.
Rather you are trying to increase your future purchasing power. In other words, your sole purpose in saving and investing is to increase your future income. When you save and invest, you create a source of income for future. The income from this source adds to the income that you already have, or that you expect to have in future.
Now is the time for you to sit back and sort out the investment for transactions motive from the investment for precautionary motive and the two from the investment for income motive. Because what is good for one goal may not be good for the other. And how do you decide what is good for one goal and what is good for the other? Let us see that next week.
*The author is an investment consultant. Readers can send their comments and queries to firstname.lastname@example.org