This is part 2 of a 3 part series. If you have not read part 1, do click here.
Generally, whenever I am trying to get someone to invest in MFs, it is almost always through a SIP and that also for a long duration – 10 years. I keep telling them that they should not touch the money for that time.
However, they have seen those MF ads which invariably end with ‘MFs are subject to market risks……’. The only other product advertised with a similar warning are cigarettes. So naturally they get worried.
So, to take the fear of the warnings out of the equation, I came up with onions. Their prices vary from Rs.20 to Rs.80 over any given year, but everyone accepts that as normal!
Let’s say there was a way to store onions for 10 years and more without spoilage and without any cost.
Our strategy is as follows. You decide to buy Rs.1000 worth of onions on a fixed day every month and put them in storage. After 10 years of doing this, we will take a call on what to do with the stock.
So let’s say in Month1, the price of onions was Rs.40 a kilo and so, we got 25kgs of onions and kept them in storage. In Month2, the price of onions was Rs.50 a kilo and so, we got 20 kgs of onions and added them to storage. In Month3, the price of onions falls to Rs.25 per kilo!
Now, think about this situation and what would be your thoughts? You’ve got these choices:
1. Really happy as you’ve got more quantity this time because of the cheaper price.
2. Really sad because the total value of your stock has fallen drastically.
Give this some thought. Don’t scroll down before you have reached a conclusion.
The fact is, since the plan was for storing the onions for 10 years, it just does not matter what the prices are in-between that time period.
Should you just never be checking the price? By checking, I mean checking the price to make a decision about the future of the investment. I don’t think so. You should not be making any decision based on the price of onions till you come close to the end of the 10 year period. Maybe around the 7th year.
More in the next piece………………….