‘Invested Fund’ and ‘Investable Fund’ have differently varying impacts

“Niveshit Nidhi Aur Nivesh Yogya Nidhi, Dono Bhinna Hai Aisa Samajhiye;

Bhavishya Ki Ghatnaaon Ka Asar Vilom Hona Hi Sameecheen Samajhiye.”

‘Please understand that ‘Invested Fund’ and ‘Investable Fund’ are different.

An event in future impacts them inversely, understand the financial appropriateness.’

Before we start the column let us recall the following events in June:

Nifty up by ~3% on June 3

Nifty down by ~6% on June 4

Nifty up by ~3% on June 5

Investors who were happy on June 3, were sad the next day and were back smiling on June 5. Against this category of investors, there were some whose mental status was exactly the opposite; they were sad on June 3, happy on June 4 and again sad the next day. If one observes the mood of the investors closely, the extreme swings can also be visible during intraday movements of the indexes or in stock prices.

To understand this, we need to understand that the invested funds and investable funds are different. They need to be understood from different perspectives; from different vantages, as their impact on future events will be quite different from one another.

Investable funds refer to the funds set aside for future investment. This includes cash, savings and other liquid assets. That can be converted into any investable asset. Invested funds refer to money that has already been allocated to specific investments such as stocks, bonds, real estate, precious metals or any other financial instruments. These funds are no longer available for investment without liquidating the existing investments. The basic principle of any investment is ‘Buy low and sell high’.

The positive selling and buying price difference is the profit or the gain. All theories and tools are devised to identify the low-priced ideas for buying and the high- priced ideas for selling. Investors and traders, who can identify maximum ideas with maximum price variance, are kings of the market.

Given below are some of the benefits of investable funds and invested Funds:

Investable funds-Flexibility and liquidity:

They offer the ability to quickly convert to new investment opportunities and to cover unexpected expenditures.

Risk management:

Keeping some funds available, allow us to prepare for future contingencies to provide the buffer against market volatility and ability to diversify investments when conditions are favourable.

Strategic investments:

Availability of investable funds helps in grabbing strategic opportunities and deliberately investing in favourable market rather than being forced to invest under forceful conditions.

Invested funds-Potential

for growth:

Invested funds means your money is working for you whether you are working or not, which helps to grow your money over time.

Income generation:

Creating a stream of another income is the other benefit of remaining invested.

Potential hedge:

Invested money helps us to hedge against drying up on one stream of income. Multiple investments give us peace of mind and confidence.

Achieving financial goals:

All investments are made taking into consideration investment objectives and accordingly we allocate the money to different asset classes. These investment classes help us in achieving our various financial goals. Let’s analyze the events mentioned in the beginning and investor mood swings.

For simplification let’s assume ‘Nifty’ is one single stock. What does ‘Nifty is up by X%’ signify?

It implies that the share of Nifty has gone up from the previous day’s closing price. Going by the basic principle of investment, “Buy low and Sell high”, Nifty is profitable to sell. Hence, investors with ‘invested funds’ in ‘Nifty’ are happy as their wealth has grown.

On the other hand, investors with ‘investable funds’ waiting to buy ‘Nifty’ are dejected as they missed one part of the basic principle of investment i.e., ‘Buy-low’ thereby lowering their probability of gain. It needs no further explanation to understand the predicaments of the investors if ‘Nifty is down by Y%’.

There are players in the market who expect to benefit from market rise, known as ‘Bull’ and there are players who expect to benefit from market fall, known as ‘Bear’. These Bulls and Bears are important participants of the market and help in price discovery of a stock by balancing market forces through demand and supply.

As an investor, one needs to maintain a proper mix of ‘Invested Fund’ and ‘Investable Funds’ so to benefit out of every future market events. The market keeps providing opportunities. We must be ready with ‘Invested Funds’ to benefit from opportunities emerging out of market rise and with ‘Investable Funds’ to benefit from opportunities that emerge out of the market rise.

(The writer is Executive Vice-president, SBI Funds Management Ltd; Translation and text by Munish Sabharwal, senior Vice-president and Zonal Head (North), SBI Funds Management Limited)