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The Impossible Trinity

Anand Vardarajan

Anand Vardarajan,
Business Head – Banking, Alternate Products & Product Strategy,Tata Asset Managment

The Impossible Trinity

Very simple way to explain what an investor wants can be condensed into 3 things, namely, good return, quick return and less volatility: basically Jyaada (more), Jaldi (quick) and kam jhatka (less volatile).

The unfortunate part of this triangle is that you can only get 2 out of 3 at most times. Jaldi with less jhatka will never be jyada, jyada and jaldi will never be with less jhatka and jyaada with less jhatka will seldom be jaldi. If all this sounds very jyada and you need the answer jaldi, then read on.

Can one not have all 3 at the same time? How should one go about choosing the right mix?

Imagine you are planning to travel to a particular destination. The variables that you would look for Where you would be going (destination), When (date), How i.e. Mode of transport (determines travel time, speed and comfort) and cost of the travel (cost). We would pretty much decide in the same order i.e. destination, mode of transport and comfort i.e. road, rail or air and cost.

However, in the investing world we don’t do the same. We usually decide which transport is the fastest without paying attention to the comfort or discomfort it brings along. Remember, jaldi and jyada is never without jhatka and eventually the investor feels disenchanted with the asset class. Like in travel the first thing to choose would be where we want to go i.e. investment goal. The next criteria is time horizon i.e. how quickly we wish to get there.

Third parameter would be mode of travel. Some are backpackers who love the experience over destination and for some travel comfort is very important. Similarly, in investing will not prefer bumpy rides and hence asset class is to be chosen basis investor’s travel comfort i.e. happy journey or a bumpy ride. For those who enjoy comfortable journey, debt fund is the way to go and for those who can take volatility, equity may be recommended.

Since the investor may have multiple goals such as buying a house, children’s education, marriage, travel etc. and all these can be different time horizons and one has to choose each asset class or instrument carefully. The near term goals warrant asset classes with less volatility since returns have to quick and hence higher allocation to debt is advisable. However, if long time horizon is adequately long, then one can consider equity investments and over long periods it is not as volatile.

This sounds simple but not easy. Bill Gates asked Warren Buffett, that he had poured his investment wisdom and even portfolio in public domain, then why can’t investors just copy that and become successful investors. “Nobody wants to get rich slowly” replied Buffett.

May be jaldi is the enemy of jyada.

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