The biggest football extravaganza on Earth has started with 32 nations competing for the most coveted prize in the game. As fans throng stadiums in Russia with millions catching the action live on their TV screens, soaking every moment of the quadrennial event, we look at some of the common threads stitching football and investment in mutual funds.
Team formation and asset allocation
In a game of football, there are forwards, midfielders, defenders and the goal keepers. The coach forms the team factoring in the match situation, quality of opposition, and strengths of his players among others. A balanced team with quality players is integral to success.
Similarly, in mutual funds, asset allocation is done keeping in mind one’s risk-appetite, investment horizon, liabilities, income, and most importantly financial goals. A balanced and diversified portfolio with a mix of equities, balanced, and debt funds helps individuals realise their financial goals with ease.
Player characteristics with fund behaviour
In football, strikers need to be aggressive and agile, so as not to miss a scoring opportunity. Similarly, midfielders need to provide the ball to strikers as well as help defenders. On the other hand, the role of defenders is to keep a close watch on strikers from the opposition and prevent them from scoring.
All these characteristics of players can be attributed to the behaviour of various funds. In mutual funds, equities are aggressive in nature whose primary goal is to generate long term inflation-adjusted returns and accumulate wealth.
The role of balanced funds resonates with those in the midfield as these funds not only aim for wealth creation but help reduce risks during market fluctuations through a mix of equities and debt. The role of debt funds, on the other hand, is to provide relative stability to the portfolio during market swings.
Choice of right funds is equal to choosing the penalty shooter
In football, penalties play a decisive role. When a team is awarded a penalty, more often than not the ball goes into the net. However, taking a penalty kick is not everybody’s cup of tea. It is an art that requires a calm composure. There are numerous instances when a team had to pay dearly for its player failing to convert a penalty kick.
In the 1994 World Cup finals, the first finals to be decided on penalties, Italy’s Roberto Baggio failed to convert his kick, thereby giving Brazil its fourth World Cup title. In the process, Italy had to wait for another 12 years to win the World Cup.
Similarly, in mutual funds, the choice of right funds is equivalent to choosing a penalty shooter. It needs a careful analysis, a calm composure and opting for the right funds to ensure that you accumulate the desired corpus to reach your goals. Any hasty decision may backfire, resulting in erosion of corpus and pushing back your essential goals by a few years.
The offside trap
Often, in their eagerness and over-enthusiasm to score goals, players fall prey to the offside trap. Scoring a goal from an offside position accounts for nothing and this can change a game’s outcome.
For instance, in the 2014 World Cup finals against Germany, Argentine striker Gonzalo Higuaín scored a goal from an offside position that was promptly ruled out. Had that goal been legitimate, Argentina would have drawn first blood which could have changed the entire complexion of the game.
In mutual funds, the offside trap can be understood from two behaviours of investors. One, in their eagerness to earn higher returns, some investors tend to favour funds which invest in firms without sound credentials and a history of consistent returns. Often in such cases, they follow a herd mentality and when the performance of such funds dwindles after a short high, it results in wealth erosion.
Secondly, during market correction, some investors tend to panic and exit the market. This again jeopardises wealth creation for critical financial goals.
Just like in football the team scoring an early goal gains advantage, in mutual funds it pays dividends to be an early bird as gives more time for compounding.
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