My four-year-old daughter goes to nursery. On a good day, she tells me that she learned something. Most days she says she played at school. Because that’s what a good education means; to learn without taking the learning process too seriously. And let’s face it, there are few things as serious as the process of making money. But what if, for a while, you could, with a small amount that does not stress you out in any way, enjoy the process of making money.
Let’s begin with any small amount of money that you may have to spare in any given month. This is a simulation exercise, so you don’t have to do anything with the money. Simply track what would happen were you to invest the amount.
The rules are simple. You try not to put all the money in one form of investment, so you segregate it into at least two if not three separate quantities. Now, each segregated amount is considered a separate unit and must be treated independently from the other units.
For each unit, sit back, and put the various basic concepts in my previous column into practice.
Begin with the most important decision for each unit. The time horizon within which you want to check your performance. Here, you need to be realistic. It’s not possible to get any sort of return in less than four weeks; even that is a short time frame, but let’s begin with four weeks.
The investment options in ascending order of risk are: savings bank accounts, term deposits, insurance schemes with guaranteed returns and mutual funds.
Next, identify one unit that you want secure – meaning one you don’t want to take any risks at all with. Just keep in mind that taking low risks means getting lower returns. In other words, keeping the money as cash in your wallet is the most secure option, but it means that BD10 will stay BD10 and not earn anything.
The other thing to keep in mind is that equity markets, and hence mutual funds, give the highest return over a long-term horizon. Over the short-term, they can be unpredictable and high levels of gains or losses could be simply “luck”. Our objective however, is to understand the process.
For the savings, term deposits and hybrid insurance schemes, all you need to do is “invest” and the returns are fixed. You do, however, need to assume that the returns promised by the bank or institution are earned over a shorter duration of time. For example, bank deposits will give you say three per cent returns per year, which means over the one-month period you will earn only 0.25 per cent.
For mutual fund investments, identify the type of scheme you would be most comfortable with keeping in mind which country, business sector or risk level you prefer. There are several providers of mutual fund schemes, so you need to research. You could begin by simply investing in schemes that invest in the “top 100 companies” or, if you’re feeling more adventurous, one that has the highest returns (and therefore higher risks).
On the day you make this “investment”, divide the amount of money you wish to invest by the “NAV” or “Net Asset Value” of the said mutual fund scheme to get how many units you hold. Each week track the performance of that fund by multiplying the end of week NAV with the number of units you “bought”. If at the end of any week, you feel you have made enough percentage return, you could “exit” and add the profit to the original amount and re-invest the same elsewhere.
The idea of this game is simple. You will take charge of some amount of money, be responsible for it, research on various options available and see if and how much money the money can earn for you. At the end of the four weeks, go out and genuinely spend some of the “profits” you would have earned. Feel the thrill of taking charge and celebrate the small victory. As a next step, step out of the game and take charge of your money in the real world.
