Mismatch Risks

In the month of May, I was returning from Ahmedabad in Duronto Express, which is a non-stop train between Ahmedabad and Mumbai. One of the fellow passengers wanted to get off at Borivali. However, he did not know that train does not have a stoppage at Borivali. He had two options—either to jump at Borivali, which was obviously a riskier option or to travel up to Mumbai Central and return to Borivali from there. He opted for the second option. He had to make arrangements for going back to Borivali; his time got wasted, money spent, and energy drained. There was a mismatch between the station he wished to get off at and the train he had chosen.

Most of us end up making similar mistakes while investing. Several years ago, a middle-aged, well-off couple called me from a small city in Gujarat. Apart from the bungalow they lived in, total value of assets they owned was about `5 crore. This mainly consisted of real estate in form of plot of land, two residential properties, and a few shops. Out of `5 crores, only about `25 lakh of investment were liquid in the form of bank fixed deposits, shares, mutual funds, etc. Rest were all in illiquid form, indivisible real estate. They had called me because they needed `47 lakh to fund their daughter’s forthcoming education abroad. They had two choices, either to take an education loan or liquidate portion from their real estate property, which was approximately costing `90 lakh. Hence, there was an apparent mismatch between their financial goals and investments.

Most of us never spend the time to make an appropriate list of our financial goals; the financial goals for which we are saving and investing money. Due to this habit, we are unknowingly exposed to mismatch risk.

All of us want to invest in instruments which generate higher, faster, and maximum returns. Now consider this, between an airplane and cycle which will move higher and faster? The obvious answer is an airplane. However, if we want to go to a place that is 3 km away, which one should we opt for between the two? Everyone will agree for cycle.

Always focus on optimum returns and not on maximum returns. What is the point in generating maximum returns if they are not of any use to you when you need them? Everytime we invest, we should ask ourselves which financial goal the investment is for? If the investment is not aligned to a financial goal, unknowingly we are exposed to a mismatch in risk.