The informed investor always give credit or blame their Skills (efforts) or Luck in investing. Well, truth is, both work in investments. The debate of investing luck or skill – is never-ending. Recent below 3 events can help to understand the difference.

Luck is something by chance. Means you have no control over it. It happens and impacts everyone. You say you “your bad luck”, because, it impacted you and your loss is most important in priority.

The skill is your inputs. Your efforts that you put. They may change your investments but events are bound to happen. Efforts may change or cover your investments.

So, simply put, efforts are in your control. Luck is out of bounds.

You can be lucky to get less impacted or not impacted using some efforts in some cases only.

Event 1 – A Saving for ALL

SEBI the regulator of Mutual Funds, in its board meeting on September 18, 2018, announced changes in the total expense ratio (TER) of mutual funds. They changed the age-old rules of charging expenses. This means more transparency in expenses, and reducing mis-selling and churning.

Wow, could any investor have guessed this benefit?

Did any financial planner take this into account when they made a plan for you projecting future returns for a goal?

Because it’s a sheer luck that you got this in 2018.

To elaborate on the news, the expense ratio is the amount that MF deducts from your money to manage your money. It includes MF company expenses, marketing expenses, brokerage, cost of registrar and MF company profit.

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Simply to put, for a fund of say 1000 Cr, they were charging 2.2%, now they will only charge 1.75%.

Means an extra 0.45% returns every year. Year on year, so compounding will even increase your returns more.

So is this investing luck or skill?

Luck of course as all of us are going to benefit. We did not imagine it would happen someday and we did not calculate it.

Out of control event!

Imagine it could have been a reverse decision too! What if SEBI increased the expense ratio?

Event 2 – A loss in Liquid/Debt funds

A company called IL&FS just got downgraded (means credit agencies indicate it will delay or default its payment on interest or capital).

This company is a behemoth in financing infrastructure projects. But seeing bad days.

Result: The NAV of Principal Cash Management Scheme went negative. Yes, the safest of debt funds saw negative days. Many schemes of Kotak MF, DSPBR MF, LIC MF are suffering.

You will say:

If not Invested – My good luck (read: effort) as I was not investing in these schemes (think before thinking this – do you know whether your liquid fund has IL&FS security or a security that can go IL&FS ways?) or
If invested – My bad luck as even the walking cow on road hits me every morning while jogging. So I am thinking of giving up exercise.

Event 3 – The Domino Effect

The event of IL&FS was not limited to debt. The MFs have liquidity crises so they are selling anything which can help. One of them tried selling Debt paper of a healthy company (ICRA rating AAA) called Deewan Housing & Financial Services, but already sneezing market pundits thought it’s a chemical attack!

So, they thought this company is turning sour, so the stock prices came down by 45%+.

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Some extra cautious thought that entire sector (Housing Companies) is a loss, so prices of other companies like Indiabulls Housing etc also came tumbling down like a domino effect in motion.

So MF investors who are facing some bad day in debt now have bad in equity too as entire NBFC sector has become Panipat (war zone).

Investing luck or skill? Think again!

Can you avoid these events by investing luck or skill

Maybe yes by DIVERSIFICATION.

Maybe yes by ASSET ALLOCATION.

But what if some part of IL&FS or DHFL still remains in your portfolio after diversification or asset allocation?

This is exactly the luck – things you cannot control.

So, two things from here: One, you take a step (tactical) where you move out. Second, you stay if you know it’s a matter of a few bad days.

But one thing is sure:

Few things can be controlled by efforts, but luck is also an element. Also control cannot be 100%.

My Formula: Give your best effort before investing decision. The harder I put efforts, the luckiest I become. Investing luck or skill – invest.

Leave luck to Law of Averages (means some bad things will happen, but some good things too will counter them, like event 1. I will get my dues in course of time – I believe so)